Bitcoin Series 20: The Fool-Proof Bitcoin Press Release Kit for [Fill In Your Country Here]

Bitcoin Series 20:  The Fool-Proof Bitcoin Press Release Kit for [Fill In Your Country Here]

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Last week, we discussed that cash also presents challenges that society was able to handle, so perhaps cryptocurrencies won’t be so unmanageable after all.   This week, I am happy to announce our effort to lighten the research burden of harried public administrators worldwide regarding bitcoin and other cryptocurrencies  with this Fool-Proof Bitcoin Press Release Kit – Sovereign Nation Edition.

Use of this kit will generate the following benefits for Your Country:

(1)    Attract innovative technology businesses to implement a ‘tech hub’ strategy

(2)    Give consumers the benefit of increased competition while protecting them from fraud

(3)    Focus law enforcement resources efficiently on the biggest risks to Your Country

(4)    Avoid embarrassing gaffes that your robotic overlords (aka: your grandchildren) will snicker at

(5)    Procure interviews for your previously unknown Finance Minister with Bloomberg, the Wall Street Journal, Reuters and Reddit

(6)    Finally get that long-deserved invitation to Davos to discuss ‘innovation’

Even better, you can capture all these benefits without ever having to look up or know what a “dogecoin” is – simply fill-in-the-blanks on our handy kit below.

Note:  This strategy might be somewhat less effective if you have a centrally managed economy that jails people for moving capital across borders.

While you can pick and choose from any of the five templates below, for maximum effectiveness, release all five at the same time in a coordinated assault against your [regional competitors] [Switzerland] [Singapore] [Mountain View][those guys that invaded you 400 years ago].

Part 1:  Trade Minister press release
Part 2:  Central Bank press release
Part 3:   Financial regulator press release
Part 4:   Tax authority press release
Part 5:   Law-enforcement agency press release
****************************************************************
Part 6:   BONUS Tourism Board press release (for small island nations only; use with care)

Note: Start now!  If you do this after 75 other countries implement the kit, it might be too late to convert your empty warehouses into a ‘FinTech’ hub.

Concerned citizens:  Please feel free to forward this template to your local authorities.  The material below is licensed for use by public entities as donation-ware; optional donations from National Treasuries or patriotic citizens (bitcoin only please) are always appreciated at:

17LBdguZxFuAyDYtqu2Y3USSQBtjFTosVK

Improvements/suggestions/translations to other languages are welcome in the comments.

Part 1: Minister of [Trade] [Economy] [Development] of [Our Country] Press Release

[Our Country] believes in free markets and innovation and welcomes entrepreneurs from around the world.   We want to be the preferred jurisdiction in [our region][the world] for the innovators building the [tech][financial services][fintech] companies of the future.

In this regard, we are excited to be announcing a comprehensive and coordinated regulatory and policy framework for cryptocurrencies such as Bitcoin and other related currencies.   These private currencies are an interesting new form of decentralized digital currencies that many believe will lead to significant technical innovation in financial services.   We would be thrilled if these innovators chose [Our Country] as their base of operations and believe our framework is among the best in [our currency zone][our continent][the world] in this regard.

This framework is designed:

(1)    To be consistent with our existing regulatory and tax principles

(2)   To provide appropriate consumer and law-enforcement protections

(3)    To provide a predictable and rational environment for entrepreneurs

We think the combination of our advanced financial and professional services industry, well-educated workforce, investor-friendly policies and [low tax rates] [nice climate] [convenient location] [fast broadband] [good-looking population] [great restaurants] make [Our Country] the perfect destination for the financial services firms of tomorrow.

Part 2: Central Bank of [Our Country] Press Release

We have followed the emergence of decentralized [digital currencies] [private money][commodity money] (also known as ‘cryptocurrencies) with some interest.   The best known currency of this type is Bitcoin but there are hundreds of other currencies organized along similar principles.

Our assessment is as follows:

1.       Cryptocurrencies, as currently structured, do not fall under the remit of the Central Bank of [Our Country].   

2.       The Central Bank of [Our Country] will not (and cannot, according to its Charter) provide “Lender-of-Last-Resort” support to financial institutions denominated in cryptocurrencies.

