An Overview of Bitcoin

MOST PEOPLE FIRST ENCOUNTER BITCOIN as a digital currency (this is shorthand; whether it is a “true” currency is a matter for debate). While Bitcoin is entirely a digital “object,” this does not make it much different from other forms of currency that today exist entirely or almost entirely in digital form, even including standard world currencies. One can buy, sell, trade into and out of, and exchange it for other forms of currency, just as one would trade for any other currency. There are exchanges where individuals can buy bitcoins for U.S. dollars, euros, and yen. Like all currencies, there are exchange rates at which these transactions will be processed, and these rates change constantly. When we talk about the “price” of Bitcoin, it is usually relative to one of these world currencies.

Like other forms of digital currency,  including  ordinary  dollars,  users  can store Bitcoin in an account with something like a “bank,” although in Bitcoin’s case this is typically an exchange specifically created for this purpose, rather than a more typical bank. Many of these exchanges, such as the now-shuttered Mt. Gox (Rizzo 2014b), have been targets for scams and theft, due in part both to Bitcoin’s antigovernment reputation and its hostility to regulation. Unlike other forms of digital currency, users can also run a small piece of software called a “Bitcoin wallet” on their own computers and store their bitcoins there rather than in online accounts.

Bitcoins can be transferred by using one of the many exchanges set up for that purpose, or they can be sent directly to another user’s wallet by using an address provided by the wallet holder. That address, like all Bitcoin data, is encrypted: it’s a string of letters, numbers, and symbols that mean nothing  to  anyone without the proper decrypting software and keys: an example would be a string like 1JArS6jzE3AJ9sZ3aFij1BmTcpFGgN86hA. The address is technically the encrypted version of a cryptographic “public key.” The address cannot be decoded without the user’s “private key.” All transactions on the Bitcoin network are public and available to all users of the full Bitcoin software; but since the addresses are encrypted, nothing more about the identity of the wallet holder is necessarily available. Bitcoin is therefore considered pseudonymous (Beigel 2015): it is not fully anonymous, since every transaction is recorded, but determining the true identities of those involved  in  the  transactions  requires more information than is directly available in the network. The possibility of identifying those true identities and the potential methods for obscuring them altogether are live topics of discussion in the cryptocurrency community (see, e.g., Meiklejohn and Orlandi 2015).

The Bitcoin software does not exist in a single physical location, or in one virtual “cloud” location: it is not hosted by a company like Level 3 or, for that matter, Amazon or Google. Instances of the Bitcoin software run on thousands or tens of thousands of computers all over the world. It depends for its continued life not on any one of those computers, but on the many machines that make up the network. Further, many of those computers—all of the ones running the complete Bitcoin program—host copies of the complete record of all Bitcoin transactions, though it is not necessary to host the records to use Bitcoin. That set of records is called the ledger, and is conceptually equivalent to the transaction records of other financial entities, such as a bank or brokerage account. These qualities of the Bitcoin software are what lead advocates to describe it as “decentralized” and/or “distributed”: there is no single central authority who publishes and maintains the software, so it is “decentralized”; and the software itself sits all over many separate machines on the network, so it is “distributed.” A Bitcoin wallet is a relatively small piece of software that allows users to keep bitcoins on their own computers without needing to host the full Bitcoin ledger.

The ledger is the first widespread implementation of a software model called a blockchain. The techniques involved in building the blockchain work to ensure that transactions are unique and authentic: “The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the blockchain  are enforced with  cryptography” (“How  Does Bitcoin Work?”). Computers that participate in  the  verification  process  are  rewarded with fractional amounts of Bitcoin. This is the exclusive means by which Bitcoin is created; the process is known as mining, in a deliberate reference to gold. The blockchain is large and processing it requires significant computing power; in fact, because it is a record of all Bitcoin transactions ever, any computer participating in Bitcoin mining must today have substantial networking and processing capabilities. While in its early days Bitcoin could be mined by relatively fast home computers, today most mining is done by pools of dedicated high-power systems, due to the increasing difficulty in generating a “hash” designed into the blockchain model. This fact alone has raised significant questions  about  Bitcoin’s  claim  to  “democratize”  or  “decentralize”  currency operations, in part because the system is exposed to the “51 percent problem”: if one entity controls more than 51 percent of the mining operations at any one time (something which was at one point unthinkable, but which now has happened at least once), it could, at least theoretically, “change the rules of Bitcoin at any time” (Felten 2014; also see Otar 2015). The amount of power consumed by blockchain operations is large enough that it has suggested to some that Bitcoin itself is “unsustainable” (Malmo 2015). The use of cryptographic techniques is what gives Bitcoin and other technologies like it the descriptive term cryptocurrency.

