Bitcoin, the deep web, & the big conflicts of the 21st C

Summary:  The e-conflicts have begun with the development of e-currencies, e-markets, and even e-wars. History tells us that people often don’t see the major trends of their time, either lacking perspective or distracted by more cool but less important phenomena. So it is today, as bitcoin gets the most attention while dark e-markets change the world. But governments and corporations see their challengers, and marshal their power to push back.

The deep web

Contents

  1. Dreams of freedom
  2. Bitcoin, the first e-currency
  3. Dark markets
  4. The corporate wars
  5. For More Information

(1)  Dreams or freedom

Fantasies of radical personal autonomy, an independence from governments, have been common in western civilization since Daedalus’ dreams of flight. Modern tech has given them new life, with dreams of independent suburbs in the sky — the L5 orbital habitat — and of seasteading — floating nations of makers and their servants, free of the takers.

Private currencies are another expression for this search for autonomy.  Currencies provide a storehouse of value and medium of exchange.  Gold served as a currency for millennia, providing a relatively good store of value but too cumbersome for a medium of exchange in the modern era, so people seek to create privately issued currencies.

In American history we had government-regulated privately issued currencies from the State-chartered banks which issued dollars during the 1837-1862 free banking era (more info here) and the Federally chartered banks that issued dollars after the National Banking Acts of 1863-66. These had many problems, most notably a tendency to fail from bad luck, mismanagement or theft (by insiders or outsiders) — making their currency worthless. The need for more a stable currency led to the Federal Reserve Act of 1913 that created our current currency.

Now we have a new era as tech makes possible private e-currencies, in theory perhaps beyond control of governments.

There are many types of non-State currencies, aka alternative currencies. Digital currencies are currencies based on the Internet. A virtual currency is an alternative digital currency. A cryptocurrency is a digital currency using cryptography to secure the transactions and create new units.

Bitcoin was the first major crypto-based virtual currency. Satoshi Nakamoto published his design in 2008, and released its open-source software in 2009. It got great attention but little commercial traction for two reasons: a weakness of implementation and a conceptual flaw.

 

Bitcoin

(2)  Bitcoin, the first e-currency

Although Bitcoin works as a medium of exchange, its wild fluctuations in value make it a poor storehouse of value. But its implementation had a greater weakness. There are two common means of creating new currencies. First, by gaining acceptance of users by voluntary agreement (e.g., shell money) or coercive means (“legal tender for all debts public and private”). Second, by allowing easy conversion into a widely accepted currency or store of value (e.g., dollars or gold) — the solution most e-currencies use.

Although the system is peer-to-peer, allowing users to transact directly without an intermediary, in practice most users relied on exchanges to hold bitcoin and convert them to dollars. These are a bitcoin network’s most vulnerable points, exposed to failure and government action.

Such private exchanges are a commonplace in history. In the late 19th century, rural areas had a shortage of currencies. The local general store often acted as a clearinghouse for IOUs among people and bank (extending credit for purchases in the general store).  Today we have the government-regulated clearinghouses backing the US securities exchanges (e.g., DTC for stocks, OCC for options).

The unregulated bitcoin exchanges have had a spotty history (e.g., the bankruptcy of Mt. Gox, “The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster“). In response bitcoin has followed the usual path with the creation of government-regulated clearinghouses (e.g., Coinbase). If bitcoin use grows to real size then government regulations will follow, showing the fallacy of the bitcoin concept: why bother with the complexity of creating another government-regulated payments system? Why not just use PayPal, or some similar method to bypass the massive fees harvested by the credit card oligopoly?

Success in e-currencies comes from losing the dream of freedom from government. That failure results from a fundamental failure: few people want a currency free from government regulation. Techies listen to libertarians and other on the right-wing fringe and so focus their energy on a sideshow. Meanwhile the main event builds in the shadows, providing services in great demand.

Wikileaks

(3) Dark markets

Dark markets have always existed. The internet makes them vastly more powerful. They provide better ways to buy and sell forbidden services (e.g., sex, assassination), to buy porn, to trade free of taxes (e.g., tariffs, income and sales taxes), to buy and sell forbidden goods (e.g., drugs, pirated entertainment), to meet in the shadows (e.g., Ashley Madison for adultery), to talk unheard (e.g., hackers and al Qeada), or to exchange information (e.g., Wikileaks).

Building the dark web will create fortunes. It’s a gold rush still in the early stages.

The primary challenge is to avoid government oversight (e.g., subpoena of records by civil or criminal agencies) and government regulation of their operations. The secondary challenges are to conduct normal business operations: raising capital, marketing, personnel (recruit, train, motivate, pay, and retain employees), finance, etc — while in the shadows. In many cases that requires building relationships of trust with customers and suppliers (or becoming a trusted intermediary or agent between others) without the usual government stamps of approval.

