The Avanti Group: Is Bitcoin’s bubble finally bursting?

The Avanti Group: Is Bitcoin’s bubble finally bursting?.

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Bitcoin is a digital currency based on some fancy cryptography that is designed to facilitate anonymous

transfers, and resist regulation by government.

A Bitcoin is essentially a claim on a string of numbers (that take the place of a physical coin) that can

be bought and sold. There are exchanges that will convert between bitcoin and other currencies, and

even some merchants who will take bitcoin in cash.

The idea of an anonymous digital currency itself is not new. David Chaum proposed the concept of

electronic cash and developed a scheme in the 1980′s. Chaum’s currency proposals never did really get

off the ground, but his keynote address at the first World Wide Web conference had a major impact on

the development of the Web.

Bitcoin itself is largely based on hashcash, a ‘proof of work’ scheme proposed by Adam Back in the

1990′s as a way to stop spam. The idea behind hashcash was to increase the cost of sending email to

the point that spam became uneconomic by requiring each sender to perform a quantity of

computational make-work.

Before the rise of Bitcoin in 2009, the most successful scheme of this kind was E-Gold, which operated

from 1996 until it was shut down by the Secret Service in 2007. E-Gold tapped into the libertarian

ideology of anonymous cash, but their technology fell far short of the rhetoric. E-Gold wasn’t really

anonymous, and wasn’t even located outside US jurisdiction. The company was registered in St. Nevis

and Kitts, the datacenter was located in Florida. The idea that E-Gold somehow operated outside the

scope of US regulation was a spectacular example of self-delusion by their management.

E-Gold wasn’t an anonymous currency as such, it was an exchange that allowed customers to transfer

ownership of gold between them. Which was sufficient to allow its use as a means of avoiding

government controls on money transfers. When the system was shut down, some of the largest

complaints came from Iran, where citizens had been using it to evade US sanctions, and were left

unable to access the money in their accounts.

The E-Gold episode had two curious aspects. One is that the exchange was permitted to operate for so

long, when it was obvious that it was operating illegally. In my work stopping Internet frauds, I would

meet Secret Service, FBI and Postal Inspectorate officers on a regular basis, and the conversation would

almost always turn to the ongoing mystery of why the scheme was allowed to keep running.,,The

authorities did not act until their hand was forced by the collapse of ‘Solid Investment,’ a Ponzi scheme

that had made extensive use of E-Gold to conceal money movements.

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