Bitcoin: Imagine a net without intermediaries

by on April 16, 2011 · 43 comments

Yesterday the FBI effectively [shut down](http://thehill.com/blogs/hillicon-valley/technology/156429-fbi-shuts-down-online-poker-sites) three of the largest gambling sites online and indicted their executives. From a tech policy perspective, these events highlight how central intermediary control is to the regulation of the internet.

Department of Justice lawyers were able to take down the sites using the same tools we’ve [seen DHS use](http://techland.time.com/2011/02/17/operation-protect-our-children-accidentally-shutters-84000-sites/) against alleged pirate and child porn sites: they seize the domain names. Because the sites are hosted overseas (where online gambling is legal), the feds can’t physically shut down the servers, so they do the next best thing. They get a seizure warrant for the domain names that point to the servers and [force the domain name registrars](http://pokerati.com/2011/04/15/poker-panic-11-update-on-domain-name-seizures/) to point them instead to a government IP address, such as [50.17.223.71](http://50.17.223.71). The most popular TLDs, including .com, .net, .org, and .info, have registrars that are American companies within U.S. jurisdiction.

Another intermediary point of control for the federal government are payment processors. The indictments revealed yesterday relate to violations of the [Unlawful Internet Gambling Enforcement Act](http://www.firstamendment.com/site-articles/UIEGA/), which makes it illegal for banks and processors like Visa, MasterCard and PayPal to let consenting adults use their money to gamble online. According to the DOJ, in order to let them bet, the poker sites “arranged for the money received from U.S. gamblers to be disguised as payments to hundreds of non-existent online merchants purporting to sell merchandise such as jewelry and golf balls.” ([PDF](http://www.wired.com/images_blogs/threatlevel/2011/04/scheinbergetalindictmentpr.pdf))

Now, imagine if there were no intermediaries.

[In my TIME.com Techland column today, I write about Bitcoin](http://techland.time.com/2011/04/16/online-cash-bitcoin-could-challenge-governments/), a completely decentralized and anonymous virtual currency that I think will be revolutionary.

>Because Bitcoin is an open-source project, and because the database exists only in the distributed peer-to-peer network created by its users, there is no Bitcoin company to raid, subpoena or shut down. Even if the Bitcoin.org site were taken offline and the Sourceforge project removed, the currency would be unaffected. Like BitTorrent, taking down any of the individual computers that make up the peer-to-peer system would have little effect on the rest of the network. And because the currency is truly anonymous, there are no identities to trace.

And if a P2P currency can make it so that there is no fiscal intermediary to regulate, how about a distributed DNS system so that there are no registrars to coerce? This is something Peter Sunde of Pirate Bay fame [has been working on](http://www.wired.co.uk/news/archive/2010-12/02/peter-sunde-p2p-dns). These ideas may sound radical and far-fetched, but if we truly want to see an online regime of “[denationalized liberalism](http://techliberation.com/2010/11/28/mueller%E2%80%99s-networks-and-states-classical-liberalism-for-the-information-age/),” as Milton Mueller puts it, then getting rid of the intermediaries in the net’s infrastructure might be the best path forward.

Again, check out [my piece in TIME](http://techland.time.com/2011/04/16/online-cash-bitcoin-could-challenge-governments/) for a thorough explanation of Bitcoin and its implications. I plan to be writing about it a lot more and devote some of my research time to it.

  • http://www.cordblomquist.com cordblomquist

    Jerry, doesn’t Bitcoin still have a centralized record of all the coins “minted” in its history? I believe that’s the case, and if it is, doesn’t that mean that there is still a central authority, at least in a sense that there’s a central keeper of information?

  • http://jerrybrito.com Jerry Brito

    Nope. There is no central keeper of information. All the transactions are public, and the database of all transactions is distributed over a P2P network. So, no, nothing central to take down.

