It looks like Bloomberg is testing a Bitcoin ticker. Abbreviating Bitcoin as XBT, Bloomberg terminal users can now look up Bitcoin’s pricing history. Data comes from Bitcoin exchange service Mt. Gox as well as Tradehill. More details here.

The Bitcoin ATM is now available for pre-order. The makers of the Bitcoin machine, Lamassu, are now accepting orders for the machine. Lamassu will sell the machine with the appropriate software installed and leave regulatory compliance to those operating the ‘ATM’.  Customers in the US are required to sign a due diligence questionnaire.  Prices start at $5000 via Bitcoin or wire transfers. Order yours here.

Why Libbitcoin matters. Libbitcoin is an advanced alternative implementations of the Bitcoin protocol. While there are other alternative implementations, this one is unique it allows Bitcoin users with some technical skills but not necessarily experienced programmers to “work directly with the underlying [Bitcoin] building blocks.”

This may be a competitor to the current implementation, bitcoind and have the effect of limiting the influence of Bitcoin updates coming from authorities such as the Bitcoin Foundation. This may help to maintain Bitcoin’s decentralized nature and has some political implictions as explained here.

Bitcoin is officially Money. The SEC is suing Trendon Shavers for running a Ponzi scheme, the Bitcoin Savings & Trust. Part of Mr Trendon’s defence was to claim that Bitcoin investments are not securities and Bitcoin is not money; last week a judge disagreed.

Unfortunately these bridges which make up the exchange market are concentrated and often broken.  This leads to concerns over reliability and security, which can cause market panic and extreme volatility. As Bitcoin enters the mainstream a wave of new businesses, services and software developers have recently dedicated their efforts to solving this problem. Their task will not be easy, and the while the exchange rate has seen some recent stability, there is a long way to go before obtaining bitcoins can be called user friendly and reliable.

This is an especially big problem for the expansion of Bitcoin. Attempting to purchase bitcoins is a frustratingly slow, nervous and difficult process for a consumer who is used to the convenience of internet shopping.  The usual reversible and/or disputable payment methods of credit cards, PayPal, etc. are rarely available in the purchase of non-reversible bitcoins. Generally consumers are required to use slow and expensive bank wires. This situation is an example of the difficult task facing exchanges as they attempt to integrate two very different systems.

Bitcoin was not designed for compatibility with traditional banking.  There is no Bitcoin protocol for ID verification. There are no accounts to freeze or confiscate.  As such exchanges have the unenviable task of attempting to shove Bitcoin transactions into the current banking regulatory mould.  While Bitcoin’s recent gains in popularity have brought about new entrants to the exchange market, it has also brought the scrutiny of regulators. Compliance with financial regulation, particularly in the states, is costly, time consuming and no small barrier to entry.

The Bitcoin exchange market is in the midst of a rapid evolution which will be critical for Bitcoin’s continued adoption. Here we will attempt to provide an overview of the current market and developments on the horizon. This is a tricky task as it is an attempt to take a snap shot of a rapidly moving target.

What are the current options in the Bitcoin exchange market?

While there are a number of different ways to obtain bitcoin, however, the large online exchanges are currently the dominant players in the exchange world.

Online Exchange Markets

By far the most popular option is a large online exchange such as the market leader Mt.Gox. Exchanges such as these operate entirely online. Customers must first open an account which now usually requires sending in copies of ID and waiting for verification in accordance with anti-money laundering polices. Once an account is set up a money wire or another form of irreversible payment is sent in to fund the account. After those steps, which are likely to take days if not weeks, bitcoins can be purchased. While this method requires some patience, the advantage is that it can be done entirely online.

At some exchanges there are faster funding options such as Dwolla or cash deposits, however, these options are often suspended or shut down due to banking and regulatory issues.

Over the Counter Alternatives

For those looking to avoid common delays from online exchanges, or perhaps looking for greater privacy, a common option is a local Bitcoin exchanger.  Services such as LocalBitcoins.com match local Bitcoin traders with those looking to buy or sell. Exchanges can be arranged entirely online using options such as bank wires and the site offers an escrow service. However, many transactions that originate via the site happen in person and with cash. Another OTC option is services such as Bitcoin-OTC.com which helps to match buyers and sellers via an IRC channel.