The Bitcoin program is currently “capped,” permitting only twenty-one million coins to be “mined.” It is limited in this way because its developers believe that the total number of coins in circulation has an impact on the value of the currency. This is an economic rather than a computer science argument, and it is one with which few economists agree. To some extent it  derives  from Austrian economics and from the monetarist view of inflation propounded by Milton Friedman and others, but it flies in the face of easily observed facts. Bitcoin’s price decline from upward of US$1,000 in late 2013 to US$200 in mid-2015 represents something like 500 percent inflation in eighteen months, in the strictest economic terms, despite the supply of Bitcoin increasing only by about 10 percent over that time period (“Controlled Supply”). In other words, and very literally, a product I could buy for 1 BTC in late 2013 would have cost me 5 BTC in mid-2015. One could scarcely ask for a more textbook example of not just inflation but hyperinflation: the fast and brutal destruction of value for those who hold the instrument. There  is  nothing  mysterious  about  this:  gold itself (like all other commodities, whether limited in supply or not) routinely inflates and deflates, without regard to the total amount of the metal available. Yet Bitcoin advocates continue to advertise the cryptocurrency as if it is immune from inflation, discounting the hard evidence before their own eyes. Quite a few apparently responsible pieces (e.g. Vigna and Casey 2015) have made claims like this at the same time that Bitcoin has been experiencing not just inflation but hyperinflation of exactly the sort Federal Reserve “critics” claim to fear most.

The Bitcoin software has a distinct origin point, in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” by a pseudonymous author who called himself “Satoshi Nakamoto.” Yet we need to reach back deeper into history to grasp Bitcoin’s complete political and intellectual contexts. Most of those involved in the development and early adoption of Bitcoin were and are part of several intersecting communities who have long put a huge amount of faith into very specific technological–political orientations toward the world, ones grounded in overtly right-wing thought, typically coupled with myopic technological utopianism. These include movements like Extropians, cypherpunks, crypto-anarchists, political libertarians with an interest in technology, transhumanists, Singularitarians, and a wide swath of self-described hackers and open source software developers. Sometimes the politics of these individuals and the groups in which they travel are inchoate, but often enough they are explicit (see Carrico 2009, 2013a, 2013b for detailed discussions of these various movements, focusing in particular on their politics). Yet even Nakamoto himself, in one of the first announcements that the Bitcoin system was actually running, rested his justification for the creation of the system on the extremist story about inflation and central banks: “The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve” (Nakamoto 2009). Ironically, Nakamoto seems not to have realized that his belief that Bitcoin would be immune to “debasement” was based on a flawed monetarist definition of inflation, or that Bitcoin itself could fuel credit bubbles and fractional reserve banking.

