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Bitcoin Weekly 2016 August 24: Bitstamp turns 5 Ledger wallet giveaway, CEO of CHBTC interview, final Silk Road BTC auction and Bitcoin Core 0.13.0

Bitcoin Weekly News

This week brings a birthday for London-based Bitstamp Bitcoin exchange, the company is turning five and is giving away a bunch of Nano Ledger hardware wallets. News outlet CryptoCoinsNews interviewed the CEO of China-based exchange CHBTC, who answered some questions about China and Bitcoin. The final auction for bitcoins sized in the Silk Road auction, although the turnout has been the lowest of all the auctions at only five bidders.

The blockchain technology fintech world is growing more interesting with Swiss bank UBS announcing a blockchain-based major currency remittance system, thus expanding the horizons for the use of blockchain in fintech.

For Bitcoin Core enthusiasts, version 0.13.0 of Bitcoin Core was just released (and is available for installation) with numerous updates and fixes to the protocol, but most importantly preparations for Segregated Witness–a proposed solution that will lower the data size of Bitcoin blockchain transactions and allow more to be stored in blocks.

As for the Bitcoin market, current value appears to be holding at $583.46 USD (Bitcoinaverage.com). According to charts at CryptoCompare.com this is up from last week at $572. For most of the month, Bitcoin has maintained a value around $570-580 since early August, when a sudden drop in the BTC value (from $654 to a brief low of $513) coincidental to the hack of major Bitcoin exchange Bitfinex (BTXNA, Inc.).

Bitstamp issues final notice for users to verify accounts

Bitstamp CEO Nejc Kodrič. Image courtesy of Bitstamp.

Bitstamp turns 5, giving away Ledger wallets for its birthday

Monday marked the 5th anniversary of Bitstamp Ltd.’s launch. The London-based Bitcoin exchange launched in 2011 and now services customers across the world with offices in New York, London and Luxembourg.

To celebrate this grand event, the company is giving away 10 Ledger Nano Ses ($65 USD) and 100 Ledger Nanos ($33 USD). These are sleek, USB-compatible Bitcoin hardware wallets produced by San Francisco-based Ledger Technologies Inc.

Registered and validated users of the Bitstamp exchange can participate by filling out 5-question quiz about the company.

Above is Bitstamp’s co-founder and CEO Nejc Kodrič speaking about the past 5 years and what it’s meant for the company.

Bitstamp’s legacy is not just as a Bitcoin exchange and institution that has survived the test of time when other exchanges have failed but that it has thrived. Bitstamp reached 1 million transactions by 2012, has processed over $12.8 billion USD since launch and became the first nationally licensed Bitcoin exchange in Europe this year.

CCN interviews Dawei Lee, CEO of CHBTC, one of China’s largest exchanges

CryptoCoinsNews published an interview with Dawei Lee, the CEO of CHBTC, China’s biggest exchange for Ethereum and fourth largest for Bitcoin. The company, founded in 2013, has become one of the leading cryptocurrency exchanges in China offering trades for Ethereum (ETH), Ethereum Classic (ETC), Bitcoin (BTC) and Litecoin.

Boasting about his company’s stats, Lee said, “CHBTC’s highest 24 hours trading volume was 5.431 million Etheruem (about $70.53 million) and 17.13 million Ethereum Classic (about $45.82 million), became the world’s largest Etheruem and Ethereum Classic trading platform. While Bitcoin’s average 24 hours trading volume is 120,000, which makes CHBTC rank fourth in Chinese exchange.”

In an age where many exchanges have suffered hacks and losses, Lee also proudly stated that CHBTC has operated three years without any security incidents. The company uses many industry-standard protections including offline cold storage, multi-signature wallets, SSL encrypted traffic, and two-factor authentication (2FA) with SMS and Google verification.

On the topic of China and cryptocurrency, Lee is optimistic. He says that China has continued to signal positively, such as positive announcements the Cyber Security bureau, the PBOC. However, he noted, that China still has no formal stance on cryptocurrency, digital currency, or blockchain technology since December 2013 (when the Chinese central bank released a statement that caused a lot of upheaval).

Lee also briefly touched on the “zero fee” trading model that many Chinese exchanges use, noting that international colleagues criticize the exchange for this model. In fact, many Bitcoin market tracking websites will dismiss volume and values from exchanges that run zero fee models because they feel it incentivizes spam trading to simply inflate volume without currency actually changing hands in a meaningful way.

This model has also led to some confusion and criticism in the market in past years as exposed in this 2014 article by CoinDesk about Chinese Bitcoin trading volumes.

Overall, Lee also has a very positive view of the Bitcoin industry and community and its future as well.

“The Bitcoin community is a resilient, vibrant and passionate force,” he said. “As we are a China-based member of this community many times we are not in tune with what is happening with the international community due to the language barrier, culture differences and the great firewall. But what unites us all is the potential to change the world for the better with this revolutionary technology that has been able to bring like-minded individuals from across the world together on a common mission.”

Read the full interview with CHBTC’s CEO Dawei Lee at CryptoCoinsNews.

Final Silk Road auction sees only 5 bidders, sells at $1.6 million

According to CoinDesk, the United States Marshals Service (USMS) has auctioned off the final lot of bitcoins sized from the Silk Road bust. The bitcoins, totaling 2,700 BTC (worth approximately $1.58 million USD) sold to an anonymous bidder.