New Software Options

On the horizon are projects that aim to provide peer-to-peer exchange solutions. MetaLair is an open-source project designed to create a decentralized exchange network. The network created would allow for both crypto-currency to crypto-currency via an automated escrow service with plans for fiat to crypto capabilities. While still very much in development, a solution such as this technology would provide a quick, peer-to-peer exchange solution.

The Expanding Market

Earlier this year Bitcoin’s USD exchange rate hit all-time highs at near $260. This happened as Europe was experiencing a new round of financial trouble in Cyprus and Bitcoin hit the mainstream press.

What was once considered to be only the play thing of computer nerds or conspiracy theorists was now seen by the mainstream press as a possible opportunity. Perhaps still a very risky and out-there opportunity, but Bitcoin got quite of lot of attention.  And it sparked a rush to invest in the new currency and related businesses.

Many Bitcoin start-ups went from being small operations run by one programmer in his/her spare time, to potential big businesses being courted by major venture capitalists. This is especially true for the exchange market as many realize that Mt.Gox’s huge market share can be chipped away at, and the race to do so is on. As Bitcoin exchange support service Bex.io’s co-founder Yurii Rashkovskii put it, the current situation “is a land grab.”

The many new exchanges entering the market is exciting news for the Bitcoin economy which has suffered from extreme market concentration.  The oldest and by far the largest Bitcoin exchange is the Japan based Mt.Gox. While its market share is starting to slip, for years the exchange enjoyed an over 80% market share for USD/BTC exchange.

This extreme concentration has been an ironic problem for the brilliantly decentralized Bitcoin as it leaves one very large point of failure in the exchange market. The trouble this can cause was shown earlier this year during Bitcoin’s run up in price. Mt.Gox is such a dominant force in the market that it’s posted BTC/USD exchange rate is the defacto ‘Bitcoin price’.

In April, as Bitcoin’s price was soaring over $200, Mt.Gox was hit by a series of DDoS attacks that delayed and briefly blocked access to the site. Market speculators panicked and the price plummeted to near $60.

This exchange volatility makes accepting Bitcoin payments a risky business for merchants, often undermines the currencies legitimacy and holds back those considering investing in the Bitcoin world.

However, as the Bitcoin economy continues to expand, new entrants in the exchange market not only stand a chance of making quite a lot of money, but also will wind up solving some of the currencies biggest problems in the process; exchange market concentration and price volatility.

The Race is on

The new businesses entering the market are numerous and varied and any list or figure given here would likely be out-dated by the time it reached the reader. However, some idea of the activity in the area can be gained by looking at new investments in Bitcoin exchanges and exchange related businesses.

Many investors go about their business quietly and solid numbers are unavailable, however, there have been a number of well publicized investments in the Bitcoin exchange space in the past few months.

In April Coinsetter, a Bitcoin trading platform offering margin trading, raised $500k from a number of investors including the Bitcoin Opportunity Fund run by SecondMarket founder Barry Silbert.

Coinbase, a Bitcoin wallet service that can be used to purchase BTC, announced in May this year that they had raised $6 million from a number of big investors including Fred Wilson, Ribbit Capital, SV Angel, and Fundersclub.

Also in May BitInstant, a Bitcoin exchange funding service, raised $1.5 million in a seed funding round led by Winklevoss Capital.

There has also been a number of venture capital funds created for investing in startup Bitcoin businesses. These include Liberty City Venture’s Digital Currency Fund and BitAngels.

The race for market share is such that new businesses providing support to exchanges are springing up; specifically BTCGlobal and Bex.io.  These new businesses provide technical support for new exchanges. “We do the tech. You do the rest” reads the Bex.io website. Or as co-founder Yurii puts it they are “Mt.Gox in a box”.

“Looking at the eco system as a whole there is definitely a need for more access points into and out of the Bitcoin economy and it makes no sense for everyone to be reinventing the same wheel” explains Bex co-founder Jessie Heaslip. ”We are inventing one wheel that we are going to license out.”