Journalist Nathaniel Popper, in the most thorough history to date of Bitcoin and its connection to these groups (Popper 2015), draws attention to the role of so-called crypto-anarchists and cypherpunks in what would eventually become Bitcoin (for analyses of the direct connections among Bitcoin, cypherpunks, and crypto-anarchists see Boase 2013; DuPont 2014; for this story from the perspective of Bitcoin promoters see Lopp 2016; Redman 2015). Among the clearest targets of these movements (see both the “Cypherpunk’s Manifesto,” Hughes 1993; and the closely related “Crypto-Anarchist Manifesto,” May 1992) has always specifically been governmental oversight of financial (and other) transactions. No effort is made to distinguish between legitimate and illegitimate use of governmental power: rather, all governmental power is inherently taken to be illegitimate. Further, despite occasional rhetorical nods toward corporate abuses, just as in Murray Rothbard’s work, strictly speaking no mechanisms whatsoever are posited that actually might constrain corporate power. Combined with either an explicit commitment toward, or at best an extreme naïveté about, the operation of concentrated capital, this political theory works to deprive the people of their only proven mechanism for that constraint. This is why as august an antigovernment thinker as Noam Chomsky (2015) can have declared that libertarian  theories,  despite  surface  appearances,  promote  “corporate  tyranny, meaning tyranny by unaccountable private concentrations of power, the worst kind of tyranny you can imagine.”

Even at their brief length, both May’s and Hughes’s manifestoes nod toward “markets” and “open societies,” both of them keywords for the right in the United States since Hayek (on the rightist foundations of the concept of “open society,” particularly as it relies on the thought of Mont Pelerin member Karl Popper, see Tkacz 2012). Both May and Hughes, like most rightist populists in the United States, presume that politics is organized exclusively around the sovereign individual who expresses himself through the power he accumulates; both craft artificial and unjustified distinctions between good people who are like myself and deserve a kind of absolute protection from the law, while (often simultaneously) invoking rhetoric of natural law and human or civil rights. They shift responsibility for lawbreaking and antisocial behavior to some nebulous but determinate “others” whose bad acts are to be steered around by technical means (Payne 2013 does a particularly good job of relating this point  of  view  to Bitcoin; also see Scott 2014). They reject the fundamental equality of human beings based on citizenship or respect, and instead assert the rights of specially appointed (and self-appointed) actors, themselves, to fundamentally alter the terms of governance, without so much as the knowledge, let alone the assent, of the governed—in short, they subscribe to an extreme version of “might makes right,” and the only equality they are interested in is the ability of each person to empower himself fully against the claims of others. May (1992) writes, “The State will of  course try to  slow  or  halt the  spread of  this  technology,  citing national security concerns, use of the technology by drug dealers and tax evaders, and fears of societal disintegration. Many  of  these  concerns  will  be valid; crypto anarchy will allow national secrets to be traded freely and will allow illicit and stolen materials to be traded.” Despite the validity of its concerns (which, it should be noted, more recent cypherpunk activists have been even less willing to grant than was May), the state’s efforts “will not halt the spread of crypto anarchy.” To the degree that Bitcoin realizes the dreams of May and Hughes and the other cypherpunks, it is a dream of using software to dismantle the very project of representative governance, at the bidding of nobody but technologists and in particular technologists who loathe the political apparatus others have developed. That many of these same crypto-anarchist and cypherpunk technologists—to say nothing of the Bitcoin entrepreneurs who work closely with major Silicon Valley venture capitalists—today sit at or near the heads of the world’s major corporations tells us everything we need to know about their attitude toward concentrated corporate power (May himself worked at Intel for more than a decade).

One of the most prominent canards used to defend Bitcoin against allegations of its profoundly right-wing nature is to suggest that Bitcoin is advocated by some who see themselves as on the political left, and that only a subset of those deeply involved in the promotion of Bitcoin describe themselves as libertarian. One of the “myths” supposedly debunked on the Bitcoin wiki is given as “the Bitcoin community consists of anarchist conspiracy theorist gold standard ‘weenies,’” to which the response offered is the following: “The members of the community vary in their ideological stances. While it may have been started by ideological enthusiasts, Bitcoin now speaks to a large number of regular pragmatic folk, who simply see its potential for reducing the costs and friction of global e-commerce” (“Myths). Defenses like this take the notion of “political affiliation” too literally, as overtly declared party allegiance.[1]  They are part of what fuel the “magical thinking” (Payne 2013) according to which Bitcoin can be advertised as “apolitical” and at the same time profoundly political (see Kostakis and Giotitsas 2014; Varoufakis 2013). Yet what is critical  about Bitcoin discourse, like other parts of cyberlibertarian discourse, is less  the overtly political alliances of those who engage with it than the politics that is entailed by their practice. In Bitcoin promotion, these arise especially with regard to corporate and governmental power (Bitcoin evangelists routinely promote the former, so long as it is favorable toward Bitcoin, and disparage the latter) and the dissemination of views about the nature of money and governmental oversight of money. It is not only those who see themselves as libertarians who, through the adoption of Bitcoin and the political communities around it, routinely distribute political and economic views that are grounded in conspiratorial, far-right accounts of the Federal Reserve and the nature of representative government. Whatever its success as a currency, Bitcoin  has proved incredibly useful for spreading these views, to some extent shorn of the marks of their political origins, but no less useful for the powerful corporate interests who benefit from other aspects of rightist discourse.