3.       Cryptocurrencies, in aggregrate, represent less than 0.03% of global money supply and present no systemic risks to our monetary and banking system at this time.

4.       We remind users of and investors in cryptocurrencies that they are not legal tender in any nation, that no merchant is required to accept them and that their value historically has been volatile.    Detailed guidance on this topic, as with all investment topics, is best addressed by [Financial Services Regulator of Our Country].

This is the last statement we will be making on this topic unless circumstances change.

Part 3: Financial Regulator of [Our Country] Press Release

Cryptocurrencies, a new form of digital currencies, have taken the media by storm in the last year, as they potentially herald an opportunity for innovation in financial, contractual and asset registration services.   We want [Our Country] to be a leader in this field, so we are highlighting our guidance to consumers, businesses and financial services firms, in an effort to balance the needs of consumers, businesses and law enforcement.

1.       Ownership and use of digital currency by individuals or business is legal.   Individuals should note that cryptocurrencies have no guaranteed value, have historically been very volatile in price and, if lost or stolen, provide no recourse to the owner.

2.       Businesses that use digital currency to accept payments or make payments do not require any special registration.    This includes buying, selling, investing, hedging or related activities that are in support of their operating business.

3.       We are happy to announce a voluntary industry initiative for cryptocurrency custodial services.   These are services that hold digital currency ‘wallets’ on behalf of customers.   This voluntary certification includes a commitment: (a) to maintain segregated consumer funds, auditable on the ‘block chain’ in the case of bitcoin and with a bank in the case of cash, (b) follow a set of standardized security practices and (c) offer a $50,000 insurance policy that is funded by fees from the industry and underwritten by Lloyd's of London.

While this initiative is voluntary, we do believe many consumers will choose services that undergo this certification.

4.       “Exchanges” or “Money Transmission” businesses (in other words, businesses that convert cryptocurrencies to traditional currencies or vice-versa) will be subject to the same Anti-Money-Laundering, Know Your Customer and Suspicious Transactions Reporting requirements as traditional financial institutions.   

More specifically

a. Each of these businesses must register by [date] with [relevant regulator]

b.   Each of these businesses must have implemented the relevant requirements by [date]

c. We have certified several third party KYC and AML services as ‘pre-approved’ for meeting our guidelines in this regard, though their use is not required

d.   We will not prosecute businesses that did not register before we had issued guidance, so long as there is no evidence of willful attempts to facilitate money laundering

e.   We are also implementing a ‘safe harbor’ rule for startups in this space to allow business model experiments to flourish.   For the next three years, startups of this type that conduct less than [$1][$3][$5] million per month in transaction volume, need only register with [relevant regulator] but do not have to implement the full suite of KYC/AML activities for the first [12][24][36] months of their operation.

f.        Exchanges or other services that work solely with cryptocurrencies and do not facilitate conversion to and from traditional currencies are currently exempt from this regulation.   We will review this topic again in 24 months.

We are also excited to announce that we are in the process of discussions with [our main stock market][our main commodities exchange] about the possibility of it providing exchange services to exchanges operating in [Our Country].    Their [25][50][100] years of experience in this area and high liquidity could be very valuable on the wholesale side.

5.       Many cryptocurrency firms will still require traditional banking services.  

Given this, it is important that our existing banks serve these firms while, while knowing what is required from them in terms of compliance.   We see tremendous value in these businesses having strong local banking relationships with our safest banks rather than having to pursue awkward work-arounds for integration to the existing financial system.

We have issued a set of guidelines in this regard and the first five banks have completed their training.    We are happy to announce that:  Bank of [Our Country], Bank of [Our Capital City], Cooperative Bank of [Our Country], International Bank of [Our Country] and Royal Bank of [Our Country] are ready to provide banking services to businesses and consumers operating in the cryptocurrency area.   Other banks will be completing the training over the upcoming months.

6.       One of the more interesting developments in cryptocurrencies has been the development of stock exchanges and other markets based solely on cryptocurrencies.    Our initial assessment is that these exchanges are best addressed by our existing frameworks relating to crowd-funding.  As they are still in a rudimentary stage, we will be studying them further and releasing guidance by [some date later this year], noting that we recognize the opportunity for greater efficiency in this sector.

