There's nothing like a dollar bill for paying a stripper. Anonymous, yet highly personal—wherever you use it, that dollar will fit the occasion. Purveyors of Internet smut, after years of hiding charges on credit cards, or just giving it away for free, recently found their own version of the dollar—a new digital currency called Bitcoin.
You’ll know it when you see it (strippers who accept tips in bitcoins advertise their account addresses right on their bodies). And more important, if you pay with it, no one needs to know. Bitcoin balances can flow between accounts without a bank, credit card company, or any other central authority knowing who is paying whom. Instead, Bitcoin relies on a peer-to-peer network, and it doesn’t care who you are or what you’re buying.
In the long run, a system like this, which restores privacy to electronic payments, could do more than just put the sneak back into the peek. If enough people take part, Bitcoin or another system like it will give political dissidents a new way to collect donations and criminals a new way to launder their money—while causing headaches for traditional financial gatekeepers.
You may have heard about Bitcoin last year, when the digital currency was briefly a major media story and speculators rushed to cash in on the rising value of bitcoins. Or perhaps you heard about hackers raiding the coffers of the largest online bitcoin exchanges, which coincided with the price of bitcoins plunging. Since January Bitcoin has stabilized. It’s been holding an exchange rate of about US $5.
The dream of an anonymous, independent digital currency—one where privacy is maintained for buyers and sellers—long predates Bitcoin. Despite obituaries in magazine articles from Forbes, Wired, and The Atlantic, the dream is far from dead.
The pursuit of an independent digital currency really got started in 1992, when Timothy May, a retired Intel physicist, invited a group of friends over to his house outside Santa Cruz, Calif., to discuss privacy and the nascent Internet. In the prior decade, cryptographic tools, like Whitfield Diffie’s public-key encryption and Phil Zimmermann’s Pretty Good Privacy, had proven useful for controlling who could access digital messages. Fearing a sudden shift in power and information control, governments around the world had begun threatening to restrict access to such cryptographic protocols.
May and his guests looked forward to everything those governments feared. “Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions,” he said. By the end of the meeting, the group had given themselves a name—“cypherpunks”—and the superhero-like task of defending privacy across the digital world. In just a week, cofounder Eric Hughes wrote a program that could receive encrypted e-mails, scrub away all identifying marks, and send them back out to a list of subscribers. When you signed up, you got a message from Hughes:
Cypherpunks assume privacy is a good thing and wish there were more of it. Cypherpunks acknowledge that those who want privacy must create it for themselves and not expect governments, corporations, or other large, faceless organizations to grant them privacy out of beneficence.
Hughes and May were deeply aware that financial behavior communicates as much about you as words can—if not more. But outside of cash transactions or barter, there’s no such thing as a private transaction. We rely on banks, credit card companies, and other intermediaries to keep our financial system running. Will those corporations save and even share a dossier of your spending habits? Even using cash requires trust that the bill will maintain its worth. Will governments print too much currency or too little? Many cypherpunks would say that the only way to answer these questions is to build an entirely new system.
Gradually, their mistrust germinated into an anarchist philosophy. Most simply wanted to be able to buy things without someone looking over their shoulders. But others on the mailing list imagined liberating currency from governmental control and then using it to lash back at their perceived oppressors.
Jim Bell, a onetime Intel engineer, took these fancies further than anyone, introducing the world to an odious thought experiment called an assassination market. Citizens needed an effective way to punish politicians who acted against the wishes of their constituents, he reasoned, and what better punishment than murder? With an anonymous digital coin, argued Bell, you could pool donations from disgruntled citizens into what amounts to bounties. If a politician made enough people angry, it would only be a matter of time before the price pushed him out of office or cost him his life. Bell’s essay, “Assassination Politics,” eventually attracted the attention of federal agents. His spiral through the U.S. court system started with an IRS raid in 1997 and ended this March with his release from prison.
While cypherpunks like Bell were dreaming up potential uses for digital currencies, others were more focused on working out the technical problems. Wei Dai had just graduated from the University of Washington with a degree in computer science when he created b-money in 1998. “My motivation for b-money was to enable online economies that are purely voluntary,” says Dai, “ones that couldn’t be taxed or regulated through the threat of force.” But b-money was a purely personal project, more conceptual than practical.
Around the same time, Nick Szabo, a computer scientist who now blogs about law and the history of money, was one of the first to imagine a new digital currency from the ground up. Although many consider his scheme, which he calls “bit gold,” to be a precursor to Bitcoin, privacy was not foremost on his mind. His primary goal was to turn ones and zeros into something people valued. “I started thinking about the analogy between difficult-to-solve problems and the difficulty of mining gold,” he says. If a puzzle took time and energy to solve, then it could be considered to have value, reasoned Szabo. The solution could then be given to someone as a digital coin.