bitcoin

The Internet's creative hive mind is charting the future of commerce -- the bitcoin phenomenon shows what online currencies are capable of.

This July a computer developer who goes by the handle Doctor Nefario landed at the Seattle-Tacoma airport from China for a two-month mind-meld with various U.S. developers, which he planned to mostly fund using the increasingly popular decentralized digital currency bitcoin. After explaining to suspicious Customs and Border Protection agents that he had $600 in cash in his possession and another $1,500 to exchange in bitcoin -- plenty for a two-month visit, he insisted -- Nefario, founder of the Global Bitcoin Stock Exchange, was promptly sent back to China after agents spent hours trying to wrap their heads around the concept of real money that exists only in virtual reality.

"Avoid any mention of bitcoin," Nefario advised in a blog post recounting the tragicomic affair. "They don't like it at all."

Good luck with that. Founded in 2009 from a self-published 2008 white paper by developer Satoshi Nakamoto, whose actual identity still remains a mystery, bitcoin's peer-to-peer virtual currency has gone viral, from WikiLeaks to Google and beyond. It's a fascinating experiment in economic evolution, where goods and services can be exchanged using an opensourced mobile currency mostly outside the reach of regulators, speculators and central bankers. There are over six million in existence, pegged between $14-$17 per unit -- although their actual price can fluctuate wildly in a given day -- with a tentative cap of 21 million. Bitcoins are stored in a digital wallet, and can be used in any country to barter with a massive and growing list of sites that accept them.

Here's how it works: A public peer-to-peer transaction ledger, called a block chain, is stored on every computer running bitcoin and records every transaction ever made. The ledger weighs hundreds of megabytes in size, and is validated every 10 minutes by a computer working to secure the network, called a bitcoin miner, which wraps blocks of broadcasted message transactions in cryptographic hash functions. Transactions are entirely public, while those who transact are nearly private. The result? An emergent digital economy for the iGeneration.

"It's quite complex, even simplified," early bitcoin developer Jeff Garzik told AlterNet. "Bitcoin is a currency -- or, more specifically, a currency-like commodity -- that did not exist two years ago and is still in the early bootstrap phase. A lot of its economy is inevitably tied to the existing economy, and simple logic tells you that you will never have a completely separate money system, even if bitcoin is wildly successful. But bitcoin will be one among many currencies: Just like you exchange U.S. dollars for euros when travelling, you will exchange bitcoins for euros to meet the needs of a specific situation."

Not yet, of course, recalling the travails of Doctor Nefario. Or Senator Chuck Schumer, D-NY, who recently complained that buyers and sellers of "illegal drugs" were using bitcoins as "an online form of money laundering" on the anonymous online marketplace Silk Road. "The only method of payment for these illegal purchases is an untraceable peer-to-peer currency," Schumer wrote with Senator Joe Manchin, D-W.Va., in a letter to U.S. Attorney General Eric Holder and Drug Enforcement Agency administrator Michele Leonhart. "After purchasing bitcoins through an exchange, a user can create an account on Silk Road and start purchasing illegal drugs from individuals around the world and have them delivered to their homes within days."

Schumer and Manchin urged an immediate shutdown of Silk Road, stopping short of prescribing the same for bitcoin. But taken together with Nefario's treatment, it portends a clouded future for bitcoin anonymity and ubiquity. "I think we agree with Senator Schumer in principle," Garzik told AlterNet. "None of us want evildoers to use bitcoins for evil. But just like millions of U.S. dollars are used for buying drugs and guns, a currency is sometimes used for crime and violence. We hope that bitcoin's public transaction ledger tips the scales in favor of the good guys. Bitcoins are slightly more traceable and less anonymous than paper U.S. dollars."

Anonymity is not just a growing concern with politicians, but with researchers as well, now that transparency champion WikiLeaks accepts anonymous bitcoin donations. Total anonymity is a misconception that has the potential to turn into a dangerous mistake.

"Bitcoin is undoubtedly a remarkable milestone in the evolution of electronic currencies, but the system is not inherently anonymous," explained University College Dublin researcher Martin Harrigan, co-author of an analysis of bitcoin's privacy limits. "It is basically a case of caveat emptor for users."

"WikiLeaks mistakenly calls bitcoin anonymous, which is disappointing," added Garzik. "Bitcoins offer strong privacy to individuals, but I would not recommend that a dissident in a repressive regime use them."

There are other concerns. Massachusetts Institute of Technology student Edward Yang recently published an online analysis claiming that bitcoin isn't actually decentralized. Malware designed to raid bitcoin wallets has reared its opportunistic head. In March, someone mysteriously infiltrated leading bitcoin exchange Mt. Gox and drove the going price down to a penny within a half-hour. The honor system, as it turns out, can be compromised in reality and hyperreality alike. The same greed and schemes afflict both.

"Bitcoin is just another abstract electronic abstract medium of exchange that ultimately depends on faith in actual currency and agreed-upon values," author and public commentator James Howard Kunstler told AlterNet. "When currencies get into real trouble, faith in them evaporates."

"Bitcoin software is very immature, and its recent success took a lot of us by surprise," explained Garzik. "We're working at warp speed, trying to build the ecosystem and ensure its security. But one can see from the Mt. Gox incident that we are still having growing pains."

But no pain, no gain, as the cliche goes. And the gain seems to be outweighing the pain at this stage of the game. Google has jumped into bitcoin with a Java implementation that simplifies payment via smartphones. An Android app turning mobile phones into digital wallets arrived in early July. The most powerful Internet company on the planet's interest in this emergent economy is a positive one, said Garzik.

"Bitcoin ecosystem needs more clients," he told AlterNet. "Heterogenous ecosystems are more healthy than homogenous ones."

And for all of Schumer's hypocritical bluster, American politicians, and especially their more net-savvy aides, are growing interested in bitcoin's potential. Lead bitcoin developer Gavin Andresen recently met with political staffers who encouraged the bitcoin community to contact the offices of their local representatives and evangelize the digital currency's cultural promise. In our continually depressed economy, they seem not less but more interested in extraordinary solutions. You just have to know who to talk to.

"I wouldn't bother talking to the representative," Andresen wrote in June on his blog. "They're probably too old to really understand bitcoin. Talk to a twenty-something staffer who grew up with the Internet and is likely to be a lot more sympathetic to the idea of a peer-to-peer Internet money."

But whether it's bitcoin or another digital currency such as Facebook credits and the myriad others that are emerging in what futurist Venessa Miemis calls the "superfluid economy," it is clear that the economy as we knew it is on its last legs. The Internet's creative hive mind is charting the future of commerce, and chances are, given Washington's debt ceiling charades and the politically and economically compromised Federal Reserve, that its currency will be a digital one. Digitalism has already overtaken the market, with over 95 percent of stock transactions firing algorithms at the speed of light through the internet. Virtual currencies like bitcoin seem interested in leveling the playing field for the rest of us, provided we can handle the code.

"Bitcoin transactions are more secure, and cost far less, than existing bank-to-bank transactions, making bitcoins very attractive," Garzik concluded. "In an imaginary future, bitcoins will exist alongside fiat currencies, giving people more choice and more control over their wealth."