7.       We have established a commission to further study the concept of ‘Digital Autonomous Corporation’, a form of distributed cooperative without central leadership.   The commission will be making recommendations about the correct legal structure, if any, for such entities.  I look forward to their findings.

Overall, we are excited and intrigued by the possibilities offered by cryptocurrencies.    We note that the field is still in its early days and not all service providers in this field are ready for the average consumer.    We believe and hope that with the appropriate frameworks, we can help businesses in this arena mature, develop new, cost-effective services to market and drive innovation worldwide.

Part 4: Tax Authority of [Our Country] Press Release

We have conducted our initial review of cryptocurrencies (a new form of digital currencies) and are offering the following tax guidance, consistent with the general principles underlying our system of taxation.   As a general rule, transactions using digital currencies should be treated in the same way as transactions using foreign currencies, including, but not limited to, the principles delineated by IAS 21 – The Effects of Changes in Foreign Exchange Rates (IFRS).

(1)    Payments received with cryptocurrencies will be treated as ordinary income or revenue as appropriate

(2)    Business expenses paid with cryptocurrencies will be treated as expenses

(3)    Purchases of cryptocurrencies with traditional currencies are not taxable and not VAT-able

(4)    Changes in currency rates (between the cryptocurrency and your presentation currency) in non-trading operating businesses should be treated as exchange rate gains/losses (ordinary income and ordinary losses)

(5)    Trading/investing gains or losses from realizations (sales) of cryptocurrencies shall be treated as capital gains or losses.

We remind all taxpayers that [Our Country] has a principles-based* accounting and taxation system and their individual circumstances should be taken into account when assessing their tax liabilities.  

* IFRS countries only.  Special GAAP template available on request.

[Optional bonus section for low-tax jurisdictions]

In order to stimulate the development of cryptocurrency-based businesses and demonstrate our superiority as a jurisdiction to [our regional competitors] [Switzerland] [Singapore] [New York] [London], we are implementing a five year special tax holiday (2014-2019) during which capital gain rates on the trading of cryptocurrencies will be [5.0%] [2.5%] [0%].

Part 5: Law Enforcement Agency of [Our Country] Press Release

We have a long-standing commitment in [Our Country] to fighting money laundering, terrorism financing, and other financial crimes and this commitment extends to new innovations such as cryptocurrencies.  

Our long-standing principle in these matters is to use a standard of risk-weighted enforcement by which we target our efforts against the highest-risk situations.   According to the United Nations, over $1 trillion is currently laundered through the traditional financial system, a value that is 100 times higher than the total money supply of cryptocurrencies.   This means that the bulk of our enforcement efforts must stay focused on the traditional banking sector, where our main exposure and risk lies.

That said, we have developed a Cryptocurrency Task Force with a team of agents well-versed in these matters that will be responsible for law enforcement relating to cryptocurrency.  Criminals, money launderers and terrorists should understand that cryptocurrencies are not a safe haven for them and we intend to prosecute them to the fullest extent of the law.    Our agents are already infiltrating cryptocurrency money laundering networks and establishing undercover positions in this domain.

We do not intend to prosecute entrepreneurs who might have inadvertently violated compliance-oriented banking regulations during the period before it was clear how cryptocurrencies would be regulated, unless there is clear evidence that they were turning a blind eye to criminal activity.  

We will be working closely going forward with the [Financial Regulator of Our Country] to help ensure every firm is in compliance with their obligations.   We recognize that this is a complex topic and even the largest banks, with decades of experience and large compliance teams, have room for improvement in this regard.   It is only by working together that we will best ensure that we win the fight against criminals and terrorists.

Part 6:  BONUS – Tourism Board Press Release (not suitable for all countries)

This release should only be used if (a) you are very small island country that (b) could plausibly have a tourism industry.   Use with great care! 

You will need to first visit all 500 of your merchants to explain to them what a “bitcoin” is, namely that it is a way for rich tourists to pay for painted conch shells with their cell phones, so long as the WiFi is working and their battery hasn’t died.  Then proceed as follows.