  • http://www.cordblomquist.com cordblomquist

    I was thinking of the IRC server which clues new users into the trusted nodes that maintain the BitCoin data, but failsafes seem to be in place in case this is ever taken down: http://www.readwriteweb.com/hack/2010/12/interview-bitcoin.php

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  • http://twitter.com/dgcmagazine Editor

    Jerry GREAT article. There are several systems out now that fulfill the requirements for anon/decentralized currency. Bitcoin is a good one, Loom.cc and Open Transactions are also top notch. Designers have moved away from that PayPal type structure, made things open source and removed any requirements for personal information.

    Mark Herpel
    editor@dgcmagazine.com

  • Tom Sydnor

    Jerry,

    May I respectfully suggest that you overlook a critical defect in Bitcoin? Frankly, it should be almost impossible to implement Bitcoin successfully without engaging in egregious consumer fraud. Last I checked, even libertarians agree that deliberately defrauding consumers is Bad. Indeed, last I checked, it is something worse than just “bad” to trick consumers into performing, for “free,” functions so dangerous that corporate professionals who fully understand those dangers cannot be paid enough to incur them. See 18 U.S.C. 2(b).

    Nevertheless, your argument for something as technologically inefficient as BitCoin seems to derive from an unspoken premise. Essentially, you presume that a “choke-point” for law-enforcement arises because acting as a bank or payment processor for entities whom you know or should know to be engaged in mostly illegal or criminal activities is so incredibly dangerous that for-profit corporations run by adults who have specialized in thoroughly understanding those risks simply cannot be paid enough to keep performing those functions through the centralized means that would be more secure and technically efficient. As you note, even the capitalists at MasterCard, Visa, and Paypal cannot be paid enough to process certain types of transactions.

    So some now propose, instead, to “decentralize” those payment-processing functions by getting consumers who do not understand those risks to diminish their own computing power in order to do all of this really dangerous liability-triggering payment processing for “free.” Fraud—or some departure from prevailing principles of personal responsibility—thus seems inherent in any technically inefficient “decentralized” payment-processing scheme adopted only because adult capitalists who profit by specializing in understanding the risks of processing payments cannot be paid enough to incur the risks of processing payments for, as you put it, copyright pirates, trademark counterfeiters, and child pornographers. But if the capitalists at Visa can’t be paid enough to provide such services, then why would consumers who truly understood those risks choose to endure the same risks for “free”—while also slowing down their own computer and Internet connection?

    I have done quite a bit of research and writing on such questions, here is a link that can direct you to many of my papers:

    http://www.pff.org/issues-pubs/testimony/2009/090729-sydnor-testimony-p2p-inadvertent-filesharing.pdf

    Fortunately, I also accept that my views on these matters, even if informed by past empirical research, are—as applied to this new resort to the inefficiency of “decentralization”—once again mere theories. And I also accept the idea that the best test of any theory is empirical verification. Indeed, I can even accept that the inevitable consequence of proposing any means of empirically testing one’s own theories is that some of them will be falsified. Being proven wrong is thus probably an inevitable consequence whenever any human tries to think carefully about new technologies and challenges.
    So I will propose a means through which you can prove to everyone here at TLF that you are right and I am wrong. In effect, I am arguing that legally sophisticated entities who fully understood the risks of playing “payment processor” would not choose to expend their own computing resources and bandwidth in order to do for “free.” Fortunately, you are uniquely well-situated to exercise your persuasive powers upon an entity that I can concede should qualify as “legally sophisticated.” That entity is George Mason University.

    Consequently, I would concede that I may be wrong about Bitcoin if you can convince George Mason University to run a Bitcoin “node” in its equivalent of “exit mode” while admitting, in writing, that GMU has chosen to let any and all third parties use GMU-owned-and-controlled resources to process payments via Bitcoin even though its President, Officers, General Counsel, and Board of Trustees all understand that by doing so, GMU will eventually and knowingly facilitate illegal and criminal activities including piracy, counterfeiting, the creation of violent child pornography, racketeering, phishing, wire fraud, identity theft, tax fraud, money laundering, sex tourism, terrorism, illegal gambling, the operations of illegal online pharmacies that dispense counterfeit drugs, organized crime, commercial murder for hire and paid political assassinations—and to do so “automatically,” even though GMU could have thwarted many or most of these crimes simply by monitoring third-party uses of GMU-owned-and-controlled computing resources.

