When we are talking about the online currency Bitcoins – a currency backed not by any nation state, but instead a series of mathematical rules – coverage tends to focus either on the surging value of each coin (currently about $130 or £85) or the fact that Bitcoins are quite a handy way to buy drugs online, using the Silk Road website.
Both are of interest, but are roughly akin to focusing on how the aeroplane might disrupt the hot-air balloon industry: it’s true, but drastically misses the true potential of an innovation to change the world – for good or for evil.
The real transformative power of Bitcoin, or something like it, lies not in a speculative bubble, but in its potential to put currency outside of the control of governments, or law enforcement agencies.
What that could mean has been brought to light by a s massy international investigation into a different online currency, Liberty Reserve, which now stands accused of involvement in a $6bn money laundering scheme.
Liberty Reserve, which operated out of Costa-Rica, was a centralised “gateway” currency, making transactions hard to trace. People needed to provide only minimal details – name, email, address and date of birth – to open an account, making it an easy way to make money traces disappeared.
In pre-prepared remarks, Preet Bharara, the US attorney for the southern district of New York, described the site in damning terms.
“The only liberty that Liberty Reserve gave many of its users was the freedom to commit crimes, as it became a popular hub for fraudsters, hackers, and traffickers, and the global enforcement action we announce today is an important step towards reining in the wild west of illicit internet banking. As detailed in the indictment, Liberty Reserve was intentionally created and structured to facilitate criminal activity. It was essentially a black market bank,” he said.
Law enforcement has finally caught up to the weakest link in the maze of virtual back streets, false-facers and more: the trail of money. Trying to trace a hack is often almost impossible, but trying to follow where – say – stolen money goes is far more doable.
That’s not an easy task – securing the Liberty Reserve indictment took seventeen law enforcement agencies. But given the extensive record-keeping in traditional banking, regulations around moving money across borders, and more, chasing the cash is a far easier task than trying to follow sophisticated online operators with experience of covering their tracks.
Unless, of course, some unknown genius invents a currency that so far lies beyond such regulations, is to all intents and purposes untraceable, and doesn’t require even the minimal information requested by Liberty Reserve.
Or, in other words, something exactly like Bitcoin.
Bitcoin makes Liberty Reserve look quaint – as unlike the alleged money launderer, Bitcoin is decentralised. There’s no single company or entity controlling the currency, and so it’s nearly impossible to shut down.
Where real money is exchanged into Bitcoins is still a potential weak spot for authorities – and some Bitcoin exchanges are looking to sign up with regulators – but given that an exchange could operate with almost any currency from almost anywhere in the world, stopping all of them would be no simple matter.
Bitcoin is assailable in lots of ways: attacks on the major exchanges shake people’s faith in the currency. Major sell-offs could cause collapse. The central infrastructure is creaking, and so could be pushed over the edge.
But Bitcoin itself is almost irrelevant, it could well overcome its current challenges and gain stability and scale. But if not, it’s provided the world a large-scale demonstration of what a decentralised currency could do.
If Bitcoin, or a currency working in a similar way to it, got a stable value and a large user base, it could take cash flows forever out of the hands of government. Whether that’s a great thing or a terrible thing depends on what you’re trying to do, what you think of government and what country you’re talking about.
Giving pro-democracy activists operating in countries run by autocratic regimes is a way to receive funding and operate more effectively is something most of us would approve of. Allowing terrorists or criminal gangs to do the same in our home country is something we would likely oppose. But it’s the same technology that facilitates both.
The prosecutors of the southern district of New York are very publicly celebrating their shutting down of the Liberty Reserve operation. They should enjoy it – it may be one of their last such winning.