This auction drew only five bidders in contrast to the previous auction in November, which saw a turnout of 11 bidders. During that sale the lot of 44,000 BTC (approx. $25.4 million USD) with New York-based exchange itBit winning 5 lots (and other unknown bidders receiving the rest). Another known big bidder from previous USMS auctions is venture capitalist Tim Draper, who won all of the first auction and part of the second auction.

This is the fourth and final USMS auction of Silk Road sized bitcoins and the dwindling number of participants raises a number of questions.

Amid the possible reasons could be that previous auctions tended to see extremely large entities seeking chunks of cheaper bitcoins in order to fill coffers for trading and those may be satisfied currently. Another potential reason might be because Bitcoin market value has fluctuated since 2015, seeing a spike in April of near $800 (up from previous months around $450), which then fell to the current $583. While it’s clear that Bitcoin market value is up from 2015, the current volatility might make the currency seem harder to hold.

UBS announces “Utility Settlement Coin” using blockchain-based technology for fintech

Swiss bank UBS AG has developed what it calls a “Utility Settlement Coin” (USC) in conjunction with four other of the world’s biggest banks that uses blockchain-technology to allow financial institutions to settle transactions quickly.

According to Reuters, the function of USC is to act as a digital cash equivalent to each of the major currencies backed by major banks (such as dollars or euros) rather than using a decentralized currency such as Bitcoin. Holdings in USC would have parity with a deposit in the same currency, meaning that spending USC would be the same as spending the real currency it was paired with.

“Digital cash is a core component of a future financial market fabric based on blockchain technologies,” UBS Investment Bank’s head of fintech innovation Hyder Jaffrey said.

This represents one of the first developments of blockchain technology for fintech purposes that many experts in the field have suggested could have huge disruptive influence in that sector. Especially because blockchain-based technology automates large amounts of the underlying clerical and verification work that needs to be done in order to exchange securities or currency in traditional banking systems.

This means that not only would a blockchain-based coin (such as USC would be) would save a lot of money on administration fees it would also speed things up considerably. In the case of securities, major U.S. stock exchange company Nasdaq has been experimenting with blockchain technology for settlement allowing transactions to occur in minutes (faster than what the industry calls “T+3” or approximately three days).

This represents a move similar to what think tank R3CEV LLC (which includes UBS) has been working on since its foundation in 2015. Other fintech innovations seeking to use blockchain technology include Overstock.com’s TØ.com decentralized exchange remitting a crypto-stock, Chain, Inc. using the Bitcoin blockchain for asset transaction tracking, Align Commerce, Inc. seeking to disrupt international payments by moving faster than traditional services, and many others.

The World Economic Forum recently published a report that blockchain-based technology will eventually occupy a central place in the global financial system. According to the report, 80 percent of the banks surveyed are currently in the process of developing some form of blockchain-based fintech technology. The WEF also concluded that blockchain fintech represents the foundation of the next generation of financial infrastructure.

For further analysis of this announcement from UBS see Mark “Dr. Bitcoin” Hopkins, who tipped SiliconANGLE to this news. Hopkins reveals that a report from 2015 from Santander InnoVentures claimed that blockchain-based technology could save the banking industry $15-20 billion in infrastructural costs by 2022. This announcement from UBS represents the cusp of big banks putting blockchain infrastructure to use and will show what sort of savings it can sustain.

photo credit: Bitcoin IMG_1924 via photopin (license)

photo credit: Bitcoin IMG_1924 via photopin (license)

Bitcoin Core 0.13.0 release

The Bitcoin Core team has released the most recent version of the Bitcoin Core client at 0.13.0 and it is now available for download and installation (announcement here). This release contains hundreds of improvements, including security fixes and preparation for the implementation of Segregated Witness (read more about this here and at Bitcoin Magazine).

With the preparation for segregated witness this update hopes to pave the way for increased capacity in blocks, the elimination of transaction malleability and new ways to upgrade Bitcoin’s scripting language with soft forks. (Note: Segwit is not supported yet on the mainnet Bitcoin network, this is only the infrastructure code to support it.)

Also included in this update is compact block relay code, a protocol to reduce peak amount of bandwidth when downloading new blocks by eliminating a major source of redundant peer-to-peer traffic for nodes; fee-based filtering, a mechanism allowing nodes to skip relaying unconfirmed low-fee transactions (that peers would ignore anyway); BIP32 HD wallet support for Bitcoin Core’s built in wallet allowing all keys for backup; and Child Pays for Parent (CPFP) transaction selection to incentivize miners to push priority for unconfirmed transactions by allowing children to pay increased fees for parent.

Much of this update includes highly technical, but very powerful, protocol changes (listed above) but the biggest takeaway is the preparation for Segregated Witness.

For over a year now, the Bitcoin community has been holding a debate about the future of the Bitcoin blockchain revolving around block size. As the network matures, Bitcoin blocks written to the blockchain have been filling up with transactions and eventually blocks will hit a set limit on the total size of transactions potentially slowing down the network (based on demand). Segregated Witness will work to shrink the size of transactions themselves in a block and therefore allow more transactions to be squeezed into a block.

Since a Bitcoin block is “discovered” by miners approximately every 10 minutes, the total number of transactions that can be placed into any one given block limits the speed that transactions can be processed on the network (leading to ever-increasing fees to get transactions confirmed quicker). This is especially true if some transactions must wait for later and later blocks to be confirmed. Larger blocks, however, would also be harder to transport and relay through the network and would take more space to store, both which would create their own new problems.

The debate still continues between those who desire to keep Bitcoin block sizes small (with the standard 1M size limit) and those who want to look to larger or unlimited block sizes to allow increased number of transactions per block.