    Over time, all of these are inevitable consequences of BitCoin. Indeed, they are all inevitable consequences of any exchangeable currency. But perhaps that is why existing laws impose many legal duties upon those who provide payment processing and banking services. Perhaps those laws are trying to maximize the socially beneficial uses of currency while reducing its potential to facilitate socially destructive, (and thus, illegal) behaviors like piracy, counterfeiting, the creation of violent child pornography, racketeering, phishing, wire fraud, identity theft, tax fraud, money laundering, sex tourism, terrorism, illegal gambling, the operations of illegal online pharmacies that dispense counterfeit drugs, organized crime, commercial murder for hire and paid political assassinations. Perhaps that is what “rule of law” is all about—even if the nature of representative democracy ensures that each of us fortunate to live in one will often be subject to laws that would have been different, had their drafting been up to us alone.

    Nevertheless, I realize that there are some people who take seriously the notion that just because performing a given act with a particularly level of culpability would send a person to prison for decades in the brick-and-mortar world, that does not mean that anyone should be liable were they to just as culpably program (or let someone else program) a computer that they own and control into performing the same potentially criminal act “automatically.” But if this is presently a view that can be taken seriously even when serious consequences are at issue, then the critical question should follow: Why, then, should informed BitCoin participants be afraid to admit—openly and in writing—that they know full well that they have intentionally chosen to invest their own resources in order to facilitate such conduct?

    I suspect that the preceding question has many answers, and that many of them can be found in the United States Criminal Code.

    In any case, Jerry, thank you for your post and article that called my attention to Bitcoin. Perhaps for different reasons, I, too, will look forward to researching and writing about it.

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  • http://profiles.google.com/gavinandresen Gavin Andresen

    Tom: do you have another link? The Progress and Freedom Foundation link doesn’t work.

    RE: maximize socially beneficial uses while minimizing socially destructive uses: That is a noble goal. But I’m skeptical of the power of laws and regulations to minimize socially destructive behavior. I think the criminals will just ignore the regulations, and honest, law-abiding citizens will end up paying the costs (both monetary and inconvenience) of the regulations.

    If Bitcoin continues growing it will also be subject to the “bootleggers and baptists” problem– the bootleggers being the existing payment companies who profit from the regulatory barriers to entry, and the baptists being people concerned about illicit uses.

  • http://profiles.google.com/gavinandresen Gavin Andresen

    Tom: do you have another link? The Progress and Freedom Foundation link doesn’t work.

    RE: maximize socially beneficial uses while minimizing socially destructive uses: That is a noble goal. But I’m skeptical of the power of laws and regulations to minimize socially destructive behavior. I think the criminals will just ignore the regulations, and honest, law-abiding citizens will end up paying the costs (both monetary and inconvenience) of the regulations.

    If Bitcoin continues growing it will also be subject to the “bootleggers and baptists” problem– the bootleggers being the existing payment companies who profit from the regulatory barriers to entry, and the baptists being people concerned about illicit uses.

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  • Peter

    Can someone explain what hidden demand bitcoin is seeking to supply i.e. ignoring the technical aspects? Many thanks

  • thestaringabyss

    Tom Sydnor is a Luddite. I would attempt to pay him not to pollute this blog with his sensationalist tl/dr comments but I don’t think he takes Bitcoin.

  • Tom Sydnor

    Gavin, thanks for the heads-up about the link. Here are two replacements. Here is my first paper on fraud and deceit practiced upon persons operating “nodes” in peer-to-peer file-sharing systems. It has links to most of the then-existent research on the difficulty of achieving truly voluntary cooperation among nodes:

    http://www.uspto.gov/ip/global/copyrights/cpright_filesharing_v1012.pdf

    In case you are wondering whether things got better, they did not. Here is a second link that summarizes subsequent events and research:

    http://www.pff.org/issues-pubs/testimony/2009/090729-sydnor-testimony-p2p-inadvertent-filesharing.pdf

    My questions about Bitcoin can be summarized as follows.