Title: Bitcoin now legal tender in [Our Country]

Text: [Our Country] is happy to announce that Bitcoin is now legal tender in [Our Country] for any purchases and is also accepted for any and all payments toward governmental services, including taxes.   While nothing will replace the warm hospitality, coconut daiquiris and crystalline beaches that are the heart of our nation and economy, we welcome [Bitcoiners][Litecoiners][Dogecoiners] of all nations to visit, move to or invest in the most Bitcoin-friendly country in the world.

1 week vacation packages to [Our Country] from New York, Silicon Valley and London are available, on an all-inclusive basis, for only $3,995 (payable in Bitcoins).   1 week vacation packages and a puppy are available for only $4,300 (payable in Dogecoin).  Permanent residency in [Our Country] is available to anyone who purchases at least $300,000 in real estate (payable in Bitcoins).   Citizenship in [Our Country] is available to anyone who invests at least $2,000,000 in a new business (again, payable in Bitcoins).

Good luck regulators - see you in the Wall Street Journal soon!  

For the full bitcoin series: ledracapital.com/bitcoin 
Twitter: @polemitis and @ledracapital
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Bitcoin Series 19: Bizarre Shadowy Paper-Based Payment System Being Rolled Out Worldwide

A so-called "Dollar Bill" or "Note" as it is formally known.  Credit: Wikimedia Commons

Or how cash would be described in the press if invented today.   Full bitcoin series here: 

Bizarre Shadowy Paper-Based Payment System Being Rolled Out Worldwide

New York, February 17, 2014

World governments announced a plan today to allow citizens to anonymously carry parts of their wealth on their person and exchange it with others using small pieces of colorful paper printed with nationalistic and Masonic imagery along with numbers that purportedly represent the amount of wealth each piece of paper represents (if the paper is not a counterfeit). These pieces of paper are formally a "note" from each nation's central bank, but they are also called "cash" by many - this is a technical matter that is too complex to cover in our basic primer; Suffice it to say, that it is representative of the complexity and user-unfriendliness of this new system.

‘Bills’ – A complex construct

These pieces of papers (also known as “bills”, "dollar bills", "George Washingtons" or "Dead Presidents" among the shadowy community of anti-banking libertarians who have been the primary users of cash to date) will differ from country to country and are not redeemable outside national borders.    

In what will come as a surprise to generations who have grown up with calculators and computers, ‘bills’ only come in fixed denominations, requiring users to maintain a large number of these pieces of paper that must be aggregated to execute a transaction and then re-aggregated to ‘make change,’ a complex process of returning to the payee the excess of the payment using yet other bills.  (Don’t worry if this sounds complex, we had trouble understanding it ourselves at first and it is certainly not ready for the average consumer in its current form.)  

Mike Smith, VP of Employee Training at Sears has said: “I cannot imagine training tens of thousands of our employees to use cash, verify that it is genuine and learn to ‘make change’ without making errors.   This is going to require a wholesale installation of special change-making hardware – the so-called ‘cash registers’ –  and millions of dollars of employee training, while creating long lines and delays for consumers.   Furthermore, we would need to adopt new security procedures and armed guards to avoid theft of the physical bills while in the store or during transport to our bank.    We can’t see ourselves adopting cash under these conditions.”
 
Perfect for Criminals

The launch of cash has provoked an immediate reaction from law-enforcement agencies worldwide that universally condemned the development.

“Cash is a 100% anonymous and untraceable payments technology.   It is like a weapon of mass destruction launched against law enforcement,” said Mike Smith, the recently confirmed FBI Director.  “It is the perfect payment mechanism for criminals, drug cartels, terrorists, prostitution rings and money launderers.   We don’t know how we will be able to combat such a technology and fully expect that a new generation of super-criminals will emerge, working in the shadows of a world where they can conduct their illicit affairs without leaving a trace.” 

Banking Superintendent of New York State, Mike Smith had the following to say: “I can’t think of any reason that a law-abiding individual would want to use cash. At a bare minimum, we believe there should be a licensing procedure for individuals or businesses that plan to use cash, a ‘Cash-License’ as it were.   This license will limit ‘cash’ to trust-worthy individuals who keep detailed auditable records of all their cash transactions in order to keep New York safe from criminals.”

