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BitCoin, the Most Dangerous Project Ever?
Jamie found a followup to the bitcoin story we've been following awhile. The article talks about the untraceable, un-hackable nature of BitCoin. They can't be locked down like PayPal, and the article predicts that governments will start banning them in the next 18 months.
I agree the article is badly written. Transactions take place between public keys. As a public key is just a big random number, they are essentially "anonymous" unless the key is linked to your identity somehow - for example, because somebody you traded with told the police "I sent X coins to Eldavo John and he used address Y".
That's why it's better described as pseudo-nonymous rather than fully anonymous. It's possible to break the anonymity if people co-operate. I'd say it provides about as much privacy as the regular internet does. An IP address is basically private to regular citizens. If you represent law enforcement and turn up at a bunch of companies with the right paperwork you can make everyone work together and the privacy of the IP address falls.
Well, to handle Bitcoins today all you need to do is install and run the software from bitcoin.org. It runs just fine on regular servers, desktops and even laptops - hardly expensive infrastructure. If the system takes off and traffic levels reach PayPal levels, running it on a laptop won't be feasible anymore, you'll need some kind of high end server. If the system really takes off and starts matching VISA, a node would have to be distributed and might take a rack of machines. It never really gets infeasible because there is a "lightweight mode" in which the resource requirements are much lower and the security properties are slightly weakened. In this mode it's quite possible to run the system on a smartphone. Your device is independent, but if somebody is able to overtake the networks hashing power it can be made to believe anything. Right now that's 1-2 terahashes/sec, not something that's going to be beaten by anything except rich, sophisticated organizations (big tech companies or governments).
But I think your question/pondering is more about whether Bitcoin has value beyond mischief. I think it clearly does, otherwise I wouldn't be working on it ;) The existing electronic payments system isn't that great, really. To pay for something instantly over the internet today you have to use credit cards. Wiring money is an alternative but due to outdated banking systems it's extremely slow, money moved this way often moves slower than a physical truck would even though the transfer is actually electronic. It's also quite expensive.
Credit cards have a bunch of problems for both buyers and sellers. For sellers the biggest problems are chargebacks and the costs of taking part in the system. It's really hard to handle chargebacks. Big companies use sophisticated risk analyses to try and spot unusual behavior, smaller companies just bump the price of everything by 10% to handle the fact that some payments just won't happen. The costs of taking part are also a problem. You can't just install some software on your web server and go. Credit card details are basically big passwords, but in an inconvenient form that you can't change and that every merchant you buy things from must be given. Unsurprisingly, this is totally insecure even with the PCI auditing process that is intended to ensure merchants keep CC data safe. See the recent Sony breach for an example.
Credit cards aren't really great for buyers either. Whilst chargebacks are useful, you can't opt-out of the ability in order to get lower rates from the merchant, or set up some other kind of escrow scheme. For another, the system is very inflexible. Whilst you can theoretically take steps to secure your CC credentials better on your end, the fact that you share them with anyone you buy things from makes such effort mostly worthless. Finally they are kind of inconvenient. Despite being one big password you usually have to type in several long, hard to remember codes and
There are alternatives other than "is legal tender" and "is worthless." A thing is worth whatever people will pay for it. If some people start accepting bitcoins as payment, other people will be willing to pay money for bitcoins in order to use them as payment -- particularly if the exchange rate is favorable. Once people realize that they can thereby sell their bitcoins for money to those people, more people will be willing to accept them as payment.
This has nothing to do with its status as legal tender. Canadian dollars are not legal tender in the US, but if someone on the US side of Niagra Falls wants to operate a store and list all the prices in US and Canadian dollars and accept either one as payment, is that illegal? Even assuming it is, if they put a vending machine in the lobby where you can exchange Canadian dollars for US dollars and then spend the US dollars, does it result in any practical difference, or do anything someone couldn't do with bitcoins?
But none of it matters until they reach critical mass. People will only buy them if vendors accept them, and vendors will only accept them if people are buying them. The problem is how you get one to happen in significant numbers before the other.