The start-up has the goal of making opening an exchange a less capital intensive and technically challenging endeavour.  Bex will focus on developing “the most repeatable parts of this business” and then link together the exchanges using their platform in a “global liquidity pool.” This liquidity pool would allow small exchanges in various locations to operate reliably without a large amount of start-up capital. Instead they would be able to access liquidity from other Bex based exchanges.

Support businesses such as Bex could dramatically lower technical and capital barriers to entry for new exchanges. But Bex is not aiming to capture any of the very large US market share, that would be too resource intensive and risky.

Also looking to create an exchange network is the new Ripple system. Operated by OpenCoin Inc., which received a round of venture capital funding in April, Ripple is looking to create a network of small and large exchanges which are ‘Gateways’ to the Ripple network. With Gateways in many locations Ripple users will be able to exchange a wide variety of currencies. Leading Bitcoin exchange BitStamp is already setup as a Ripple Gateway.

What is the online exchange market doing?

For years Mt. Gox has been the undisputed market leader with a USD exchange market share of 80%+. Mt. Gox came to be in this position largely by getting in first and managing to be the last man standing as the Bitcoin economy grew and became the subject of many theft attempts.  Mt. Gox simply survived the growing pains that killed many others.

Since April, Mt. Gox has slowly been losing its market dominance.  And now sits at just below 50% of the USD exchange market.

*Via BitcoinCharts.com

 *Compiled from data obtained via BitcoinCharts.com. Shows total BTC volume including trades in USD and other currencies, using 7day averages.

Mt. Gox’s decline in market share, as can be seen from the above chart, is due largely to a loss in its own volume rather than being over taken by a competitor.

With all of the issues Mt. Gox has expirenced this year, law suites, bank account closures and issues with USD withdrawals,  it’s not terribly surprising that it has lost volume. But where has the volume gone? Perhaps there has been a reduction in speculator trading. Perhaps Bitcoin users are moving to exchange alternatives.

Unfortunately there are not easily available numbers on the use of exchange alternatives, but as all Bitcoin transactions are public, we can have a look at the Bitcoin transaction numbers in general.

*Chart taken from BlockChain.info 180 day USD major exchange volume using 7 day averages.

The above chart shows USD volume on the major exchanges. It is clear that USD exchange volume in general has been on the decline, particularly in the last month.

However, USD transaction volume on the Bitcoin network has seen a rise in the last few months. This shows that while exchanges have been losing some volume, the Bitcoin network has not.

*Chart taken from BlockChain.info 180 day USD transaction volume using 7 day averages.

It would be very interesting to look at a comparison of trade volume of various exchanges vs. total transactions on the Bitcoin, however, due to a number of technical factors this is quite difficult. However, BlockChain.info provides an estimate of Bitcoin transaction volume and produces a Trade vs. Transaction ratio chart.

The chart was created to examine speculation in the Bitcoin economy. It compares Bitcoin ‘Trade’ volume, volume of exchange between BTC and fiat, to Bitcoin ‘Transaction’ volume, number of transactions which likely represent transactions between users or for purchases of goods and services.  The charts tracks the ratio of transactions to trades; transactions/trades. A higher ratio means less speculation. 

*Via BitcoinCharts.com

The US Dollar remains the dominant national currency in the Bitcoin economy.

Regulation

While Bitcoin’s recent explosion in value and mainstream attention has brought many new entrants to the exchange business, it also brought about the attention of regulators and the scrutiny of banking partners.  Just as the Bitcoin economy is moving into the mainstream regulators and bankers are applying the brakes.

Serious regulation entered the Bitcoin economy earlier this year with US financial regulator, FinCEN, releasing a guidance paper on ‘virtual currencies’.  The guidance made it clear that any entity which buys and sells virtual currencies, such as an exchange, is considered to be a money transmitter.  This is a heavy burden to bear. Not only does it require strict adherence to anti-money laundering policies but also lengthy and costly licensing hurdles. To legally operate as a money transmitter in the States, a business needs to obtain money transmitter licenses from 48 different states. Estimates vary on the time and cost of this compliance but it is certainly a significant hurdle for a start-up business to clear.

