Sunday, March 24, 2013

Will New Bitcoin Backdoor Extensions Keep Bitcoin Ahead of Government Snooping?

The CIA's venture capital firm In-Q-Tel has taken a great interest in Bitcoin and has called some of its developers to give a presentation about Bitcoin this June, which is troublesome for the prospect of freedom and privacy.

But resistance is not futile as Andrew Leonard would like his readers to believe. Other developers are working on Bitcoin extensions to add further privacy for users. Bitcoin transactions are already fairly anonymous even though they can be viewed on a public open-source record.

Privacy lacks for Bitcoin users, not in the transaction, but in where the coins are stored. Specific encrypted coins can be traced through a transaction to a certain wallet whose owner is may or may not be anonymous. Even if the wallet is anonymous, everyone knows where their specific coins have been which could potentially expose the wallet owner's activity and identity.

A new Bitcoin privacy extension, Zerocoin, is seeking to solve this privacy concern. Zerocoin, being developed by Johns Hopkins University, will basically pool Bitcoins in escrow and scramble them between buyers and sellers to hide the origin and destination of specific coins.[...]

Yet as Bitcoin developers are hard at work finding ways to make it even more anonymous, will they be successful in preventing backdoors for government access, thwarting FinCEN regulations, and involvement by the CIA?
As I wrote recently, the real weak point for Bitcoins at this time is the area the Treasury is zeroing in on, conversion of bitcoins to and from dollars. It's is awkward to execute, but it is still possible to operate anonymously once you are in the bitcoin system, but the putting money in or taking it out is where it can be monitored.


  1. IMHO, it's going to be difficult to ever make completely anonymous transactions. I haven't taken the time to completely analyse the bitcoin system and architecture, but obfuscation is usually a better approach in these situations. If you can come up with a way to generate a huge number of fake transactions that are just as difficult to unravel as the real transactions, then you make tracing transactions extremely expensive.

  2. It's been a while since I looked at the bitcoin structure but I think each transaction can be made anonymous by generating a new sender address for each transaction.

    Speaking of anonymity, there's no way to comment anonymously on your blog.

  3. idea. use gold and silver to convert to bitcoins.

  4. Bitcoin is to money what Rand Paul is to libertarianism. As a student of Rothbard, surely Wenzel knows this, and has likely commented to such effect in the past. Nonetheless, it bears recalling the words of The Wise One himself:

    "This process: the cumulative development of a medium of exchange on the free market--is the only way money can become established. Money cannot originate in any other way, neither by everyone suddenly deciding to create money out of useless material, nor by government calling bits of paper "money." For embedded in the demand for money is knowledge of the money-prices of the immediate past; in contrast to directly-used consumers' or producers' goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding demand for a medium for exchange to the previous demand for direct us
    A most important truth about money now emerges from our discussion: money is a commodity. Learning this simple lesson is one of the world's most important tasks. So often have people talked about money as something much more or less than this. Money is not an abstract unit of account, divorceable from a concrete good; it is NOT a useless token only good for exchanging; it is not a "claim on society"; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange. But aside from this, it is a commodity--and, like all commodities, it has an existing stock, it faces demands by people to buy and hold it, etc."

    For all its promise and benefits, it is a retardation of the real concept of money. Indeed, as I said initially, Bitcoin is to money what Rand Paul is to libertarianism.

    Nice paint job. Engine sucks.

    1. Fungibility, i.e., anonymity, is a feature of commodity money, and as the demand for bitcoins seems to attest, appears to have some value in the digital age.

    2. I know I didn't put it in bold, and perhaps I should have, but part of what I cited also explains how money has a "physical stock." You know, something real, tangible, that can be exchanged. Unless you consider a hard drive that contains a bunch of code you can't decipher a "physical stock," then Bitcoins don't qualify in this regard.

      Semantics can't and won't elevate Bitcoins to status as a money in the same vein as precious metals, just as semantics can't and won't elevate Rand Paul to status as a libertarian in the same vein as his father.

      I don't think there is a better analogy on the face of the earth right now. Both represent a better alternative than the mainstream, yet are far from the real thing in their respective realms.


    3. Bitcoins meet the regression theorem requisites so Mises would heartily endorse them.

    4. The idea that money must originate as a commodity first is only possible in free market (as quoted by Rothbard above).

      We do not have a free market.

      Therefore, bitcoin was created as a new commodity created to meet market demand for a better medium of exchange. A medium of exchange that is resilient and resistant to manipulation and third-party interference.

      Why Mises' Regression Theorem is Wrong

    5. Jay, I believe the who point of it being something tangible relates to the goal of ensuring that it cannot be replicated ad infinitum such as what central banks are doing with the various fiat currencies. Also I think you are missing the value that this "commodity" has for the general public which is the ability to have their "money" secure from government, which unless you are very wealthy or well placed (in say Singapore) is rather difficult to keep from the state's greedy hands.

  5. If people want anonymous or near-anonymous bitcoins, the market will meet the demand. There are already methods of buying bitcoins that are decentralized and private.

    Regardless of what one thinks of Bitcoin, it's far superior whatever it is the Fed is mining.

  6. "As I wrote recently, the real weak point for [drugs] at this time is the area the [DEA] is zeroing in on, conversion of [drugs] to and from dollars."

    All you need to do is exchange your cash for bitcoin on the black market. Sure, they'll catch some people (it's not hard to imagine arrests based on undercover bitcoin purchases) but, for every transaction they catch, there will be tens of thousands they don't. And it will be a lot harder to catch someone selling bitcoin than it is to catch someone selling drugs.

    1. Watch out for those bitcoin sniffing dogs!!!