Sunday, January 26, 2014

The BitCoin Terrorist: Preparing for The Coming War on Digital Coin and Cash

From a libertarian perspective, there are reasons for cautious optimism about the future of digital coin in peaceful expansion of human freedom.  But there are also risks.  So long as the will to dominate exists, there will always be a threat that digital currency will be subverted into an instrument of oppression instead of freedom.  It may only be a matter of time before authoritarian governments seek to make government-controlled versions of digital coin mandatory, and phase out all legal uses of paper notes and coins. Such a change would be a devastating loss to human prosperity and happiness, and decimating to the free market.

Government officials are already foreshadowing what may come.  For example, as reported here and discussed here, Treasury Secretary Jack Lew has publicly expressed fears that Bitcoin will be used to commit acts of terrorism.

Based on Jack Lew's comments, we should not be shocked to someday experience a horrendous "terrorist" attack (or series of attacks), which will be covered by the corporate media as financed and enabled by Bitcoin or the like.  Such an attack may provide a pretext for outlawing all forms of free electronic coins, and may be used to engender distrust of anyone who speculates or trades in such coin.  Around such time, the governments of the world may introduce banker-controlled electronic coin, and start phasing out all forms of tangible cash, for "public safety" and to frustrate "tax cheats."

These are not predictions based in conspiracy theory.  No central planning is needed to bring about BitCoin terrorism.  On the contrary, it is possible for such an outcome to arise out of forces that are visibly at work in the world, including the growing acceptance of digital currencies as a medium of exchange, government seizures of BitCoin, and the continuing use of terrorism as a political tool by motivated minorities.  Regardless of the role of any identifiable banking elite, the real possibility of a terrorist attack funded by digital coin is entirely foreseeable.  There can be no doubt that an authoritarian government, funded by central bankers and threatened by digital currency, would exploit a gullible and misinformed public's anger over such an attack to, at the very least, outlaw all anonymous forms of digital currency transfers and disparage peaceful users of digital coin by association to terrorism.

Others have predicted similar outcomes.  Robert Wenzel has predicted that legislation will be passed making Bitcoin and other digital coin anonymity illegal, and requiring Bitcoin processors to accept chargebacks from users.  The second half of that prediction is perhaps shakier, but the first half is well within the realm of possibility, if not already required under anti-laundering laws in some circumstances.

A ban on anonymity might be enough to ruin Bitcoin as a medium for tax-free, stateless transactions and evading capital controls.  Whether or not a ban can be made practically enforceable, a concentrated attack on digital coin by governments would doubtless do great harm.  It's worth thinking about how governments might attempt to enforce such bans, in practice, and what the end game might be.

We know from persecution of BitCoin exchanges in the U.S and China that any person using a bank account to service a digital coin for currency exchange can be shut down or forced to track personal identities of the exchange's customers.  Business leaders can be pressured to disavow “fantasies of a crypto-powered stateless future” and to suppress distribution of exchange service applications. Such exchanges are a vulnerable point in any digital currency system and relatively easy to control, if tied into the banking system.  It's difficult for a free coin exchange to operate without use of electronic money transfers, except for by using face-to-face transactions.  Nonetheless, supply and demand will ensure that face-to-face coin exchanges will remain available every place where the benefits of such exchanges outweighs the costs and enforcement risks required to participate in them.  This is proven by the success of the "drug war" in promoting highly profitable exchanges of illicit substances for cash, by all sorts of people.

Suppose that face-to-face transactions become necessary to exchange digital coin for other currency, while digital coin is not widely adopted as a medium of exchange due to tight regulations imposed on businesses.  This might be considered a worst-case scenario for free exchange of digital coin.  Digital coin that relies on a public block chain or similar transaction register suffers from some drawbacks over physical mediums of exchange such as paper notes or precious metal coins, in face-to-face transactions.  Even if using an anonymous wallet identifier, registering the transaction in public registry entails greater risk than a simple face-to-face exchange of physical cash.  However, digital currency retains one tremendous advantage over physical media, even in these direst of circumstances: the ability to be transported and to cross borders undetected.  Using the simple expedient of a mind wallet (or an obscured wallet for the forgetful), digital currency provides a robust and secure way to evade capital controls when traveling, so long as a coin-for-currency exchange is available at the destination.   This feature of digital coin probably ensures its continued use as free medium of exchange so long as no technological tool exists to entirely prevent it from operating anonymously.

For anonymity, the point of vulnerability is the block chain.  Being publicly available, the block chain can be inspected and analyzed by revenue police to identify participants in digital coin transfers.  Such police work is made much easier if most users make no attempt to hide their government-assigned identities.  Police work can then focus on unidentified users, who will have to exercise greater caution to avoid being identified.