One US based exchange start-up, Vaurum, has experienced interest from investors and has raised a seed round, but also faces an uphill battle with compliance. Avish Bhama, Vaurum founder, sees compliance as being a barrier to entry and one which has been very costly for his business. “Complying will cost us ~100k+ / year.  It is expensive and time consuming and is a big barrier to entry. … It’s hard to put a number on it, but lately more than half of my time has been spent on regulatory stuff.”

CampBX, an established US based exchange, also puts a significant amount of resources into staying compliant. “Bitcoin regulation is evolving at a fast clip, and we actively revise our compliance program every quarter to remain fully compliant.”

One could assume that friction with US regulators would simply move Bitcoin businesses off shore. However, this did not save Japanese based Mt. Gox from a run-in with US authorities. Shortly after the release of their guidance regulators seized the Dwolla account of Mt.Gox’s  US subsidiary, Mutum Sigillum LLC. The subsidiary also had its Wells Fargo bank account closed as regulators accused the business of operating in the US as an unlicensed money transmitter. Nearly two years prior while opening the Well Fargo account the businesses CEO, Mark Karpeles, signed a form declaring that the business was not a money transmitter.

While they have now registered with FinCEN, Mt.Gox had failed to register immediately after FinCEN’s guidance which categorized exchanges as money transmitters.

US regulators willingness to enforce their rules on any digital currency based service with US customers was demonstrated in their dealing with Mt. Gox and in the recent shut down of Costa Rican based digital currency provider Liberty Reserve. Statements after the May shutdown of the business make it clear that US regulators intend to enforce their anti-money laundering standards on foreign companies. Under Secretary for Terrorism and Financial Intelligence, David S. Cohen, clarified that the US would pursue illicit financial actors wherever they may be, in the US or overseas.

“We are prepared to target and disrupt illicit financial activity wherever it occurs – domestically, at the far reaches of the globe or across the internet.” 

Any exchange which hopes to share in the very large US market will have to keep US financial regulators in mind. However, the ever resilient Bitcoin economy is developing services designed to ease compliance issues for exchanges.  BTCGlobal, a Uruguayan based support service for Bitcoin businesses, has launched a “Massive Parallel Licensing” program which aims to create a network which will allow members to leverage each other’s regulatory infrastructure and resources.

Via the BTCGlobal Site: “The highest hurdle for entrepreneurs interested in launching a Bitcoin exchange business is the significant international and local regulatory requirements. It is estimated that an investment of over $10 million would be required to reach total legal compliance in all the U.S. 50 states alone. The BTC Global Massive Parallel Licensing program addresses this hurdle with a package that includes comprehensive regulatory support and a full suite of Bitcoin products and services.”

However, increasingly Bitcoin businesses are simply choosing to block US customers as they see entering the US market as too risky and/or costly and focus on other jurisdictions which have been comparably much friendlier.

Regulation outside the US

Many countries have not directly addressed digital currency regulatory issues, however, some countries have stated that they are not requiring any regulatory compliance at this time. Both British and Canadian regulators have issued letters to exchanges stating that they are not required to register with financial authorities.

In Canada a letter from regulator FINTRAC was sent to a number of exchanges confirming that the exchanges were not money service businesses and were therefore exempt from laws governing those businesses.

The UK’s financial regulator HM Revenue & Customs (HMRC) sent a letter to at least one exchange start up making it clear that the business was not required to register with HMRC under money laundering regulations.

In Europe ‘e-money’ is regulated, however, for the moment the European central bank does not view Bitcoin as money or e-money and does not require compliance for Bitcoin businesses.

While regulators may change their policies, it’s clear that some locations are far more lenient than others. However, lenient regulation does not necessarily translate to co-operative banking partners.

Nervous Banks

Recent moves by regulators, particularly in the States, have scared many banks out of the Bitcoin arena and their caution is understandable. Commercial banks cannot exist in their current form without accounting rules and national currencies that are created and supported by national legal structures. They cannot afford to be on the wrong side of these legalities.  Bitcoin should be a concern for them; it was not built to fit the regulatory mould and it seems that banks are frightened of inadvertently enabling violations of financial regulations via the Bitcoin network.

There have been numerous examples of banks, often abruptly, ending their relationships with Bitcoin exchange businesses. Earlier this year US based exchange BitFloor ceased trading after CapitalOne closed their bank account, and this is just one of many examples from the US.