Others have concerns about forgery and counterfeiting.  “Ultimately, even with all the fancy inks, cash is just a piece of paper.   We fully expect criminal groups and rogue nation states to print fake cash in order to profit or to disrupt the economies of their enemies,” said Mike Smith, an analyst at Stratfor.  “In the interim, we are certain that cash will trade a discount in the real-world, given the risk to a counterparty of accepting a forged piece of paper; no doubt cash is a huge step back from the modern cryptography in place throughout our current financial system.”

No Consumer Protection

Though hard to imagine, cash operates with no consumer protection at all.   If your ‘bills’ are stolen or lost, they are gone forever.

“I just don’t understand why there is nobody that I can call to reinstate my cash if I lose it,” says Mike Smith, a businessman from Toledo.  “What type of idiotic wealth and payment system doesn’t maintain transaction and ownership records?” 

Moreover, there appears to be no authentication mechanism associated with cash payments or transfers, let alone one that matches modern security standards.   Once someone has gained physical control of your ‘bills’, they are free to spend or use them as they wish and there is no way to reverse the transaction, stop them or even identify who has stolen them.

Even simple destruction of the bill, which, as you recall, is just a piece of paper, could result in losses.   According to the Director of the newly founded “Bureau of Engraving and Printing,” mutilated ‘bills’ that are more than 51% destroyed must be mailed in for a special investigation that will determine if they will be replaced or not.

Recommended 'Hardware Wallets' Found To Have Security Flaws

Proponents of cash have dismissed these concerns saying that various hardware manufacturers such as “Coach” and “Gucci” will shortly be releasing “hardware wallets” in leather and suede.   These wallets are meant to hold the bills and fit into a pants pocket or purse.

“Once your bills are safely ensconced in your Gucci wallet and securely placed in your pants pocket [the front pocket is recommended as a ‘best practice’ for security], it is almost impossible for them to be stolen, lost or destroyed” said Mike Smith, VP of Communications for Gucci NA.

But some early adopters have reported that the hardware wallets have security flaws.   “I was out in Bangkok two weeks ago at a bar and I forgot my Gucci wallet there,” said Mike Smith, a visiting tourist.    “When I returned the next morning, my wallet was there but my cash was gone!”  We contacted Gucci regarding this hacking attack, but a spokesperson would not comment “about confidential customer financial matters.”

Even criminals have not been immune to the risks of cash.   The notorious “Silk Road” drug-dealing marketplace, where vendors and customers left envelopes full of cash (on which they had very clearly written their names) in an anonymous drop-box that managed the exchange, mysteriously closed last week, citing ‘theft of the cash due to a bug in the envelope sealing process.’   While technical experts believe that might be possible that the glue on the envelope was not correctly applied, they also warn that a ‘bill’ is basically a private and public key at the same time and note that there might be dangers involved in letting anonymous criminals hold the private keys to your wealth.

Requires Physical Presence

In what might be most unusual limitation on cash, it only works for payments within 36 inches or less (or the so-called “arm’s length transaction” as hackers in the community have colorfully titled it) as it has to be handed from one (human) party to another to execute the transaction.

This requirement is widely thought to be a fatal flaw of cash by traditionalists.

Mike Smith, VP of Retail Banking at Chase said: “A form of payment that cannot be used at a distance, cannot be used for e-commerce, cannot be used by mobile devices, cannot be used for machine based transactions, cannot be scripted or programmed, cannot be thought of as a payment system.   I will admit, as a form of performance art, cash transactions are an amusing experiment, but this has no applicability in the real world of banking, finance or commerce.  

Furthermore, given cash’s association with criminal activities, we will be refusing to offer banking services and terminating the accounts of any customer that uses ‘cash’ in a business or personal capacity.   It is the only way we can ensure we remain compliant with our regulatory obligations.”

Remarkably, if you attempt to use cash in a different country from the one that issued it, it will categorically be rejected.   In order to use cash abroad, you will have to go to designated points, usually in airports or certain banks, with limited hours of operation, that will “exchange” your bills for bills of the country that you are visiting.   These exchanges have high fees – usually 2-3% for each exchange, meaning that tourist will lose 5% of their cash or more on a typical trip just in these ‘exchange’ costs, which seems extraordinarily high for what is, ultimately, an exercise in multiplication or division.