Photo: Dawson/Bloomberg News
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Ask Doctor Bitcoin: What are the implications of Sandtander’s new cryptocurrency?

DrBitcoinHeader800x465According to a report in the Financial Times this morning, Santander’s long promised foray into blockchain technology was finally disclosed upon.

UBS, the Swiss bank, pioneered the “utility settlement coin” and has now joined forces with Deutsche Bank, Santander and BNY Mellon — as well as the broker ICAP — to pitch the idea to central banks, aiming for its first commercial launch by early 2018.

Bitcoin and related crypto-currencies primarily promise to cater to the so-called “un-banked,” so why would a major bank attempt to leverage blockchain technologies?

Simply put – it saves tons in administrative fees. Those who are regular users of Bitcoin (particularly for large-scale and/or international transactions) may not realize how much of a value they’re attaining at the expense of the banks. According to the report by Santander Innoventures that heralded today’s announcement, blockchain technologies could reduce banks’ infrastructural costs by $15-20bn a year by 2022. Simply put, there are enormous administrative staffing and technology requirements to reconcile international and inter-bank transfers.That’s why there’s been a number of coin, blockchain and crypto startups created to tackle this issue specifically (Setl and Ripple being two prime examples).

So what is Santander and the other banks using for this application?

One might imagine that they would try to use an already in-market solution, or even Bitcoin itself, but instead they’ve deigned to create a custom implementation of Ripple, a digital currency solution that’s been around for quite some time. Details on the banks’ implementation of Ripple are scant at this time, but from what we do know about Ripple, we can make a few sets of assumptions on how their system will work.

Ripple is a fundamentally different system of value exchange than Bitcoin or most other cryptos. Adam Levine of Let’s Talk Bitcoin summarized it neatly back in 2013. Some parts of Ripple have changed since then, but it’s essentially still an apt description of how value exchange compares and contrasts with traditional crypto:

For those of you not familiar with the Ripple system, it can be thought of as a parallel development to Bitcoin that tries to solve many of the same problems; trustless, bankless money transmission to anywhere in the internet connected world.   Ripple goes about solving the problems slightly differently.

There are no miners; transaction validity is determined by a cascading consensus engine.  Ripples themselves (XRP) were fully pre-mined and initially owned by Ripple Labs. They aren’t really traded as currency themselves, instead they are intended as an anti-spam mechanism – Like a stamp on an envelope with a check inside.

Where Bitcoin is an ownership based person-to-person system, Ripple is built on interconnected networks of p2p credit. Bitcoins are wholly owned with no risk of the redeeming party defaulting.

The Bitcoin system transfers ownership of one thing – Bitcoins.  People can build layers on top of it to do other things, but at a protocol level it’s just bitcoins on the Bitcoin network.

What if you don’t want to send Bitcoins?  Ripple is a good option.  When you send US dollars through the Ripple system, you’re really sending IOUs that will be redeemed somewhere else in the system. Depending on your need to transact in non-Bitcoin terms, this might be important- or you might prefer instead the wholly-owned nature of cryptocurrency.

In some situations, Ripple sounds like it could work – and in the case of banks that don’t want to transfer vast sums of value onto a blockchain, perhaps a Ripple-like IOU approach is the way to go.

In my opinion, though, Ripple has some fundamental flaws that must be examined and weighed both for the benefit of banks looking to move to this new technology as well as folks looking to innovate on blockchain technology in the crypto-sector. A report commissioned by distributed ledger consulting group R3CEV and authored by bitcoin developer Peter Todd has raised questions about Ripple and it’s ability to withstand the rigorous security demands of high-finance.

“Ripple still holds the majority of XRP, and it is in their favor for its value to increase,” says the report. “Ripple justifies XRP as an ‘anti-spam mechanism’ to deter transactions… However, as the volume of transactions increases the server load, transaction speed is slowed while the cost of the transaction and the amount of required XRP continues to increase.”

Todd next walks readers through a number of theoretical attacks that could take place against the Ripple protocol, discussing his estimates of the cost, scope, duration and probability of the scenarios.

Perhaps the most glaring, Todd’s writing infers, is the damage that could be done due to a “software backdoor”, as he finds that Ripple “does not provide a secure way to download any of their software”.

“This is a serious omission that has lead to significant monetary losses in the past. Ripple Labs should be following industry best-practice by signing git commits and tags as well as PGP signing their Ubuntu packages,” Todd added.

Todd ends by highlighting the potential real-world implications of these attacks in an elaborate scenario involving a dispute between the Russian government and Shell Oil, forecasting how these parties might attempt to achieve their aims through coercion on the network.

This is a common flaw in some implementations of cryptos as well – those looking to launch a new cryptocurrency and looking to avoid being 51% attacked during the nascent moments of the life of the coin may look to private mining or some other form of centralization, but in these cases, they’re creating honeypots for hackers as well as the key thing blockchain technology was designed to mitigate: central points of failure. As we discussed in the Bitfinex post a couple weeks ago, the common key component to every major loss, theft or hack in cryptocurrency history has been central points of failure.

My prediction is that this group of banks will move forward with their implementation of Ripple, and see some gains from using this new technology, and likely use it as a stepping stone to more open versions of the technology in the future.

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Ask Dr. Bitcoin: What is Dollar Cost Averaging?

DrBitcoinHeader800x465The typical cryptocurrency enthusiast goes through a few steps as they continue their journey, particularly if they see any early gains with their crypto investments.

