Happy May, Idiots!



Today I want to talk about the long-term incompatibility of “dark” wallets and Bitcoin. Tomorrow, I’ll expound upon that by talking about the potential long-term incompatibility of “multi-sig” wallets and regulated bitcoin services.



Earlier this morning, crypto-anarchist group unSystem unveiled the alpha version of its super-anonymous “Dark Wallet”. The technology incorporates CoinJoin, a feature first proposed by core bitcoin developer Greg Maxwell in order to mask bitcoin users’ transactions by consolidating them into single “stealth wallet” addresses. Dark Wallet is, in some respects, a win for privacy advocates troubled by the Bitcoin blockchain’s radical transparency, and the visibility it gives third-parties into user activity.



But the technology also creates a nightmarish scenario for authorities attempting to trace black market transactions made with crypto-currencies, and the creators are now taking the opportunity to wave big middle fingers in the faces of federal agencies like FinCEN and the IRS. Lead organizers Cody Wilson (already famous for his “3-D printer gun”) and Amir Taaki (developer of black marketplace DarkMarket) recognize and even embrace the fact that Dark Wallet will fuel black market activity.



“I want a private means for black market transactions," Wilson told Wired, "whether they’re for non-prescribed medical inhalers, MDMA for drug enthusiasts, or weapons.” He has also noted that Dark Wallet is essentially “just money laundering software,” and shrugged off the fact that crimes like kiddie porn, terrorism and murder-for-hire may happen more easily thanks to the technology by noting, “liberty is a dangerous thing.” Above all else, Dark Wallet, “mocks every attempt to sprinkle [bitcoin] with regulation,” according to Wilson, and it says to government authorities, “‘You’ve set yourself up to regulate bitcoin. Regulate this.’”



And I thought I was arrogant.



Telling the most powerful government in the world to go screw itself while you’re in your infancy certainly makes for excellent theater, but it also burns everyone else in the Bitcoin community in the process. Because…well…Wilson and Taaki are absolutely right about the tech.



When combined with fully-decentralized marketplaces like DarkMarket (which has since been renamed the less confrontational “OpenBazaar”), Dark Wallet creates tools that will almost certainly be used disproportionately, and effectively, by outlaws. Wilson and Taaki themselves seem to recognize that their technology is better for revolutionaries and criminals than mainstream consumers and merchants, who could just as happily use services today from Coinbase, BitPay, Xapo or Blockchain.



The big issue is whether dark wallets and dark markets will make all bitcoiners look guilty by association. Patio furniture purchases on Overstock and weapons purchases on OpenBazaar could potentially take place on the same blockchain block without raising red flags. Skeptics will ask, “is that a good thing for society?” And as the monetary base of Bitcoin increases from the billions to the hundreds of billions of dollars, large untraceable transactions will become a much bigger point of concern for national security hawks and tax collectors alike. Again, skeptics will ask, “is that a good thing for society?”



The implications of harboring money launderers and honest users on the same Bitcoin blockchain may be worse than many people imagine.



Yes, I know. The US dollar is already the reserve currency for the black market. And yes, people will pay for illegal goods and services with any type of currency if it’s easy to use. But dark wallets / markets are unique in how vastly superior they may be as an option for black market commerce, and participants in those markets would quickly abandon dollars and migrate to bitcoin if dark wallets prove to offer superior speed and security.



I believe the flood of black market activity in Bitcoin will get worse before it gets better.



And if you live in a low-inflation country, I’d even argue that there are no compelling consumerbenefits to using bitcoin today unless you plan to use it for black market commerce, or you are simply buying toys with long-term gains.



People tend to not spend bitcoin when it falls below their cost basis, and the killer apps for remittance services, e-commerce “checking”, micro-payments and anything else may still be years away from development. For non-speculators, this means that truly anonymous black-market commerce solves the greatest customer pain point, and as such is currently bitcoin’s killer app–during the same period in which regulators will grapple with “BitLicense” guidelines for money services businesses.



In a world with Dark Wallet technology, how can you possibly stop Coinbase customers from sending money to an anonymized wallet used to buy drugs through Silk Road 2.0 or guns through OpenBazaar? You can’t, unless you force BitLicensed businesses to disallow alltransactions sent to unidentified wallet addresses. Criminals will either exploit this reality and flock to bitcoin en masse (and soon), or skittish regulators will write crippling restrictions for bitcoin service providers that punish everyone involved.



I don’t know whether there is a third path. But I do know that what scares the crap out of regulators, scares me twice as much. Especially when cowboys like Wilson and Taaki seem to enjoy poking the sleeping giant.





Now for Today’s Tid Bits:



Coinfloor’s Unique Auditing Technique

http://blogs.wsj.com/digits/2014/04/30/londons-new-bitcoin-exchange-hopes-to-avoid-mt-gox-fate/

New London-based exchange Coinfloor is trying to avoid becoming the next Gox by essentially crowdsourcing its auditing to its customers. The exchange publishes a list of accounts and balance encoded in a way that account holders can identify their own accounts. Coinfloor is essentially relying on users to check and make sure the company has the Bitcoin it says it does, and the theory is that if someone’s account balance is wrong they will speak up. Coinfloor also says that withdrawals and transactions will also be signed off by multiple parties within the company as an extra layer of security.



Bitcoin Lobbyists… Kind of

http://www.pfhub.com/mastercards-lobbying-focus-in-washington-will-be-on-bitcoin-628/

In a quarterly federal lobbying disclosure record report, it was discovered that MasterCard would be paying lobbying firm Peck Madigan Jones to focus on digital currencies such as Bitcoin. MasterCard is the first corporation to officially lobby on Bitcoin, but its unclear what they’re lobbying for exactly.



Reserve Bank of Australia’s Statement on Bitcoin

http://www.coindesk.com/bitcoin-limited-risk-to-payment-systems-says-reserve-bank-of-australia/

Report: http://www.rba.gov.au/foi/disclosure-log/pdf/131419.pdf

The Reserve Bank of Australia (RBA) has issued a briefing document in which it calls Bitcoin a “limited” risk to the country’s payment systems. The document is quite dated, being published in May 2013, and was retrieved by a Reddit user who requested it from the government. However despite the report’s age, it shows that as early as last year governments possessed a very clear understanding of Bitcoin and other digital currencies and what their strengths and weaknesses are.



Blockchain Needs Beta Testers!

https://blog.blockchain.com/2014/04/28/blockchain-beta-group/

Blockchain is looking for a group of beta testers to help it develop new tools and features. According to Blockchain CEO Nic Cary, the need for the a beta group rose out of Blockchain’s fast-paced development and the need for quicker and more accurate feedback. If you’re interested, fill out the form on the link above!



Bitcoin Made Simple

http://www.theguardian.com/news/video/2014/apr/30/bitcoin-made-simple-video-animation

The Guardian has put up a great short video that goes over the basics of Bitcoin, taking into account all that’s happened so far this year. There’s probably no new information for many readers, but feel free to share it with friends and family who are still curious about Bitcoin. And even if you do know a lot about Bitcoin already, watch the video for the wonderful animation.



MIT Bitcoin Experiment Interview from Bloomberg

https://www.youtube.com/watch?v=OO_NttW0D8M&feature=youtu.be

Great to see the Bitcoin Experiment get some publicity on a big network like Bloomberg. Despite some of the condescending and border line off topic questions some of the interviewers gave out, the big coverage on the experiment is definitely a huge plus. Congratulations again to the team!





Tell me I’m wrong about black market commerce being bitcoin’s killer app for the next couple of years. I dare you.



Cheers,

TBI





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