The internet started buzzing yesterday with the news that someone had broken into the Franklin, Tennessee office of the accounting firm PricewaterhouseCoopers and obtained copies of Mitt Romney’s past tax returns for an unspecified number of years. They claim to have made digital copies of them and mailed flash drives containing encrypted versions to various organizations, saying that if they do not receive $1 million by September 28, they will release the public key that will enable people to unencrypt the files and read the documents.
While there are some suspicions that this may be a hoax (there are some bizarre elements to this story that make it read like fiction) there can be no doubt that this is blatant blackmail and to be condemned. The Secret Service is now investigating it. While I find it strange that Romney is not releasing his returns, wonder what he has to hide, and would like him to release them, this kind of extortion is simply wrong.
But what really grabbed my attention was that the ransom was to be paid in the currency of ‘Bitcoins’.
Last year, I wrote about Bitcoins. This is an alternative peer-to-peer digital currency system that bypasses the current global financial system that gives a stranglehold to a few governments and big banks. We have seen how that system was abused by the US government in choking off the normal means by which people could give money to organizations it does not like, such as WikiLeaks, and we see it again being used as an instrument of US policy to pressure the government of Iran.
I frankly do not quite understand how Bitcoins works though you can read about it here. I was unwilling to put in the effort to do so because it was not clear to me whether it had any staying power. I had not heard about it for some time and idly wondered whether it had not caught on sufficiently to be successful when my attention was captured by a Marketplace report last week that said that it is the means by which payments are made in the online market for illegal drugs, and partially described how it operates
It turns out that there are websites (with names like Silk Road) through which you can purchase illegal drugs and other products. These function very much like Amazon or eBay, along with customer service reviews, gift coupons, and the like. And the reason that they can do this and avoid government crackdowns (so far at least) is that they apparently use Bitcoins as the means of payment.
Nicholas Christin has studied the workings of this alternative marketplace and has published his study that explains how Bitcoins are used here.
The relatively recent development of usable interfaces to anonymous networks, such as the “Tor browser bundle,” has indeed made it extremely easy for anybody to browse the Internet anonymously, regardless of their technical background. In turn, anonymous online markets have emerged, making it quite difficult for law enforcement to identify buyers and sellers. As a result, these anonymous online markets very often specialize in “black market” goods, such as pornography, weapons or narcotics.
Suppose that Bob (B), a prospective buyer, wants to access the Silk Road marketplace (M).
After having perused the items available for sale on Silk Road, Bob decides to make a purchase from Sarah (S). While Tor ensures communication anonymity, Silk Road needs to also preserve payment anonymity. To that effect, Silk Road only supports Bitcoin as a trading currency. Bitcoin is a peer-to-peer, distributed payment system that allows anonymous transactions between different parties. Bob thus needs to first procure Bitcoins, which he can do from the many online trading places such as Mt.Gox . At the time Bob purchases the item from Sarah, instead of paying Sarah directly, Bob places the corresponding amount in escrow with the site operator. Effectively, B pays M, who will subsequently pay S. The escrow mechanism allows the market operator to accurately compute their commission fees, and to resolve disputes between sellers and buyers. Silk Road mandates all sellers and buyers use the escrow system. Failure to do so is punishable by expulsion from the marketplace.
Although the products being exchanged can be illegal, it does not mean that the people involved are necessarily more likely to cheat the people they do business with, since they have an interest in being honest with their customers if they want to continue in business. But it does mean that if something goes awry, you cannot complain to the Better Business Bureau.
It should be made clear that there is nothing secretive or illegal about the Bitcoins system itself. They have public conferences and such. The fact that it is used for illegal purposes no more discredits it than the fact that criminals using the regular banking system discredits those institutions.
But I am still confused about how Bitcoins actually work. It is clearly something more than just another currency that is used as a means of keeping track of bartering exchanges (the traditional function of currency). And yet, according to the Romney ransom attempt, it seems like you can convert dollars to Bitcoins and back again, which seems to make it just like another currency, similar to those issued by governments. But who issues this currency? There is apparently a system by which cryptography is used to control the creation of money so that inflation is kept under control.
But it looks like Bitcoins are here to stay and it may be time for me to learn how it works.
We are living in interesting times.