In Germany Bitcoin exchange Bitcoin-24 had its bank account closed by authorities in April who were concerned that the site was being used for fraudulent transactions. More recently, LibertyBit, a Canadian based exchange, halted operations as a result of bank account closures and alleged fraudulent account activity.

While start-up Vaurum has managed to build banking relationships, it took some convincing. “The hard part is that banks won’t even talk to Bitcoin exchanges because their compliance teams are scared of the regulatory issues that come along with banking a Bitcoin exchange. …  The mechanics of the partnership are pretty straight forward – it’s just that banks don’t want to get in trouble with regulators and are quite conservative by nature. … It took some time to educate banks on our business.”

The Other Options

While some are putting their effort into making the Bitcoin/banking partnership work, others are busy finding ways around it. For the moment it would seem that there is only a small percentage of Bitcoin trade happening outside the large exchanges and most exchanges do not view these options as competitors. However, the alternative exchange market is experiencing rapid growth of its own.

As Fiat currencies in their digital form exist only on the servers of banking institutions, Bitcoin to fiat exchange cannot take place without the co-operation of a banking institution.  Many who are looking to bypass the regulatory and banking relationship hurdles are attempting to fly under bank’s radar with small transactions.  This means peer-to-peer transactions rather than a large intermediary such as an exchange.

There are a number of options that aim to connect individual Bitcoin users for trades. Two examples are LocalBitcoins.com and MetaLair.

MetaLair is an open source software project that aims to create a decentralised exchange mechanism which would facilitate peer-to-peer exchanges between crypto-currencies and in the future fiat to crypto exchanges.

The project will begin by building a network to enable peer-to-peer, crypto-currency to crypto-currency exchanges. In this scenario the MetaLair software acts as an automated escrow agent which makes for a very low trust system; but of course fiat to crypto exchanges would be more complicated.

Due to the nature of the banking system, the project’s crypto to fiat exchange plans would necessarily involve fiat funds being held by a third party escrow service. MetaLair plans to provide an open protocol to allow anyone to set up as an escrow service and to build a reputation via a rating system. As lead architect Johnathan Turrall explains, “what we are creating is an open system. The details of how the fiat to fiat transactions occur between the entities are effectively between them, we are just providing an interface by which they can do that.”

While MetaLair aims to create online exchange, LocalBitcoins.com has been in operation for years offering primarily in person exchanges.  The service matches local Bitcoin traders with those looking to buy or sell. The site is known for finding exchange agents for in-person trades, however, exchanges can be arranged entirely online. These trades use options such as bank wires and the site offers an escrow service for added user security. Via a local trader it is possible to purchase bitcoins quickly, privately, in person, and with cash in over 2,200 cities worldwide.

Earlier this month the sites founder Jeremias Kangas said his site has been gaining roughly 300 new users each day and has over 50k users overall. The site currently employs 4 people and is looking to hire more as they continue to improve their service.

New local Bitcoin markets calling themselves Buttonwood have sprung up in a number of US cities. The name is a reference to the 1792 Buttonwood agreement that created the New York Stock Exchange and which took place at 68 Wall Street under a buttonwood tree.

Conclusion

While the exchange market is changing, things are still largely the same. Mt. Gox is currently the largest exchange and USD/BTC exchange is the largest market.

Venture capital backed start-ups are determined to capture the US market and they seem likely to succeed. Only those start-ups who can attract large investment funds will be able to calm nervous banks and clear the regulatory hurdles.  As such the exchange options in the States will become much more serious and will require verification from all clients, likely above the current law. Privacy will not survive in the US online exchange market.

As compliance in the States is a large and expensive hurdle to clear, many innovators who’s projects do not fit the regulatory mould will avoid the US and likely actively block US users. Bitcoin innovation may be driven out of the States.

The large online exchanges are the dominant exchange options and it is difficult to guess the percentage of the market for exchange alternatives such as local markets or OTC trades. These options would seem to be much more appealing to Bitcoin veterans, however there is no doubt that alternative exchange options are experiencing a boom of their own.