  1. Initially, they’ll put in some sum of money – usually small – into a cryptocurrency and see some amount of gains and get excited. They’ll either be excited by the gains themselves, or they’ll be excited by the process of learning how easy it is to do (compared to the mountain of challenges one has to go through in a more traditional investing situation).
  2. Subsequently, if they’ve invested via an exchange, they may try their hand at day trading. If they invested by buying from someone in person, they’ll watch the price of the coin several times a day, perhaps obsessively with a dedicated screen, rejoicing and decrying minute moves in the market.
  3. After burning out on watching the market obsessively, they settle on either buying and holding (and putting their head in the sand on price), or taking a measured approach to watching the price on a periodic basis.

I know this is the journey I took – and my third step included a detail that has become common amongst advanced bitcoin users: buy-and-replace.

Essentially, using a constellation of tools that allow me to easily buy and spend my bitcoin, I kept a relatively stable amount of bitcoin in my account by buying goods and services with BTC and then immediately re-buying that same amount. As I grew more comfortable with holding large amounts of money in bitcoin regardless of what the price per bitcoin was, I added another step to this – I’d buy-and-replace, but when I replaced, I’d buy whatever I spent plus an additional 10%.

Screenshot 2016-08-15 at 9.10.55 PMOver the first year or so of doing this, I noticed that the amount of bitcoin I held grew rather quickly as compared to years past, as did the total value of the amount – which was particularly interesting considering that it was a bear year (that is a year where the price on average decreased over the course of the year).

I thought I had stumbled onto something unique, but my larger-than-expected gains were due to a time-worn technique called Dollar Cost Averaging (DCA). Dollar cost averaging is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high. The end result is that a disciplined investor can spend a sum of money spread out over time in a fluctuating market and net more value than investing a lump sum of the same amount.

I invited one of my friends (as well as my family’s financial adviser) David Salmon of Primerica over to the offices better explain the concept using a couple of analogies he uses when asked about the concept. He uses two stories to help explain it that are particularly illustrative, and can likely help you formulate an investment strategy of your own that will help you take advantage of fluctuations in the markets that will allow you to not sweat the small (and large) market changes that are all-too-common to cryptocurrency.

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Ask Dr. Bitcoin: What does the Bitfinex Heist mean for cryptocurrency?

IMG_6069So last night, as my team was readying itself for one of the most well-attended #BigDNT presentations in memory, my attention was elsewhere, as one of the most precipitous price falls in Bitcoin history was underway. I posted to my Facebook account a quick update at the time:

So if you’re wondering why Bitcoin is dropping in price today (and why your other crypto portfolio is hurting as well), one of the leading American crypto exchanges has had a major hack, and has lost around $70-85 MM of user funds, according to reports on Reddit and Twitter.

Bitcoin will recover, but it’s unclear if Bitfinex (the affected exchange) will.

This further highlights the need for decentralized exchanges.

Technologies like Ethereum and OpenBazaar are the primary beneficiaries of today’s events (after the thieves themselves, of course).

Those are the hard facts. Here are some more:

  • Bitfinex was one of the highest volume crypto exchanges on the planet, and was based in Hong Kong.
  • They have temporarily ceased trading after the company reported a security breach that led to the theft of a large number of bitcoins.
  • The amount believed to have been stolen is 119,756 bitcoin, which at the time of writing is valued at $65.6 million.
  • Bitfinex said in a blog post that they were investigating the breach to determine what had happened, but they “know that some of our users have had their bitcoins stolen.”
  • Some of the blame almost undoubtedly rests with their security partner BitGo.
  • The theft itself is said to have been reported to legal authorities.

The market very quickly punished the Bitcoin price, dropping within hours of the news all the way to $465 per BTC before “dead cat bouncing” back well above 560. As of the time of this blog post, the price was steadily rising past $550 per coin.

Screenshot 2016-08-03 at 11.01.30 AM

What does it mean, though?

13876114_1718535025076699_4679288151748508142_nWhile this is certainly a highly significant event in the world of cryptocurrency, it’s not the most significant, it won’t be the last of its kind, and it will not kill cryptocurrency in general or Bitcoin in particular. The market capitalization of Bitcoin is nearly $9 billion, and $85 million only represents a small fraction of that.

There will certainly be many experts with very salient advice about what went wrong and how it could have been prevented, but the most fundamental thing to address in my opinion is the issue of centralization.

Bitcoin and most cryptocurrency was designed with many core principles in mind, and fundamentally these principles require decentralization. In the minds of the early founders of Bitcoin, decentralization represents the ability of Bitcoin to survive corruption, security threats, and “bad actors” like thieves and criminals (or more cynically, bad actors like regulators and administrators). Simply put, if you don’t have a central authority regulating and hoarding large pools of capital, you get rid of many of the existential threats that exist and threaten traditional monetary systems.

What’s interesting, though, is that while the means of decentralized transfer and maintenance of the system was built into the design of Bitcoin, one key piece was left out: the means of deriving market value or currency exchange. As such, to fill that gap, people and organizations started creating what basically look like traditional marketplaces – places where capital pools and becomes vulnerable in the typical ways that banks and other capital pools are vulnerable to bad actors and bad circumstance.

How does this benefit Ethereum?

This is why in my original post I said that this leaves Ethereum and OpenBazaar as the primary beneficiaries. Both of these technologies enable large-scale decentralized exchange. The technologies and digital organizations that enable this are still nascent and lesser known, but the concept is solid, and the outcome is real: trustless exchange of value in an environment less attractive to hackers. These large pools of capital are always going to be a honeypot for those that would like to make off with the money. In a decentralized exchange situation, you can store your own value in wallets that you control until it’s time to make an exchange, at which time the value exchange happens.