A Step Backward For Economics

Economists are flabbergasted that lawmakers have allowed cash to be adopted, despite their strong objections.   A key policy tool of Central Banks has been the use of positive and negative interest rates to manage economic growth.   It appears that this will not be possible with cash.

Mike Smith, a leading economics blogger for the NY Times said “This is a sad day for macro-economics.  If cash ever catches on in any meaningful sense, it will reduce our control over the levers of the economy significantly by providing a mechanism for depositors to opt out of negative interest rates.  Given the fact that it might keep us from preventing the next depression and will definitely reduce tax collections, one could even consider it ‘evil.’”

Environment and Health Impacts

Environmentalists expressed concerns about the impact of cash on the environment.  “You would have thought that in 2014, we would have moved beyond pesticide and water intensive cotton farming [retracted: cutting down trees], treating the cotton with dangerous inks and transporting it with fossil fuels, only to represent a value like “20” that can be represented electronically at effectively no cost.   When will we ever learn?” said Mike Smith, recently appointed Executive Director of the Sierra Club.

Public health officials also warned that cash could be an excellent vector for disease transmission.  “We tested several ‘bills’ in our labs recently and discovered that the average bill has 20x more bacteria than a toilet seat,” said Mike Smith, a VP of Research at the Mayo Clinic.  “Our advice is that people should avoid cash in general and only handle it if absolutely necessary.   Children, the elderly and immuno-compromised individuals should not handle cash under any circumstances.”

What’s Comes Next?

Proponents of ‘cash’ think it will ultimately be a widely adopted technology that will spread around the world, enabling in-person mid-tier transactions (not micro-payments, but not mega-payments either) in a manner that is invulnerable to electric or internet outages and that will usher in a new era of more ‘human’ commerce.

We try to keep an open mind at this publication toward new technology, but, to date, we have a hard time seeing the positive case for cash.  Certainly criminal groups will take advantage of cash’s perfect anonymity to wreak havoc on law enforcement and tax collection, something that is deeply undesirable.  Among law-abiding citizens, we can envision some possible adoption in dense urban hipster communities like Williamsburg where ‘wallets’, ‘cash’ and ‘making change’ could be yet another reflection of their tongue-in-cheek view of modern societal systems.

Other than that, it would be hard to recommend that the average consumer or merchant becomes involved in what is still today a very buggy system, filled with risk, inconvenience, high transaction costs, and possible disease transmission.   Even if handled perfectly, cash will certainly tar your business and personal life with the seedy reputation of the drug dealers, terrorists, money launderers and anti-establishment anarchists who use it today, threatening business and banking relationships and raising eyebrows among law enforcement and your community.

For the full bitcoin series: ledracapital.com/bitcoin
Twitter: @polemitis and @ledracapital
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Bitcoin Series 18: Why Bitcoin miners aren't incented to 51% attack

Background:

Bitcoin miners are not mining to 'discover' bitcoins as in the popular imagination, they are competing to be the bookkeepers of the bitcoin ledger, something for which they are rewarded with bitcoins.

Bitcoin's central technical breakthrough is that these bookkeepers do not need to know or trust each other and, so long as one party does not account for more than 50% of the computing power in the bookkeeping network, the ledger is safe from monkey-business.   Safer, in fact, than any ledger ever previously created by man - it is distributed on hundreds of thousands of computers throughout the world and it is mathematically impossible to reverse it.

As in most human systems, once one party gains more than 50% of the computing power of the network, then the story changes -- they pick up some level of control over the ledger as follows:

Things that they STILL can't do even in a 51%+ scenario:

- Spend money out of any account other than their own 

- Reverse past transactions

Things that they CAN do (not certainly, but probabilistically):

- Block certain transactions from entering the system going forward

- Reverse transactions going forward and use that as an opportunity to try to double spend their own coins.  

In other words, spend them at one merchant, get the goods, reverse the charge and re-spend them somewhere else (before anyone notices because as soon as the attack becomes known bitcoin values will plummet and everyone will stop honoring bitcoin transactions until it shakes out).