Another threat to the block chain may arise from very well-funded transaction processors or cartels.  It may be possible to mitigate such threats by redesigning how transactions are processed, or perhaps the threat isn't real.  Regardless of the details, given enough resources and guns, a government intent on disrupting block chain processing could probably find a way to do so.  It may be possible to eventually track down and eliminate block chain processors, causing others to such down out of fear.  Such an approach might be like decapitating a hydra; shutting down one processor may only encourage its competitors.  This effect was seen after the recent persecution of Silk Road.  On the other hand, this kind of violent intervention in the market can be used to enhance the police powers of the state.  The Drug War teaches us that prohibition leads to higher transaction costs and profits, the benefits of which flow to both sellers and the state, and detriment end users.

Thus, like a successful war on "drugs," a successful government war on free digital coin would not result in its total elimination, nor would it be designed to do so.  Instead, success would be measured by the degree with which government determines which major participants in the market are allowed to operate, the degree to which government power is reinforced by the activity it has banned, and the degree to which the public accepts the government's condemnation of banned activity as morally legitimate.  When these outcomes are achieved, the ban and the contraband serve as useful tools for the promotion of government power and suppression of dissident minorities.  Under civil forfeiture laws, such bans also serve as a way to compensate government enforcers and provide incentives for their continued loyalty to the existing powers.  Authoritarian government would rejoice if digital coin is made illegal but its use not entirely stamped out.  What a wonderful way to criminalize people who believe in liberty, and prey on them without limit!

Although many have focused on technical means on making digital coin transfers more anonymous, this approach concedes the inevitability of government snooping on private transactions and relegates the free trading community to a shadowy underworld.  A more effective strategy to defeat the coming war on anonymous digital transactions, and in the long run, the only effective strategy, may be to flank the enemy in a PR battle for public sympathy and understanding of the purpose and importance of the right of privacy. Head-on engagement over privacy using technological weapons in a battle where authoritarian powers claim a public safety and nationalist high ground may end up to be just dancing to the rulers' tunes.

A public relations battle is winnable.  After all, far from being an addictive or dangerous drug, the right to be secure in one's papers is a constitutionally guaranteed right.  Unless and until most people understand that police have no greater right to snoop and surveil than do members of the general public, and that the block chain is a public good for the purpose of enabling a useful and efficient medium of exchange, and not an instrument of surveillance and oppression, the infowar will be lost.

These and similar arguments must be made loudly and often -- even by goldbugs presently disparaging digital coin.  They are coming for your gold next, and in many ways have already intruded into your right to privacy regarding disposition of your metals.  Instead of disparaging digital coin, goldbugs should use its emergence as a political opportunity to advocate for expansion of privacy rights.  Digital coin can never entirely displace gold, because gold's non-replicability give it inherent value without any need of a registry of transactions.  Digital coin offers other advantages that complement precious metals as a medium of exchange, such as being electronically transmissable and programmable.  Both mediums can and will happily coexist in a free society.

Political opposition to bans on constitutional and natural rights grounds may be greatly bolstered by the good ole' practice of spreading grease around.  For example, charitable trusts may be set up, funded by donations from large bitcoin holders and micro donations from merchants and payment processors.  Efforts such as Bitcoins Not Bombs must be expanded and broadened in appeal and impact.  Pools of donated digital coin should be used for supporting popular charities across the full spectrum of society.  The objective should be to engender wide recognition of digital coin as primarily a socially beneficial thing in the hands of generous and kind people.   Without such efforts, it may be all too easy to portray digital coin as a device of selfish tax evaders, heartless sellers of additive drugs, and terrorists.

"Funded by BitCoin" should not appear on the headbands of killers; it must appear on sacks of grain for victims of wars and natural disasters, on clothing donated to churches and other charities for distribution to the poor, on bus benches, on free medical clinics and medicines, on educational materials for schools, on community halls, pollution remediation projects, nature preserves and anything prominent and widely recognized as a moral good.  Those wealthy in BitCoin or other digital coins would be prudent to spread a little of their good fortune around, lest all of their coin be devalued by force and they themselves turned into fugitives and criminals.  It must be proved that voluntary donations and self-organizing networks to achieve social goods are superior to coercive taxes and centralized control.

Abolition of cash and mandatory use of tracked digital coin must be proactively and openly resisted, well before any concrete proposals are in front of politicians.  No such propositions are publicly proposed currently, because such measures would be widely unpopular.  Adoption would only come during a time of great crisis, real or manufactured.  Without a reservoir of goodwill and political networks built up in happier times, it may prove impossible to resist public outcries to sacrifice privacy for perceived greater security.  Organizations such as Oathkeepers have shown one way to promote and defend the right to keep and bear arms and other natural rights; perhaps similar organizations can promote privacy and the right of free exchange outside of narrow libertarian confines.  Efforts should be made to add affirmations of the right of privacy and condemnation of mandatory, tracked electronic money to the platforms of as many parties as possible.  The foregoing suggestions do not make up a comprehensive plan, but might be a good start.

To be concise, the decisive tactics in the war against digital coin will be moral and political, not technological.  Now is the time to implement such tactics.  If cash is ever replaced by government-controlled trackable digital coin, with each user branded as government property using biometric ID methods tied to the coin, it will be too late.