Any technology companies or cryptocurrencies that continue to adhere to the principles of openness, transparency and decentralization will be the primary beneficiaries of the natural evolution of this technology, and now is the tail end of the time to be considered a first mover in this space. It was in response to some of the large heists several years ago that OpenBazaar and other decentralized marketplaces were started. It won’t take too many more major heists like this to further push users towards experimenting and using as a natural course of things these decentralized technologies.

[Notes: A small portion of this post was quoted verbatim from a SiliconANGLE post by Duncan Riley, re-used under their published Creative Commons BY-SA license. -mrh]

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YoCoin, a local Dallas-run cryptocurrency.

IMG_6204On Thursday evening, I was invited to give a brief talk at the meetup for a new cryptocurrency, YoCoin. I was first introduced to the group by happen-stance, when two locals from the marketing team for YoCoin came in to make a Bitcoin purchase. I’ve had the good fortune in the intervening time to get to know them and investigate the cryptocurrency they’ve been working on.

Initially, I wasn’t particularly interested in yet another alt-crypto. There are so many of them out there, it’s impossible for even someone who monitors the alt world full time to keep track of much more than their names. I did go and check out YoCoin after they told me a bit about their business during one of the times they came in to buy from me, and I discovered that while it was a mostly unremarkable scrypt currency algorithmically, the adoption curve was quite impressive.

YoCoin launched around the beginning of the year, and has shot up from a couple pennies per coin to a peak of over $.30 per coin a few weeks ago (it’s now around a quarter).

chart

What piqued my interest is why it shot up so high, so I talked to Bruce and Sam, the gentlemen marketing the coin locally. The thrust of their approach has to do with focusing on merchant and user adoption outside the bubble of crypto and finance geeks who usually go in for these things. That’s interesting to me, because that’s essentially what’s been cryptocurrency’s biggest issue: they’ve usually a rock solid technology-base, but no way to market it to people who aren’t crypto-anarchists or grey-market enthusiasts.

In a world with thousands of scrypt-coin clones, what’s interesting about YoCoin is it’s team and their commitment to market smarter (read: outside the bubble) and develop better UX and UI than what cryptocurrencies are generically known for.

I’ve been hoping for local Dallas action in the crypto space, and now we have it. I’ll be watching YoCoin closely to see how it evolves.

IMG_6104

[Disclosure: YoCoin is in talks with Barista Ventures (where I’m a Venture Partner) to execute an app development deal. YoCoin is also a frequent buyer of Bitcoin from Roger Wilco, my new content marketing startup.]

 

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Fadi Chehade to head a new ‘authoritarian’ governance regime.

Fadhe Chehade, former CEO and President of Internet governance body ICANN, has sent ripples through the community following a recent decision to be the frontman a new Chinese government program to franchise their way of managing internet access to the world.

Chehade is probably familiar to many of you in my circles, as he was a guest on my program, theCUBE back in January of 2014, when we were attending and covering an event on Internet governance and economics.

I picked up this story over at SlashDot and The Register, who framed it in an overwhelmingly negative light. And who can blame them? Not only is China at the helm of this initiative to reformulate internet governance, so is Russia and “other authoritative governments.” This isn’t the stuff that dreams are made of. The headline from that interview was that “the way we govern the internet is not tenable.” A real cynic would say that Chehade, in our 2014 interview, was telling us ‘stop me, I’ll kill again!’

FadiChehade-1024x713“The Internet is many many networks — what makes it one is a logical layer on top of the physical layer,” Chehade went on to say. “That logical layer includes what ICANN manages, names, numbers protocol parameters. That layer has to remain strong and in tact, in order for the physical infrastructure to be unified before we get to the application layer and content layer. If we lose that, and suddenly governments decide they will create their own numbering or naming system. A country like China, would name introduce to the world a Chinese Internet route.”

In the same interview, Fade told us that he saw the next eighteen months as critical, giving a “pinhole in a pipe analogy.” In his analogy, all it takes is a pinhole in a plumbing pipe to bring down the infrastructure of a house, and he saw the next eighteen months forward from January of 2014 as critical to maintaining the current approach to internet governance (that is to say, when you type in a thing that you’re looking for, you specifically get that thing – not a filtered or different thing that someone else wants you to see instead).

It was difficult to discern, knowing now what we do, whether he was simply emoting the sentiment of ICANN, or speaking from personal conviction as to how the internet works.

It’s somewhat disheartening, given all the excitement percolating around blockchain technologies, that Fade decided against pursuing one of those ends. NameCoin is a great proof of concept way forward for solving the perceived problems with ICANN specifically and Internet governance in general. The better angels around the world decry ICANN because of a US-centric worldview, and given the revelations by Edward Snowden in recent years, that the US has everyone’s best interests at heart is no longer the prevailing theory.

I think the true fear in Chehade’s decision to head this new organization is that every negative prediction he made to the audience at #MITECIR is now come to pass.

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Dell’s move to Bitcoin reflects their philosophical core.

Michael Dell on theCUBE with John Furrier and Dave Vellante at DellWorld 2012.

Michael Dell on theCUBE with John Furrier and Dave Vellante at DellWorld 2012.

Maybe I nicked this statement from someone, or maybe I come up with it, but a phrase I use a lot when I talk to people about Digital Autonomous Organizations is “.. the economy and the state are engineering problems, not political ones.”

What struck me from the Dell announcement around Bitcoin acceptance is this is reflective of a core belief in at least a version of this philosophy.

