The music, movie, and newspaper industries have all stumbled under the weight of digital democratization, but in due time every institution we hold dear will be minced into unrecognizable puddles of archaic nostalgia goo. It's just a matter of when, not if. To that end, the global hive mind seems to already have its sights set on its next victim: filthy filthy lucre.
In the not too distant future, one online enterprise aims to transform the entrenched concept of a "bank" into adorable grandpa babble. Two-year old virtual currency service BitCoin gives individuals the ability to remain anonymous with their financial transactions, thus sidestepping centralized authority (and regulation) altogether and upping the anarchic ante considerably.
Following increased notoriety, the system is beginning to show some structural faults such as when hackers recently attacked a popular venue for exchanging bitcoins, thus plummeting their value dramatically (see more inside). However, if BitCoin is able to shake off its growing pains, this experiment in people power will either completely free humanity from its self-constructed shackles or entirely obliterate civilization as we know it.
Either way, this is what's happening. Get ready for an exciting ride!
Anonymous Dolla Dolla Bills, Ya'll
BitCoin is an open source web service that facilitates financial transactions based on a virtual decentralized currency (bitcoins) through a distributed peer-to-peer network. There is no central BitCoin bank, the system exists on a infrastructure of computers around the globe and anyone can join.
Bitcoins can be traded for goods and services via various bitcoin markets and can be bought or sold for traditional money at several exchanges. Unlike other established payment networks like credit cards or PayPal, BitCoin isn't run through traditional (or accredited) financial institutions and isn't subject to any centralized regulations; it exists as a network of computers around the globe.
The end result is that users 1) incur little or no transaction fees; 2) enjoy an added degree of anonymity and, most importantly for some; 3) are beyond the reach of authorities who may wish to freeze their assets — banks, governments, or law enforcement agencies, for example.
(Don't) Show Me The Money
The openness is of the project is also what helps keep it anonymous. Each user is given a virtual "wallet" which can be stored on a local drive or online via services like InstaWallet or MyBitcoin. Each wallet can contain several accounts. Each account, in turn, may be associated with several addresses.
Neither the accounts or addresses are matched to an individual's name, they are simply a long series of characters. This makes accessing (or stealing) a wallet's bitcoins only a password away. Though all transactions are necessarily kept public across the system, the ease with which one can create and maintain various accounts and addresses makes it very difficult to associate any one individual with their online transactions.
BitCoin is an experimental union of the open Internet and macroeconomics. Bitcoins are not backed up by any kind of physical wealth or institutional seal; they're made of pure math. Users can start "mining" for new bitcoins by donating personal computer time to solving increasingly complicated computations. Each time a new calculation (a "hash") of a greater difficulty is completed; a new "block" of 50 coins is created.
These aren't just basic math games; the very BitCoin infrastructure is sustained and grown by solving these ever-increasing computations. The increasingly complex math is set up in such a way (as in way over my head) that only a finite amount bitcoins can ever be created, which by current calculations should occur around the year 2140. (More gritty nerdy details are available here.)
In the early days, new blocks could be created easily via consumer-grade CPUs, however according to the site's FAQ section, in order to create more blocks from the far more difficult computations of today, users will need to donate much time to their high-end graphics card in conjunction with special software. (And there are people who do this, by the way.) If math, overclocking, and economics are not your strong suit, then bitcoin mining is not for you. But you don't have to be a miner to take part. The service is open to all, regardless of your grasp of top shelf mathematics.
So, is the BitCoin economy real? Is any modern economy? The value of the US dollar is backed up with little more than a government seal and the collective opinion of the global market. It could be argued that the BitCoin economy is backed up by the investment of energy and time put into forming new blocks, and then is traded in an open global market (which you can track here). Additionally, bitcoins have the added allure of anonymity and freedom from regulation.
By most definitions, the BitCoin economy is real as any other economy. One that, for now, exists completely out of control of the traditional powers.
Should You Trust It?
It's way too early to tell. It certainly needs to work on its security. Recently, the bitcoin exchange "Mt.Gox" was accessed by hackers who released vast swaths of the site's database online. The breach plummeted the worth of bitcoins on open trading over the course of a day (bitoins had been trading fairly strongly after some recent coverage in various financial media outlets).
Earlier this month, security firm Symantec uncovered a bitcoin-stealing virus that can sneak into users' BitCoin wallets and email their virtual savings away. One added benefit of a traditional bank is that your funds leave a paper trail and are backed by the FDIC. No such insurance yet exists with BitCoin.
How Good Guys Can Use It
Depending on your view point if they are "good" or not, the merry pranksters/Sony tormenters/institutional muggers from now-defunt Lulz Security openly accepted BitCoin donations and claim that they received over $110K in BitCoin moneys because of it.
This is an example of how BitCoin might offer a way for funds to be donated from around the world to organizations or individuals that are politically unpopular or even persecuted. As long as they have some form of Internet connection, they can receive funding. The means to send and receive anonymous transactions that completely sidestep governmental interference has never existed before and is potentially a game changer of historic proportions. Conversely, BitCoin might be used to help refugees securely transfer their funds out of their homeland if they choose to make an escape.
On a less-weighty front, BitCoin could prove to be an alternative system to traditional banking or credit markets, giving consumers more choices and established banking giants more competition.
How Bad Guys Can Use It
Again, depending on how you define things, see the Lulzsec example.
BitCoin is potentially of interest to anyone who would want to keep their funds out of reach of law enforcement agencies. This list would include dictatorial regimes, terrorist organizations, or even tax shields for "legitimate" corporations.
The technology theoretically could be used to support a shadow (or perhaps "shady") economy for illegal goods and services such as drugs, human trafficking, arms dealers, or any variation of nasty business.
The Man's Reaction
Two US Senators, Chuck Schumer and Joe Manchin recently petitioned the US Attorney general to look further into the BitCoin economy — specifically the bitcoin-fueled websites that allow users to purchase any drug imaginable. The one weak link of the network that authorities could use to gain access are the exchanges between bitcoin and real coin. But as long as there are people willing to trade goods and services for bitcoins, there is little traditional authorities can do about it.
BitCoin isn't the only technology out there that will help keep you off the radar, for better or worse. Check out our part one of this series by clicking this link.