Bitcoins create truly democratic policy, followers say

OTTAWA – Money may be the next frontier of the Internet revolution thanks to Bitcoin, a burgeoning new digital currency.

The software that tracks, trades and stores bitcoins is free, and its code is public. This means anyone can change it, either because they hope to make it better or to provide themselves with some advantage.

But those changes won’t take effect unless everyone else downloads the new version. For bitcoin devotees this is a truly democratic monetary policy.

“Financial and economic power has always been concentrated with a very few people,” said Jared Kenna, one of the founders of, an online bitcoin exchange.

“I think this shows people that that can be changed. I think it brings a lot more power to the individual person.”

Bitcoin is not issued by any central bank or institution, but claims to be impossible to counterfeit or manipulate. The bitcoin trades on a peer-to-peer network of hundreds of thousands of computers, operating much as networks that share music files.

Although bitcoins exist only online, the money that has been put into bitcoins is very real. In the last few weeks bitcoins have been trading for about $15 US on a leading online exchange, though daily swings can be huge.

With 6.2 million bitcoins floating around cyberspace, that puts the currency’s total value at around $93 million US.

But for the geek community that’s adopted it so enthusiastically, bitcoin is more than just an investment: it’s a programming marvel that solves the problems that have frustrated the development of an online currency: identity theft and counterfeiting.

The idea of a decentralized cyber currency has been kicking around tech circles for awhile, even appearing in cyberpunk novels in the late 1990s. But no one could figure out how to prevent people from counterfeiting a digital currency without the help of some central body to monitor everything. It seemed online payments couldn’t work without oversight from banks, credit card companies, or online payment services like PayPal, which serve as a trusted intermediary to make sure accounts are credited and debited properly.

But in 2009 a solution suddenly appeared, attributed to Satoshi Nakomoto, an unknown who has since disappeared. Most people assume the name is a pseudonym, but whoever he or she is, programmers soon discovered the author had left behind a work of art.

“It’s like the Mona Lisa.” said Bruce Wagner, an IT consultant who discovered bitcoin in October and now hosts an online TV show about it. “It’s a masterpiece of technology.”

Bitcoin solved the problem of identity theft through what’s known as public key cryptography – a method of encryption that many banks, militaries and e- mail providers use to make sure the only computer that can decode a certain message is the computer that message is meant for.

But its real genius is in its anti-counterfeiting program.

You counterfeit digital currency either by programming it into existence yourself, or erasing the record of money you’ve already spent so you can spend it again.

Bitcoin gets around this by distributing a public master list of every bitcoin transaction to every computer in the network. Bitcoin transactions are broadcast to the network at large so everyone else’s wallet, the free piece of software that inducts users into the network, can check them against the master list. Once enough computers approve the new transaction, one of them can add it to the masterlist, which then gets redistributed throughout the network.

Bitcoin holds a competition to determine which computer updates the list. It sets a cryptographic puzzle that can only be solved through trial and error. Any computer with a wallet set to take part in the competition races to solve this puzzle. The puzzle is so difficult that even a very powerful computer will only solve it rarely, but with enough computers in the network all racing to solve the puzzle, someone solves it every 10 minutes, but no one can predict who. This means the network can approve transactions in a timely manner, but no individual can count on solving the puzzle to slip in a bogus transaction.

The computer that updates the masterlist gets a reward of 50 automatically generated bitcoins. This is how new bitcoins enter the economy, up to a maximum of 21 million.

The ceiling means no central bank can devalue users’ bitcoins by printing more. Another advantage is that bitcoin does not require users to trust a middle man with their money or personal information, making it as anonymous as cash in the real world.

Enthusiasts say if you want to make payments or send money online it’s easier to set up than PayPal or a credit card, processes transactions faster than either, and all without any fees or paperwork. However, arranging to make deposits and payments into your real-world bank account is still a rather laborious process.

That last part is why Lawrence White, a specialist in monetary theory at George Mason University in Virginia, is skeptical about bitcoin’s chances of going mainstream.

“People who are computer savvy regard it as, you know, cool. And people who are into financial privacy like it because it has these privacy features. But expecting it to become a widely accepted medium of exchange is very speculative at this point.”

White says the only way for that to happen is for a critical mass of merchants to start accepting it. Right now most bitcoin transactions are done by speculators and although there are some people accepting them for goods and services (anything from web design, to novelty dice, to beef jerky), White says it’s not nearly enough.

And then there’s the technical barrier. People who don’t understand the cryptography may not trust their money with it. And bitcoins can still be stolen – a particular danger comes from viruses that steal bitcoin wallets.

Bitcoin exchange manager Jared Kenna says the growing number of programmers working on bitcoin, and bitcoin services, will sort out the bugs.

“It’ll become a lot easier: usability will increase, safety and security will increase. There’s talks right now of making the wallet encrypted by default, things like that. So it’s going to go from computer nerd Linux version, that it’s like now, to an Apple version that my mom can use.”

But governments will have their say first.

Two U.S senators recently sent a letter to the attorney general and the DEA raising concerns about an online drug market called Silk Road. The only currency Silk Road accepts is bitcoins. Because of the difficulty of shutting down the market itself, message boards have been buzzing with fears that bitcoins would become a target instead.

Governments may have as little success stamping out bitcoins as they have had with illegal file sharing. A peer-to-peer network like bitcoin has no server to shutdown or ring leader to prosecute.

But for supporters, government fears are unjustified because bitcoin is no more anonymous or untraceable than cash. And many of them believe bitcoin’s spread is as inevitable as the Internet itself – and could be just as profitable.

“If we remember, 15 years ago if you were doing anything on the Internet you were going to make millions,” said Kenna. “I think it could be the same with bitcoin.”



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