In late 2012, Michael Dell came on my show(theCUBE) to talk about the changes in the industry and at Dell, and had this to say:

“When I look at the big opportunities that exist in the world and the big unsolved problems, be they in medicine, in education, in energy or the environment, I think that these are problems that technology will solve.”

“I think about the innovation that’s occurred over the last couple decades that I’ve been in this industry where IT used to be this sort of back room activity with a couple of guys wearing pocket protectors involved in, and now you essentially can’t even run a business if technology isn’t involved.”

A few months after he said this on our show, he went on to take Dell private, a move that’s allowed them to go deep into bleeding edge technology moves like Bitcoin and 3D printing.

Dells moves in 3D printing have forced competitors to get serious about the business as well (like HP).

We might be at the knee of the curve here; Dell’s acceptance of Bitcoin just might push other major enterprise players to start thinking about Bitcoin in the same way.

[Originally posted by me to /r/bitcoin. Feel free to upvote it there if you like it.]

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Ask Dr. Bitcoin: Is Bitcoin Anonymous?

DrBitcoinHeader800x465A common misconception is that Bitcoin is an anonymous currency. What it offers is a kind of ‘pseudo-anonymity’ (or ‘pseudonymity’), which means that if the someone were inclined to trace Bitcoin transactions or investigate Bitcoin addresses, they can do so just by looking at Blockchain.info, BlockExplorer, or any a number of open source tools used to perform forensics on the blockchain.

The blockchain is a ledger wherein all Bitcoin transactions are recorded. It offers pseudonymity, since people’s names and addresses aren’t reflected in the ledger, but the Bitcoin addresses can still be tied to a person through good old detective work. It might entail a little digging around, but as Silk Road founder Ross Ulbricht was unfortunate enough to discover, the owner can certainly be traced.

A new Bitcoin wallet, ‘Dark Wallet’, aims to protect the identity of users by taking pseudonymity to anonymity. Dark Wallet is a project created by Cody Wilson and Amir Taaki. Wilson gained attention last year when he fired the first-ever printed gun, while Taaki is the anarchist developer behind the DarkMarket, a decentralized online black marketplace that aims to become the next Silk Road.

Wilson and Taaki launched an Indiegogo campaign last October for their Bitcoin wallet, and it was quickly funded in cash and Bitcoins. Dark Wallet can be downloaded and run with the Chrome browser.

Just go to https://github.com/darkwallet/darkwallet, click ‘Download ZIP’, unpack the ZIP file, go to ‘chrome://extensions,’ enable Developer Mode, click ‘Load unpacked extension’ and select the unzipped folder.  This is a pre-alpha preview which means users can expect glitches and instability from the software.

How Dark Wallet works

 

darkwalletSo how can software protect one’s identity? Dark Wallet uses a technique known as CoinJoin, which has been around since the early days of Bitcoin. CoinJoin makes it possible to anonymize transactions by combining random Bitcoin transactions so the blockchain records two transactions as one. Before, you’d have to have coding skills or crypto-prowess to use CoinJoin, so not everyone enjoyed the anonymity it offers. Dark Wallet makes it simple for any Bitcoin user to mask their identity.

For example, Mike is buying a My Little Pony stuffed toy from an online seller, and at the same time, I could be buying a truck of weapons-grade plutonium from an online black market to power a new alternative-energy car battery I’m working on. Both Mike and I use Bitcoins to pay for our purchases. What Dark Wallet will do is combine the two transactions so it will be reflected as one on the blockchain (along with many other wallet users). This makes it impossible to determine who bought what. Dark Wallet will also allow users to run CoinJoin even when they’re not making any purchases or payments, in order to mix their Bitcoins and send them to another address owned by them. This makes it harder to determine the identity of Bitcoin owners.

The more CoinJoin is used, the harder it will be to trace who owns the Bitcoin.

“When you start to join transactions, it muddles them,” said Taaki. “As you start to go down the chain, you can only be 50 percent sure the coins belong to any one person, then 25 percent, then one out of eight and then one out of sixteen. The conditional probability drops very fast.”

Enticing for criminals

 

Bitcoin-Image2778935760Since the inception of Dark Wallet, Wilson has been plagued with questions as to its purpose. Dozens of critics have suggested it will make money laundering even easier, encouraging more illegal activities.

By telling people you can buy things using Bitcoin and Dark Wallet anonymously, the obvious fear is it will be used to buy illicit drugs, illegal ammunition, or even fund pornographic sites catering to pedophiles.

Back in December, Jon Matonis, executive director of the Bitcoin Foundation, said in an interview that Dark Wallet’s effort is consistent with the foundation’s goal of promoting and developing Bitcoin into a private, government-free currency, but admitted that he is concerned with some of the aspects of the Bitcoin wallet. For one thing, even the name “dark wallet” has negative connotations which could cause people to assume it’s been designed for illicit activities.

Because of these concerns, some are wondering if the authorities may attempt to prevent the launch of Dark Wallet.

Stephen Hudak, spokesman for the U.S. government’s Financial Crimes Enforcement Network, declined to comment specifically on Dark Wallet, but stated that agency is “well aware of the many emerging technological efforts designed to subvert financial transparency.”

“It’s certainly our business to be interested and vigilant with respect to any activities that may assist money laundering and other financial crimes,” he added.

The ‘F’ word

 

Wilson knows that Dark Wallet will probably be used for illegal transactions like the purchase of drugs, but that’s not his intention.