Widespread interest in Bitcoin first emerged from its utility as a means to bypass the “WikiLeaks blockade.” As put in 2012 by Jon Matonis, founding board member and executive director of the Bitcoin Foundation until he resigned in October 2014 (Casey 2014) and one of Bitcoin’s most vocal advocates:

Following a massive release of secret U.S. diplomatic cables in November 2010, donations to WikiLeaks were blocked by Bank of America, VISA, MasterCard, PayPal, and Western Union on December 7th, 2010. Although private companies certainly have a right to select which transactions to process or not, the political environment produced less than a fair and objective decision. It was coordinated pressure exerted in a politicized climate by the U.S. government and it won’t be the last time that we see this type of pressure.

Fortunately, there is way around this and other financial blockades with a global payment method immune to political pressure and monetary censorship. (Matonis 2012b)

Bitcoin made it possible for individuals to donate to WikiLeaks despite it being a violation of U.S. law to do so. In Matonis’s view, corporations participating with U.S. government laws is illegitimate and amounts to “censorship” and “political pressure”: there is simply no consideration of the idea that it might be appropriate for financial providers to cooperate with the government  against efforts that directly and purposely contravene perfectly valid law (regardless of whether one agrees with that law). Despite the fact that Bitcoin appears here to be operating against corporate power, what Matonis paints is a picture—one confirmed by the rhetoric surrounding newer proposals like blockchain-based corporations (see chapter 6)—of corporate and financial power operating without oversight and outside the constraints of governmental power. It’s clear that Matonis and others would very much have liked Visa, MasterCard, and other businesses to have refused to cooperate with the requests made by the governments under whose laws they exist at all.

In the contexts of finance and money, the word “regulation” has two distinct meanings that can easily be conflated. The first is central bank modulation of the value of the dollar: this is what Bitcoin enthusiasts and right-wing conspiracy theorists refer to when they talk about the Federal Reserve “devaluing” U.S. currency by “printing more money.” The second meaning, less frequently invoked but critical when it is mentioned, relates to the kinds of statutory oversight practiced by the U.S. Securities  and  Exchange  Commission  (SEC), with regard to financial markets, and to U.S. agencies like the Food and Drug Administration, the Environmental Protection Agency, the Occupational Safety and Health Administration, and the Equal Employment Opportunity Commission.

These agencies, technically members of the executive branch, have been the targets of right-wing ire, especially since they expanded in scope and power during  the  New  Deal.  The  “Lochner  era”  of  Supreme  Court  jurisprudence,

typically said to extend from about 1897 through to 1937, and overlapping to some extent with the “robber baron era,” marked a period of severe constraint on the powers of the federal government to regulate business practices, under a doctrine known as “substantive due process” (see Gillman 1995 for a general overview). It is no accident that the birth of modern U.S. right-wing extremism coincides with the demise of Lochner, as the forms of regulatory oversight that were once again made legitimate then placed significant constraints on corporate power, and the animus toward this form of oversight, generated by corporate titans and those whose wealth depends on corporations, continues in a fairly unbroken line from the late 1930s through to the present day (see Zuesse 2015 for a particularly pointed assessment of this history). Despite the frequent use of populist rhetoric by these movements, they have never been less than direct bids for corporate sovereignty over against democratic powers that seek, however imperfectly, to constrain what corporations do. The arguments against regulation have very little to recommend them outside the consolidation  of  corporate power, other than a certain reasonable concern about the amount of bureaucracy that might be involved in certain everyday endeavors; the arguments in favor have any number of serious and meaningful justifications, many of them directly implicated in the securing of life, liberty, and the pursuit of happiness.