    First, decentralization is rarely technically efficient. Usually, it is has been done only to shift the risks associated with some potentially illegal activity away from those who understand them and towards those who do not. Such seems to be the case with Bitcoin: There seem to be certain types of payments that will not be processed even by corporations of sophisticated adults who profit by understanding when the benefits of processing certain payments outweigh the risks. OK, but if so, then how do you expect to be able to design an application that will inform the non-experts who might run Bitcoin of all the potential legal risks that they may or probably do assume by processing payments for any and all miscreants who might want their help to process payments anonymously?

    Second, when challenged, decentralization schemes should tend to collapse or become increasingly deceptive as those doing the dirty work discover the hard way WHY that work was inefficiently “decentralized.” Given this very ugly history, don’t you think that you should provide a demonstration of just how safe Bitcoin really is by getting a sophisticated entity like a major university to run it openly and notoriously, while acknowledging openly that it is doing so even though it knows that by doing so, it will inevitably facilitate [INSERT LIST OF STATE AND FEDERAL CRIMES HERE] but is choosing to facilitate such acts even though it knows that it could prevent them simply by monitoring how resources that it does own and can control are actually used? The distributor of the file-sharing program FreeNet once admitted, albeit on a website that users of his program would probably never visit, that you just could not run his program unless you were willing to store and disseminate violent child pornography or terrorists’ plans for a new attack on civilians. Wouldn’t an even better display of candor be needed in the payment-processing context?

    Third, I love the name, “Bitcoin.” The name “Bitster” might even more firmly connect it to the tradition to which it seems to belong. Nevertheless, as of today, “Bitcoin” should do. Here are two links explaining why:

    http://blog.pff.org/archives/2010/08/more_data_confirms_file-sharing_is_really_about_pi.html

    http://actonline.org/act-blog/2011/02/09/new-study-estimates-that-copyright-piracy-accounts-for-almost-25-of-global-internet-traffic/

    Thanks again for your interest in my comments. To be clear, I am not claiming that it is impossible to obtain from at least adults informed consent to incur all of the array of risks inherent in playing volunteer Junior Payment Processor. I am simply observing that the risks seem to be great enough that it seems as if it should be remarkably difficult to obtain truly informed consent from enough adults to make the system robust. I’m not sure BitTorrent itself would work, but for the “free” movies.

    –Tom

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  • http://angrydictator.com PJ Doland

    As elegant as the implementation might be, is there a single advantage that Bitcoin has over online credit card payments for Joe Consumer, if you assume that Joe Consumer is not either paranoid or engaged in something shady or illegal?

    Digital currencies have never really caught on not because they relied on a central authority, but rather because everybody already had credit cards which limited their personal fraud liability to $50.

  • http://pulse.yahoo.com/_EXDVDKR5FIDXAGYNG2ELWFGSSE Megatron

    Tom’s entire argument seems to hinge on the fact that Bitcoin users will somehow be facilitating fraudulent or illegal transactions by partaking in the network, and that this fact should make them avoid Bitcoin.

    But the only real problem with illegal transactions is that you’re likely to go to jail for partaking in them. The government’s prohibition won’t stand unless it’s backed up by credible threats of force (or, of course, people feel strongly morally opposed).

    Yet Tom never explain explains how government might make good on these implied threats against Bitcoin users. Will the FBI arrest them all? If that’s the plan, we only need to look at file sharing to see how that’s going to work out.

  • Doood

    Transaction fees can be much lower, even free at the moment, which makes it practical to spend small amounts such as $0.01. You can’t do that with a credit card.

  • Anonymous

    If Bitcoin is attacked – there will be outright infowar. People want to eat, work, and play. The proposition that they starve until the professionals figure out some grandiose solution that’s more incomprehensible than the current disaster…

    That proposition is downright class war in an institutionalist context.

  • http://profiles.google.com/justindkeith Justin Keith

    If that many people really desire to pirate and to not respect copyright, then that shows that copyright is standing in the way of satisfaction of desires. Respecting copyright should be low cost, but the absurdity of it and the situations it causes leads people to say “screw it.” Don’t even get me started on patents.