In a previous interview, Wilson insisted there’s a need for anonymous cash online, and stated that, “It’s not that I want you to buy drugs. It’s just that I think you should have the freedom to do it.”

Yup, the ‘F’ word. Freedom. That’s what Dark Wallet is attempting to offer to Bitcoin users. Skeptics may wonder what anonymity has to do with freedom.

Mcnealyemcworld2012Sun Microsystems co-founder (and @theCube alumn) Scott McNealy famously said once that “You have zero privacy anyway. Get over it.”  Much later on, Google CEO Eric Schmidt said “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place…”

The problem is that in these modern days, one never knows when one is breaking the law.

An interesting thought exercise is to attempt to imagine how many people (experts, if you will) do you think you’d have to gather into a room to understand the totality of just federally enforceable American law? How many people (again, trained experts in the law, so we can somewhat reduce the number) do you think would be required to understand the totality of federally enforceable American law that was passed for 2013? What about the totality of the tax code that was put into place in 2013?

Ignorance of the law excuses no man, as the axiom goes. I wonder if you can say that still truly applies when the number of experts required to know the totality of the law is hard to imagine, even for those with large imaginations?

When thought about in these terms, it’s not difficult to imagine how having a way to completely obfuscate one’s financial path can be handy. By providing a way to make anonymous purchases, people will be free to buy things they have longed for without worrying about being judged or prosecuted for committing a crime of ignorance.

The goodness that anonymity offers should not be overshadowed by how others can use it for wrongdoing.

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Ask Dr. Bitcoin: Can I donate Bitcoin to politicians?

DrBitcoinHeader800x465As someone who has a keen interest in cryptocurrency and has a history in political campaigning, I am one of those peculiar animals who knows Federal campaign finance laws and enjoys learning new things about them.

[Disclaimer: I am not a campaign finance lawyer. I’ve been a journalist for far longer than I was involved in campaign finance. My interpretation should not be taken as anything other than informed opinion. For best advice, seek an actual lawyer who specializes in campaign finance.]

As such, I’m happy to convey the news this week concerning US FEC guidelines around crypto-donations to federal campaigns. In short, the government says “OK.”

The US Federal Election Commission (which exclusively governs national election campaigns) has released a proposed draft that addresses Make Your Laws’ inquiry regarding Bitcoins.

Make Your Laws, an organization that facilitates political contributions, previously submitted a petition asking for Bitcoin contributions of up to $100 for campaign to be permitted. The decision regarding the matter was delayed as Bitcoin has raised many questions, specifically anonymous donors.

The proposed draft states that Bitcoin can now be accepted as campaign donations and the digital currency will be considered as in-kind contributions like stocks and art. This is great news for election candidates as it gives them more avenues for accepting donations, and could potentially allow them to tap into a new community of contributors. And this is even better news for politicos who are already accepting Bitcoin donations, even without the FEC’s consent, as everything becomes above board and less questionable.

But whether you’re an election candidate who’s elated by this news, or someone who wants to donate using Bitcoin, there are some things you need to know first.

Like all political donations, they won’t be anonymous

 

fecWhen donations are made in cash, political action committees are required to deposit that amount in a campaign depository within 10 days upon receipt. Since Bitcoin will be treated as an in-kind contribution like art or stocks, it can be held in a Bitcoin wallet indefinitely, but once it is liquidated, the amount should be put in a campaign depository.

MYL will handle Bitcoin donations and will require details like the name, physical address, occupation and employer of the Bitcoin donator. This is so it can verify that the amount being donated is legal, comes from an American citizen, and that the contributor is the owner of the digital currency being donated. MYL will then provide a one-time Bitcoin address for the candidate to accept the digital currency.

You can’t spend it, directly.

 

The FEC proposed draft stated that PACs can purchase Bitcoins using campaign funds for investment purposes, but the digital currency cannot be used to pay for anything campaign-related. It cannot be used to pay for services rendered by a campaign team or pay for campaign materials or ads. What they need to do is turn Bitcoins into dollars by selling them, put in the campaign depository, which can subsequently be used for disbursement.

Bitcoin price fluctuation is one of the areas where many entrepreneurs have stepped in to make cryptocurrency more user friendly.

Bitcoin price fluctuation is one of the areas where many entrepreneurs have stepped in to make cryptocurrency more user friendly.

Sai, the president of MYL, told us: “The reason for this has nothing to do with Bitcoin’s volatility, but
rather with a nuance of election law — whether it’s in-kind or
currency. The final draft (unlike drafts A & B) very carefully does
not actually say either way (though it says it should be reported like
in-kind and can be held like in-kind). If it were fully treated like
in-kind, then previous AOs create precedent that would allow it to be
used for barter, and they couldn’t come to an agreement on that, so
the opinion walks a fine line to avoid opining on it.”

For now, MYL advises contributors to keep Bitcoin donations small, about $100 worth as it is an “amount of money that is not going to raise some of the bigger issues that might accompany a Bitcoin transaction.” It should be noted that MYL is only providing their interpretation on the guidance; the $100 of crypto shouldn’t be seen as a legally binding limit, only the limit they sought approval for.

Because Bitcoin exchange markets are open 24/7, its value is constantly fluctuating. Therefore, the  the FEC’s final AO suggests that PACs should value Bitcoin contributions based on the market value of the digital currency when the contribution was received.

Reporting and monitoring

 

Receiving Bitcoin contributions should be reported like any other in-kind contributions, and if the Bitcoins are sold, it is the PAC’s duty to report how much the Bitcoins were sold for.  The same rule applies for Bitcoins purchased using campaign funds. The amount of Bitcoin purchased, how much money was used to acquire it, and how much money was received when the digital currency is once again sold, should all be reported.