When Bitcoin enthusiasts extol the currency’s existence beyond “regulation by nation-states,” they frequently blur the lines between these two very different forms of regulation, which really are unconnected except at the most abstract level. After all, the Federal Reserve, as right-wing extremists never tire of pointing out, is not part of the government; OSHA, the EPA, the SEC, and the other agencies all are. The Fed has no direct enforcement power, whereas regulatory agencies typically do. The Fed’s charge is twofold: to keep the unemployment rate relatively low, and to try to assure a  constant,  relatively modest rate of inflation. These are both modulatory effects: it is not a criminal or even civil violation for the inflation rate to get too high. Regulatory agencies, on the other hand, are concerned with implementing federal laws, most of which have been passed specifically to protect the health, safety, and/or welfare of U.S. citizens. They have a variety of powers to charge or to recommend charges of a criminal or civil nature against third parties, especially corporations, when those laws are violated. Both kinds of regulation are relevant to the distribution and use of money like the U.S. dollar, in different ways. Bitcoin is obviously built to escape the kind of regulation the Federal Reserve exerts over U.S. interest rates and the money supply (which I’ll refer to as “money supply regulation” in what follows), yet this is frequently taken to mean that it somehow inherently escapes the second kind of regulation (which I’ll call “legal regulation”) despite there being very little reason to think that might be true.

Some of the issues in legal regulation that Bitcoin enthusiasts routinely say their currency addresses are ones with significant justification in law enforcement—thus, statutes making money laundering illegal, forcing banks to report transactions over US$10,000, having limits on international transfers, and so on. Typically, Bitcoin defenders respond to criticisms of the cryptocurrency based on such deficiencies by pointing out that cash transactions can face at least some of the same complications (e.g., Patron 2015, 33–34; Brito and Castillo 2013, 37). While nominally correct, such after-the-fact justifications cannot bear the weight placed on them. That one instrument has a flaw does not imply that we must accept new instruments with the same flaw. Further, a huge part of its appeal is that Bitcoin enables instantaneous, worldwide, digital transfers of wealth, something that advocates are quick to point out paper money and physical commodities cannot do. It is question begging to  say  that  we  must accept Bitcoin for having certain similarities to existing media of exchange: if it were the case that Bitcoin is just the same as physical cash, we would not be having a discussion about Bitcoin. Bitcoin is not the same as physical cash. So we cannot dismiss criticisms of it by emphasizing their similarities, unless we are also prepared to abandon Bitcoin altogether for physical cash. (This form of question-begging justification is a commonplace in digital culture; see Golumbia 2013a.)

Some of the more interesting moments in Bitcoin discourse occur when advocates of one form or another appear to realize that these forms of regulation are not identical. This has occurred particularly often when one of the many Bitcoin exchanges has defrauded its users. Remarkably, at these moments, some of the most ardent opponents of “government regulation” turn  out  to  regret deeply the absence of exactly those features of government regulation (as well as some of the functions of intermediaries) that they have fought against so relentlessly. See, for example, Bitcoin evangelist Rick Falkvinge (2013a), who argues that although Bitcoin’s “unenforceability of governmental rules is a feature, not a bug,” manipulations of the Bitcoin market, which he calls “illegal trading activity,” are “cheating of some kind, a breaking of the social contract,” while noting that there is an “irony” in people using unregulated instruments to engage in just the activities regulation is designed to prohibit. The irony is not in that usage; it is in the typically right-wing insistence that eliminating regulations will somehow eliminate the behavior that the regulations exist specifically to prevent.

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