  • http://profiles.google.com/justindkeith Justin Keith

    Exactly. Most people will respect one another when it’s inexpensive to do so and what they’re being asked to do / refrain from makes sense to them. The drug war, as one example, is not only costly – it’s stupid. People wouldn’t obey it without government guns being involved.

    The interesting thing about a decentralized pseudononymous currency is that, if any identifiable government figure or group were to attack it, users would have an interest in setting up an assassination politics betting pool.

  • Anonymous

    Not having to starve while the state corporate or otherwise makes a decision.

  • Bitcoin Saver

    Tom Sydnor does not appear fully to understand Bitcoin. There is no such thing as “exit mode” for Bitcoin (I think he is trying to understand it in terms of Tor’s “exit nodes”). There are transactions, and there are verifications of transactions. A peer participates merely to mathematically verify that a transaction which already happened, happened.

    The closest thing to “exit nodes” in Bitcoin are the exchanges (Bitcoin to other currencies and vice versa). However, Bitcoin transactions can and do occur completely within the Bitcoin economy without ever leaving it. I can earn Bitcoin without ever buying any from an exchange. Saying that exchanges are somehow responsible for, or could somehow have the ability to stop, illegal behavior is like saying a money changer at the border with Mexico is responsible for, or somehow able to stop, the use of the money for buying drugs. The money changer has no knowledge whatsoever of what the money is used for; just so, the exchangers have no way of knowing what the bitcoin they are exchanging will be used for. The only way to avoid “facilitating” such activity is not to participate at all. And by the exact same argument, I suppose we should all surrender our cash and go to a 100% electronic, government-monitored system because by participating in the cash economy, we are facilitating all kinds of illegal activities. The cash we spend might be used for, or may have been used for, drugs etc. at some point in time.

    I’d be sympathetic to the argument if it turned out that 80% of the activity on Bitcoin was illegal. But right now, I believe Bitcoin is being fueled by ever-increasing numbers of people fleeing the dollar due to the government’s insane policies. As the government becomes increasingly desperate for cash to cover its profligacy, it appears to many people that the unthinkable (things like the government seizing control of people’s IRAs) may actually occur in the not-too-distant future. Call us paranoid, but our ranks are swelling, and for good reason. These things have happened in many other countries in the world and throughout history.

    Is it immoral to want to protect our money (read: the fruit of our own hard labor and our time) from a tyrannical and immoral government that increasingly knows no limits? It may eventually be illegal, but Bitcoin is not in itself immoral. It may be used, like any technology, for immoral purposes, or it may be used as an antidote to the immoral seizure of wealth by immoral governments.

  • Bitcoin Saver

    By “if … 80% of the activity on Bitcoin was illegal” I meant “if … 80% of the activity on Bitcoin was immoral“. Of course the government could easily make 100% of it illegal by declaring the use of Bitcoin illegal.

    Though we hope they coincide more often than not, “illegal” and “immoral” are not necessarily the same thing.

  • Anonymous

    BAWWWW WE NEED GOVERNMENT TO WATCH AND PROTECT US

  • http://twitter.com/ryanf0ster Ryan Foster

    completely anonymous, untraceable transfer of funds.

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  • http://www.facebook.com/people/Jorge-Emilio-Emrys-Landivar/37403083 Jorge Emilio Emrys Landivar

    Yes, the server is there for convienence but its not necessary. 

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  • Mart

    Tom Sydnor argument appears to have a couple of flaws.
    1) as Bitcoin Saver pointed out, he appears to be labouring under a misapprehension as to the role played by members of the Bitcoin network. They merely crunch numbers to make it increasingly difficult to unwrite previous transactions from the shared database record… someone wishing to unwrite previous transactions (eg in order to either get money back they’d spent – a double spend) would have to have more computing power than the rest of the network.
    2) these people aren’t taking any legal risk. They are no more aiding criminal use of the network than an ISP is who’s services are used to access eg child porn. Bitcoin has numerous perfectly legal reasons to use it – whilst I’ve no doubt that some people may be using it to (eg) buy drugs, that is also true of US dollar bills – so are we going to bang Ben Bernanke up in jail for printing ever more of them?

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