It should also be noted that any transaction fees which arise from the use of Bitcoin should not be deducted from the original value of the contribution.

“The Committee must treat the full amount of the donor’s contribution as the contributed amount for purposes of the limits and reporting provisions of the Act, even though the Committee will receive a lesser amount because of [the] fees,” the proposed draft stated.

tl;dr: Accepting Bitcoin in campaigns is more complex than sending it.

It should be noted that the Federal regulations may be used as guidelines in state affairs, they do not directly apply as the Federal regulations only govern national elections (Presidential, Congressional and otherwise). I should also not that there have been several instances of politicians taking Bitcoin for political donations prior to the guidance from the FEC, and at least one who has since.

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Ask Dr. Bitcoin: How big of a terrorist threat is Bitcoin?

Dr Bitcoin at EMC WorldI’m traveling out West this week, in Las Vegas for EMCworld (catch the coverage I’m producing with the team on our live channel through Wednesday!), so for folks on the East coast, I’m sleeping in a bit later than them. You can imagine why I was a little bit alarmed this morning to get a call at 6AM Pacific time from Wells Fargo asking what Bitcoin was, how I used it, and if I sold it to other people.

I was caught in a net that Wells Fargo appears to be doing of their customers who interact with popular Bitcoin transaction facilitator, Coinbase. They seemed keenly interested in my expertise around Bitcoin and exactly what I was doing with this mysterious internet stuff (“So Bitcoin is like Paypal, basically?”).

Since the September 11 terrorist attacks, the US government has put in place numerous security measures to try and prevent such a horrific event from happening again. One of these measures is the USA Patriot Act, which gives different government agencies extensive powers to counter terrorist acts, which among many other things includes “Know your customer” regulations aimed at preventing regular folks from acting as money service providers, as a way of preventing terrorists and drug dealers from proliferating.

Another outgrowth of the Patriot Act and it’s regulations around money, a division of the Department of Defense is looking into Bitcoin and other digital currencies and their potential to help finance terrorist acts.

The Combating Terrorism Technical Support Office, which identifies and develops counterterrorism abilities as well as investigating irregular warfare and evolving threats, is now looking into how virtual currency may help fund acts of terrorism.

An unclassified memo by the CTTSO was obtained by Bitcoin Magazine, which revealed concern about how virtual currencies can be used to finance threats. The memo suggested what areas should be looked at to determine the level of threat virtual currencies actually pose.

“The introduction of virtual currency will likely shape threat finance by increasing the opaqueness, transactional velocity, and overall efficiencies [sic] of terrorist attacks,” the memo read.

The memo proposes solutions to be considered, such as identifying relevant case studies from the last 20 years and exploring funding instruments that supports terrorism; determining types of “red flags” that can emerge with the introduction of virtual currencies; investigating how virtual currencies can be used to predict future attacks; and developing and deploying strategies to prevent them, among others.

The memo depicts Bitcoins and other virtual currencies as something that can be used for both funding and counteracting terrorism.

DrBitcoinHeader800x465Many people believe Bitcoin is an anonymous currency. This is not entirely true, but there are measures users can put in place if they don’t want to obfuscate the path money takes.

This is obviously what concerns the authorities. Bitcoin and virtual currencies could easily be used to fund threats. Even so, that doesn’t mean Bitcoin transactions go completely under the radar – as Ross Ulbricht, founder of the notorious Silk Road website, found to his cost.

Smear campaign?

The problem is that instead of trying to understand Bitcoin before labeling it as good or bad, some people have jumped to conclusions due to the bad press its received in the past.

Pelle Braendgaard, the CEO of Bitcoin wallet Kipochi, explained in an interview that the cryptocurrency can actually help governments better understand what’s happening with their economies since every transaction is recorded on the block chain, unlike when using real money when no one has a clue where the money ends up.

Money laundering 1-13-14Yes, cryptocurrency can be used to fund terrorism (and Overstock.com and Nascar…), but it is quite unfair to single it out for that purpose. After all, US dollars can and are used to fund terrorism all the time. All of the so-called ‘worries’ about Bitcoin could be perceived as propaganda to dissuade people from using it.

The safest bet for would be terrorist sponsors will always be cash, something that can’t easily be traced back to them. Quite unlike Bitcoin, where every transaction is recorded publicly on the Blockchain.

During the U.S. Senate hearings on Bitcoin, FinCEN director Jennifer Shasky Calvery told Congress that “…cash is probably still the best medium for laundering money.”

It should also be noted that charitable foundations have been used to accumulate funds for terrorist activities too. A case in point is the Holy Land Foundation for Relief and Development, which was convicted in 2004 by the US federal court of funding Hamas, a Palestenian Sunni Islamic organization with a military wing that doesn’t care if civilians get hurt during operations (a story I covered very closely in my online coverage at the time as well as my post 9-11 radio briefings for WABC).

At the end of the day, at this juncture, Bitcoin poses an almost inconsequential security risk to what those who seek to curb money laundering for the purposes of national security and drug prevention mostly because of the market cap for the cryptocurrency. Bitcoin is still in the early days of its life; the market cap of Bitcoin is shy of $6 billion (and the market cap of all other alt-currencies is certainly shy of $2 billion). Globally, it is estimated that there is around $5.5 billion laundered each day. While the potential disruption of Bitcoin is great, it’s barely a blip on the radar when it comes to current criminal enterprises.

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