As the world of traditional banking collides with the new world of crypto-currencies there will continue to be friction. New exchanges will appear, bank accounts will be closed, regulators will take action, businesses will be shut, some will get rich, some will face prosecution and how the exchange rate reacts is anyone’s guess. But this weak point in the evolving Bitcoin economy is where the action will be. Watch this space!

Those following the internal rift in the Bitcoin community over regulation have often discussed the possibility of a fork.  The Bitcoin world moves quickly.

Hitting the web only hours ago is a paper detailing the how and why of a proposed “Bitcoin 2”. The authors, and many in the Bitcoin community, are concerned that changes will be made to the Bitcoin protocol turning it into “a distributed PayPal instead of a censorship resistant currency”.  

The paper discusses inherent weaknesses and changes to the protocol currently being discussed which could see users lose the option of anonymity or see miners concentrate into larger centres of control. The proposed “Bitcoin 2″ aims to increase Bitcoin’s resistance to centralization, censorship and political control and prevent it from being “absorbed by the established financial and regulatory environment.”

The proposed changes include…

• ·         A sliding block-chain
• ·         Distribution of dead coins
• ·         Forced mixing with Zerocoin
• ·         Miner ostracism
• ·         Transfer of coins from Bitcoin 1 to Bitcoin 2

The Paper Abstract…

We propose a set of changes to the original Bitcoin protocol (called Bitcoin 2) that allows Bitcoin to evolve into a system that is future-proof against developing threats to its original vision – an alternative, decentralized payment system which allows censorship-resistant, irreversible transactions.

Bitcoin 2 strives to be a minimal set that lays the foundations for a long-lived system capable of delivering the original Bitcoin vision, with enough room for growth to layer additional improvements on top of it. These changes include a sliding blockchain with fixed block sizes, the redistribution of dead coins with an unforgeable lottery, enforced mixing, and miner ostracism.

The proposed changes require a proactive fork of the original Bitcoin block chain, but they allow final transfers of existing coins into Bitcoin 2 and a reuse of the existing Bitcoin infrastructure.

The authors are obviously well informed and technically skilled. The paper can be read here. 

A network of small, peer-to-peer transactions would likely bypass many of these issues and would be a fitting solution for the brilliantly decentralized Bitcoin network. But is such a thing possible? The guys behind MetaLair, a UK based start-up, think so and are working hard to develop the software and find the investors to make it a reality.

Their vision is a decentralised exchange mechanism which will facilitate peer-to-peer exchanges between crypto-currencies and in the future fiat to crypto exchanges.  The MetaLair network would be similar in structure to the Bitcoin network featuring…

• No central servers
• Open-source software
• Incentives for all network operators
• A proof-of-work based system

If they are successful in achieving funding, MetaLair will develop both a free open-source version and a pay version with added features. The business intends to make money by charging for the client software with additional features that will include added security, trading and analysis tools. They hope that this could become the defacto standard wallet and trading platform for Bitcoin and other crypto-currencies.

MetaLair’s developers believe that the project will benefit the crypto-currency community as it is open-source and fully decentralized; this ensures that should MetaLair not be around the decentralised exchange will simply carry on.

“For me personally I’m only ever interested in a business if it has a primary social benefit” explains lead architect Johnathan Turrall who just returned from a trip to Cuba and South America. “The reason I went to Cuba was to look at communism and the impact that it had on financial systems, processes, business and industry. … I think potentially this system could be of great benefit to people in those areas so that is one of the motivations behind it.”

Johnathan and his business partner, Kerry Fraser-Robinson, will release their design papers whether or not the business obtains funding with the hopes that the project will eventually be developed even if they are unable to finish it themselves.

MetaLair will create and distribute the exchange software, but will not handle any funds or transfers. All transfers happen between users of the network.  The system uses an escrow service in all exchanges; however, all escrow actions are either automated, or are carried out by the human users of the system.

The projects development will be in two phases with initial development focusing on crypto-to-crypto exchange. Theoretically MetaLair can work with any crypto-currency that uses a blockchain and has M of N transaction capability. This allows the exchange software to act as the escrow agent for the transfer of both crypto-currencies in the exchange.

Explanation of M of N Transactions

An M of N transaction is essentially an escrow system built into the Bitcoin protocol that removes most of the need for trust that a traditional escrow would require. This capability allows a party to the transaction to act as an escrow without actually having access to the funds held.