To put in in conventional terms, from the time a miner has 51% control of a cryptocurrency, they can:

- Deny transactions from anyone
- Chargeback their own transactions

So the 51% controller becomes something like Visa or Mastercard, but more limited in his or her powers.

Double-spending:

There is no doubt that a 51% scenario in the bitcoin change would be very problematic and hurt trust in the system.   

I am going to argue that it is unlikely for an *economically motivated* (as opposed to a politically motivated) miner to be incented to execute such an attack.   

The logic is as follows:

(1) A miner that is controlling around 50% of the network, is earning about 75 bitcoins an hour or 1,800 bitcoins per day.   At today's prices of about $800 per coin that is $1.44M per day or $525M per year

(2) I don't know exactly what capitalization rate to put on those earnings but it is obviously an immensely valuable franchise and one that would collapse in value if one executed the attack.   Even if you only valued it at 3 months worth of revenue, that is over $100M coming in the door.   If you can maintain that position for a couple of years, it is over $1B.

UPDATE:  What about costs that would reduce the value of this franchise?  Mining hardware, electricity, etc.   From the perspective of executing the attack, hardware is a sunk cost not relevant.  Electricity is fair to be counted against the revenues, but I don't think it changes the analysis at an order-of-magnitude level.  H/T @gendal for raising the question.

(3) In order for a double spend attack to be worth MORE than that franchise, someone has to sketch out a plausible scenario where you could extract more than that in double-spending.   Let's be really conservative and try to double spend $100M in bitcoins (about 3 months of mining revenue).

(a) First condition:  We have to already be holding $100M in bitcoins and have decided that, even though we are bitcoin enthusiasts, that it isn't easier to just hold them and hope for price increases *in addition* to our super mining franchise.

(b) Second condition:  What are we going to spend them on?  Obviously products are out of the questions.   You are not going to double-spend $100M on sheets from Overstock.   Real estate is also out of the question.   Double-spending is still regular old garden-variety fraud so if you execute this scam and end up with a mansion, it will be very easy for the authorities to show up at your door.

UPDATE:  In the future, individual colored coins that represent assets might be individually very valuable and might provide a mechanism to double-spend.   H/T @kentindell for raising the point.   Counter-point:  By then, a 50% position on the blockchain will be even more valuable

(c) Third condition:  You need to be able to do the transaction, particularly the second one, FAST.   People will quickly realize the reversal and start not honoring transactions.   And if you don't do a second transaction, you are not double-spending, you are single-spending (again, bitcoins will collapse in value if an attack like this was actually implemented).

(d) Realistically, the only candidate for this is cash.    But $100M is close to the total daily volume of all exchanges worldwide.   None of them can cash out $100M, let alone $100M x 2, let alone $100M x 2 quickly, let alone $100M x 2 to your bank account without leaving a very clear record that will send you to jail.

Not So Fast

There was a small sleight of hand in the above.   Most large miners are actually pools which means the mining pool operator is not capturing all the revenue.  So perhaps an individual controlling employee of the mining pool might be incented to try this stunt, even if the pool is not.

Still - even if you cut the target double spend to $30M, it still very hard to imagine that you could pull this off in the real world.   You would still be trying to cash out via exchanges and that is a lot of liquidity to pull out -- close to their daily volumes

Real World and Conclusions:

A few weeks ago, a mining pool reached 41% of the computational power.   As the theory would predict, the miners in the pool started pulling out out of the pool and the pool operators made a statement that they would voluntarily limit their share.   Everyone in the ecosystem has much more to lose by going over 50% than they have to gain.

Now, I am not a pollyanna.  A malicious operator who would want to damage the network could try to execute a 51% attack and not care about the economic rewards.  

At this stage though for bitcoin, that would require spending or giving up hundreds of millions of dollars a year to do so, so that is really in the range of malicious nation-states only.  

The answer, of course, is (a) pulling more mining power to the network to make it even more cost prohibitive for anyone to attack it and (b) building in logic to mining clients to automatically pull away from pools that pass a certain concentration threshold.