The third and most difficult challenge is to do these things in the face of attacks by combinations of government or corporate forces. They face powerful enemies on all sides.  The DEA and Disney want to shut them down. The NSA wants to monitor them. The IRS, Customs, and divorce attorneys want their records.

Some of these next-gen web commerce companies operate in the legal world and some on the deep web — protected by means such as secrecy, cryptography, and hosting in cooperative nations. Collectively they are insurgents to the established order (social, political, economic). The Empire will strike back (e.g., see “Bugs in Tor network used in attacks against underground markets“).

The silk road

(4)  The Corporate Wars

Just as techies focus on building e-currency platforms instead of the vastly more lucrative dark e-commerce platforms, geopolitical experts chatter endlessly about minor conflicts among the great powers (if you believed them we’d be on WWXI by now) but ignore the serious wars in the developed nations.

“Corporate wars” have been a commonplace of science fiction futures for decades, usually describing a world where corporations that outgrow nations and fight with each other. In the real world corporations operate in conjunction with nations, both subsidiaries of the world’s rich.

In the real world we have the wars of the establishment vs. e-insurgents.  The US-led alliance of governments attacking Wikileaks (focusing on Julian Assange, its leader, and its funding sources). The assault on Pirate Bay by nations and corporations. The US government’s arrest and prosecution of the Silk Road 1.0 and 2.0 (see the Ars Technica series about “The Silk Road Trial“).

Conflicts run both ways. E-insurgents (aka hackers) attack governments and corporations while nations and corporations attack one another. These kinds of wild conflicts are common in history, such as the Hundred Years War. It’s too early to say how this will evolve. We live in interesting times.

(4)  For More Information

This post results from discussions with Steve Randy Waldman (blogging at Interfluidity), who contributed many of these insights. For more a real life story about life on the deep web see “The hitman scam: Dread Pirate Roberts’ bizarre murder-for-hire attempts” by Joe Mullin at Ars Technica — “On the dark web, no one is who they seem.”

To learn about the history of gold, one example of humanity’s search for a perfect currency, see Nathan Lewis’ Gold: The Once and Future Money and Peter Bernstein’s The Power of Gold: The History of an Obsession.

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11 thoughts on “Bitcoin, the deep web, & the big conflicts of the 21st C

  1. You’re killing it these days FM. One new thing is crowd funding. There was recent testimony in Sacramento regarding this. The main foes of raising money this way were AARP who argued the elderly would be victimized by scammers. No doubt this is true if safeguards are not in place but an opportunity is to create a rating service to perform due diligence on such start ups. Now is a good time for this to blossom given the negative risk free yield available to savers.

    1. Peter,

      Crowd funding is a good example of the disintermediation that the internet allows, disputing the iron hold of key corporations on the economy. These businesses in the light receive most of the attention. But the innovations in the deep web might have as large an effect.

  2. Casa RosadaCuenta @CasaRosadaAR retwitteó The New York Times

    Apparently bitcoin is disrupting our economy now (?) Casa Rosada añadió, The New York Times. How Bitcoin is disrupting Argentina’s economy http://nyti.ms/1DB0MUa

    Can Bitcoin Conquer Argentina?“, NATHANIEL POPPERA, 29 April 2015 — “With its volatile currency and dysfunctional banks, the country is the perfect place to experiment with a new digital currency.”

    1. Sabree,

      Color me skeptical. The article says explicitly that bitcoin is NOT disrupting Argentina’s economy: “The number of Bitcoin users in Argentina is relatively small; it barely registers on most charts of global Bitcoin usage.”

      The NYT has a schicht of running these breathless articles hyping the latest hot thing with poorly sourced big articles.

  3. I have long wondered if we’ll ever find out that the US Government’s intelligence agencies were at least partially behind the attack on Mt Gox.

    At the same time as that was going on, the USG made a legal attack on Silk Road, which appears to have been aided by the NSA. The FBI has been doing some pretty mediocre “dual construction” to try to make it look as if the location of the Silk Road servers was determined using legal searches, but it looks like the site was fingered using very broad-level traffic analysis of data patterns: NSA’s bread and butter.

    The TOR network has also been compromised in a couple of interesting ways, by a skillful and well-resourced attacker.

    The Empire Strikes Back. Refs:

    1. Marcus,

      Thank you for sharing your knowledge of these matters here!

      Any thoughts on the potential of bitcoin (a currency) vs the deep web (a market and communications medium)? I believe the demand for the former is far less than for the latter.

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