The most common form of an m-of-n transaction is a 2 of 3 transaction. In this case there are three parties and three private keys, any two of which are needed to sign the transaction for it to be valid.

• All parties involved in the transaction can verify that the address belongs to the transaction they are participating in.
• All parties can view the funds in the destination address.
• Escrow requests must be signed first or second by the escrow in the chain of events.
• The escrow is able to grant access to the funds to sender or receiver.
• Escrow is unable to access the funds themselves.
• Sender and receiver can still cooperate so that one party receives the funds without the need to rely on the escrow.

Any crypto-currency using the Bitcoin source code will support this feature and can therefore be used on the decentralised MetaLair exchange.

For example a Bitcoin/Litecoin exchange would begin with two parties entering buy and sell orders via the MetaLair network. The system correlates the matching bid/ask and, using a 2 of 3 transaction, will act as an automated escrow agent for both the Bitcoin and the Litecoin transfer.

Bitcoins are transferred between the parties via the Bitcoin network and litecoins are transferred between the parites via the Litecoin network with MetaLair acting as the escrow agent for both transfers. If MetaLair’s decentralised exchange mechanism notices that double spending has occurred before the maximum specified number of transactions has been reached it reverses the transaction and refunds each party.

In the crypto-to-crypto scenario the MetaLair software is acting as the automated escrow agent, which makes for a very low trust system; but of course fiat to crypto exchanges would be more complicated.

Fiat currencies in their digital form exist only on the servers of banking institutions. As such, fiat to crypto exchanges require the services of those who have access to the banking system.  MetaLair sees a number of options for fiat exchange escrow agents. These options include very large and well respected businesses that may use their name and existing banking relationships to bring in a large volume of trades.  Of course this scenario might look at lot like existing Bitcoin exchanges that have to take many steps to comply with regulation to appease their banking partners as they cannot offer exchange services with access to traditional banking.

On the other end of the spectrum, there is the possibility of individuals offering escrow services in their spare time. For example you may have an exchange in India that would only involve a small amount of Rupees moving between local accounts and would likely not draw any attention from regulators.

Essentially what MetaLiar is providing is an open protocol to allow anyone to set up as an escrow to facilitate fiat to crypto transactions, complimented with an underlying trust based system.  The fiat exchange may simply be a small transaction between individuals or small businesses. “That’s an added benefit of this approach.”

As Johnathan explains, “what we are creating is an open system. The details of how the fiat to fiat transactions occur between the entities are effectively between them, we are just providing an interface by which they can do that.”

Fiat to crypto exchange also require an escrow service, however, due to the nature of the banking system, this escrow cannot be automated via the MetaLair software. Funds will have to be held by an intermediary individual or business acting as an escrow service. “The key innovation with our system is, because it’s fully decentralized, that it lets a lot of different escrows sign up from anywhere in the world and offer their services via an API.” There are many ways in which a fiat to crypto exchange could take place, but below is how possibility might work…

• Bob is looking to sell his bitcoins for Euros and enters a sell order (ask) via the MetaLair network.
• Alice is looking to buy bitcoins in exchange for her Euros and enters a buy order (bid).
• The MetaLair system connects Bob and Alice who both agree to use Ivan as the escrow agent.
• Ivan is a small time Europe based escrow agent who has a good trust rating via the MetaLair network.
• Ivan acts as the escrow agent for the fiat funds and holds Alice’s Euros in his bank account.
• Ivan therefore also acts as the escrow agent for the Bitcoin transfer which is done via the Bitcoin network using a 2 of 3 transaction. (or this may be automated)
• The Bitcoin transaction completes successfully.
• Ivan transfers the Euros to Bob’s bank account.
• Ivan receives a fee for his services.

MetaLair will leave regulatory compliance as a decision for the users of the network and they do not expect to deal with any financial regulation themselves as the business is not an exchange. “In the same way that Satoshi has provided Bitcoin we’re providing the decentralized exchange mechanism. You don’t pay Satoshi for any of the transactions you do on the network. It’s distributed; you pay the people who are working on the network.  It’s the same process with our decentralized exchange mechanism.”