Note, fans of alternative cyptocurrencies -- this is one of the strongest cases for consolidation around the bitcoin blockchain.   The small alt-coins are very vulnerable to these attacks -- someone could attack a top 20 coin with far far smaller investment and that will be painful day for alt-coins.    For coins that are moving real economic value, I suspect we will consolidation of mining power on one blockchain or, at most, a small number of blockchains and with additional coin 'features' built on top of those more secure chains. 

For the full bitcoin series: ledracapital.com/bitcoin
Twitter: @polemitis and @ledracapital
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Bitcoin Series 17: Bitcoin loves our freedoms

Photo Credit: Diesel Demon

TL;DR:  If you hate our "freedoms", you will hate bitcoin.

Adult entertainment has driven early usage of a wide array of technical innovations, from VCRs to online video streaming to online video monetization, but has been surprisingly slow to adopt bitcoin.

This weekend the inevitable happened when Porn.com (obviously very NSFW) announced that bitcoin accounts for 25% of their sales, just a few weeks after they adopted it as a payment mechanism.

An except from a safe for work article from the Guardian:

Porn.com started taking bitcoin for its premium services in December, and the currency rapidly came to account for 10% of its sales. But in early January, a post on Reddit's Bitcoin subforum took the news viral, and after a spike where the currency accounted for 50% of its sales, the bitcoin trade settled down at 25%.

Some of the increase will be bitcoin fans rushing to support a site that takes their preferred form of payment, but David Kay, the marketing director at Porn.com's parent company Sagan Ltd, argues that there are other reasons as well:

"Privacy and confidentiality are paramount when joining an adult service for the majority. In general you can surf porn.com for free, anonymously but if you want to upgrade to the premium services you have to enter a method of payment which historically has been credit card. In order for the transaction to process you have to include your full name and address. This is not necessary with BTC."

I don't want to overplay the adult angle the way the Guardian does because it is definitely not bitcoin's killer application (bitcoin is a foundational technology and this is one of thousands of usage cases), but it is a great case study in how bitcoin helps the internet achieve its potential to fully substitute for and improve on offline options and, quite frankly, increase personal freedom.

Imagine our protagonist Sally Sue is looking for videos of Hunky Hunks and what her options might have been over the years.  (If this example does not resonate with you, substitute "practicing your unapproved religion in a repressive regime" as all the principles and mechanisms are the same.)

Circa 1485:  Obviously a witch; burn at stake.

Circa 1885:  Wanton woman; not to be seen in polite company.

Circa 1995:  Seedy shops in Times Square in semi-dangerous neighborhoods staffed by men with questionable facial hair.   Chance that Sally is going to stop in on the way to Penn Station after work?  0%

So, very little progress for a few hundred years until the internet comes along.

Circa 2013:  Free porn widely available online.   Paid offerings, however, bring up any of the following risks:  

1. Husband, boyfriend, parents, roommates see the credit card statement and disapprove
    
2. HunkyHunks.com sells or leaks data to unsavory characters 
    
3. Site starts recurring billing (and who really wants to have the discussion with their credit card company that, no, they did not approve the $29.99/month subscription to HunkyHunks.com for the next 3 years?)
    
4. Even if none of the above happen, it is on your 'permanent record' potentially available to thousands of people over time at the merchant, the credit card company, the NSA and possibly someday your credit scoring firm.

Circa 2014 (post Bitcoin):  Commerce between trust-less parties is enabled:

1. No name, address, email or phone needs to be shared with the fine men of HunkyHunks.com
    
2. No pull capabilities on your wealth (recurring billing) given to random strangers (aka the back office of HunkyHunks)
    
3. Small micro-payments for weekly, daily, hourly passes are possible
    
4. No permanent record*

And the analogy holds perfectly if you are trying to organize a group to pay donations to support a priest in an oppressive regime.

*Note:  It is true that in most cases bitcoin is pseudononymous and less anonymous than cash (unless you work at it), but it is much more confidential than credit cards. 

I hesitated in writing this article because bitcoin is just starting to shake off its drugs, sex and violence undertones and show its utility in non-anonymous and transparent applications.  

But there are still many times and many reasons why perfectly good people for perfectly good reasons will not want to give VISA/Mastercard/random merchants (and everyone around those parties) total knowledge of their activities and this is too good a case study to pass up.

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