The mid-to-late 90s saw the crypto wars, probably the Internet’s first major victory against government attempts to control information online. At stake was the public’s right to use strong encryption, which facilitates commerce and allows individuals to maintains their personal privacy, but which government feared would allow “drug lords, spies, terrorists and even violent gangs to communicate about their crimes and their conspiracies with impunity,” as FBI Director Louis Freeh told the Senate Judiciary Committee in 1997. In the end, popular opinion overwhelmed government efforts to include back doors in publicly available encryption, which might as well have been no encryption at all.
Leading the charge in the crypto wars were the cypherpunks, many of whom were radical libertarians who predicted that privacy and anonymity powered by strong encryption would fundamentally shift the balance of power between individuals and the state. For example, in this paper (also from 1997) Tim May, one of the cypherpunk’s founders, describes the some of the social implications of “untraceable digital cash”:
Some of these “marginal” uses are terrible to consider. Extortion, kidnapping, and even murder contracts become easier to set up. Extortion, for example, becomes almost unstoppable at the usual place: the collection of a payoff and/or the spending of the payoff money. The extortionist makes his threat from the safety of his home PC, using networks of remailers and message pools, and demands payment in untraceable digital cash… .
Similar to extortion are markets for kidnappings (riskier, due to the physical act), and even untraceable markets for murders. For murder contracts, the usual risk is in setting up the hit—asking around is almost a guaranteed way of getting the FBI involved, and advertising in traceable ways is a similar invitation. This risk is largely removed when anonymous contact and payment methods are used. To ensure the job is completed, third party escrow services—anonymous, of course, but with an established cyberspatial reputation—hold the digital cash until completion.
The thing is, untraceable digital cash has not been a reality until now. Over at Reason, I write that while much of the discussion about Bitcoin is focused on whether the virtual currency has all the attributes of money and whether it can ever be a viable alternative to state-backed fiat currency, its real revolutionary potential is as untraceable digital cash.
Time will tell whether the gold bugs or the skeptics are right, but what’s being overlooked is that it doesn’t matter whether Bitcoin makes it as a store of value or a unit of account for it to work as a medium of exchange. Even if the Bitcoin market remains volatile and never pans out as a good store of value or unit of account, one can imagine users converting their dollars or euros to bitcoins for just long enough to make a transaction; perhaps just minutes. And as long as it works as a medium of exchange, it is the true digital cash that was missing from the cypherpunks’ predictions.
With a little bit of effort, today you can purchase bitcoins anonymously with physical cash. You could then do all sorts of things the government doesn’t want you to do. You could buy illegal drugs on the notorious Silk Road, an encrypted website that has been operating with impunity for the past two years facilitating annual sales estimated at almost $15 million. You could gamble at various casinos or prediction markets, buy contraband Cuban cigars, or even give money to WikiLeaks. Dissidents in Iran or China can use Bitcoin to buy premium blogging services from WordPress, which now accepts payment in the currency. Perhaps more importantly, Bitcoin makes the cypherpunks predictions of markets for stolen secret information and even assassinations feasible.
I predict that we will soon see another round of the crypto wars. Now that Bitcoin has broken through to at least some public notice, I suspect we will see greater use of the currency and with it greater illicit use. I also suspect we will see the intelligence community, law enforcement, and child safety advocates take greater notice of Bitcoin as an anonymous payment processor. (Indeed, you can glean from this speech by the director of the Financial Crimes Enforcement Network that they see decentralized virtual currencies like Bitcoin as “emerging payment systems.”) And I suspect that traditional payment processors who might be in competition with Bitcoin to take notice as well. If these stars align, I imagine we will see public calls to “do something” about Bitcoin.
Although Bitcoin’s decentralized nature makes it difficult to regulate, its ecosystem (and even the network itself) is not impervious to attack. Those of us who see the benefits, and not just the costs of digital cash should begin preparing for this likely confrontation.
Over the past few days, interest in bitcoin has exploded as its valuation has reached stratospheric levels. Most of the media attention has been focused on that valuation and on bitcoin’s viability as money. For example, the Financial Times had the run-up in bitcoin’s price on its 
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