This is an attempt at setting up a network in which anyone is free to join and offer their services or exchange currencies between themselves.  Should it succeed it could offer a wide variety of options in what is currently a concentrated and under pressure market.

As the big exchanges face regulatory scrutiny and continue to impose more and more conditions on their users, the network that MetaLair is attempting to create could offer much needed options for consumers.

In the late 90’s and early 2000’s, e-gold was the industry leader.  As one of the world’s first successful online payment systems e-gold was a pioneer using many now standard practices such as SSL connections and API’s.  Brought down by a run in with regulators in 2008 the e-gold story is required reading for anyone involved in the digital currency world.

Sent in by Wikipedia editor Cadwallader, below is a thoroug review of the e-gold story.

e-gold (deliberately spelled with a lower-case ‘e’) was a digital gold currency operated by Gold & Silver Reserve Inc. under e-gold Ltd. that allowed users to open an account on their web site denominated in grams of gold (or other precious metals) and the ability to make instant transfers of value to other e-gold accounts. The company was founded in 1996 and had grown to five million users by 2009, when transfers were suspended due to legal issues. At its peak in 2008 e-gold was processing more than USD 2 billion worth of precious metals transactions per year ^[1], on a monetary base of only USD 20 million worth of gold (~2.54 metric tonnes) ^[2], indicating an extremely high monetary turnover (velocity) of about 100 times per year (similar to M-PESA). e-gold Ltd. was incorporated in Nevis, Saint Kitts and Nevis with operations conducted out of Florida, USA.

Beginnings

e-gold was founded by oncologist Douglass Jackson and attorney Barry Downey in 1996. The pair originally backed the services accounts with gold coins stored in a bank safety deposit box in Melbourne, Florida.

The company, which was launched two years before PayPal and had obtained over one million user accounts by 2002, and was the first successful digital currency system to gain a widespread user base and merchant adoption. It was also the first website or payment service to offer an Application Program Interface (API) enabling other services and e-commerce transactions to be built on top of it. ^[3] e-gold was used by both individuals and merchants for services ranging from metals trading, online auctions, to online casinos, and a donation platform. By 2001 several dozen companies and individuals began offering third party exchange services between national currencies and e-gold, allowing e-gold to become a company with an international user base.

e-gold, which allowed transactions as small as one ten-thousandth of a gram of gold, was also the world’s only successful micro-payment system. The company’s payment statistics were published live and showed hundreds of thousands of micro-transactions were being made daily by computer programs using the API.

Governance

e-gold was unique at the time in that they created the “e-gold Special Purpose Trust” which held title to the physical bullion on behalf of the users. ^[4] They also created a real-time statistical reports page ^[5] that showed the total holdings of each metal in the trust account, list of gold bars with serial numbers, the total number of accounts, as well as the total number and value of transactions in the previous 24 hours. This transparency enhanced e-gold’s reputation and popularity with their users, and also enabled many observations to be made about how e-gold was being used.

Imitators

e-gold’s market success by 2001 spawned a wave of imitators. These included Goldmoney.com, e-Bullion.com, CrowneGold.com, Pecunix.com, INTgold.com, and several others including a multi-million dollar Ponzi Scheme with no gold at all called OSgold.com. ^[6]

Crime Wave

e-gold’s early success also proved to be the cause of its demise. e-gold’s store of value and large user base made it an early target of financial malware and phishing scams by increasingly organized criminal syndicates in Eastern Europe. The first known phishing attack against a financial institution was made against members of the e-gold mailing list in June 2001. ^[7] The technique was refined with attacks against the digital gold systems like e-gold and later used to attack other financial institutions starting in 2003.

The Rise of the Romanian Hackers

With no effective means of verifying the identity of account holders, e-gold began to suffer from an increasing rate of criminal activity mainly perpetrated by Eastern European hackers against its users. In addition to phishing, the attackers made widespread use of flaws in the Microsoft operating systems and Internet Explorer web browser to collect account details from millions of computers to compromise e-gold accounts. ^[8]

Jackson’s theory was that e-gold is a book-entry system with account histories, making it simple to conduct an investigation to track down misappropriated funds after the fact. ^[9] However, the public perception, similar to that of Bitcoin today, was that e-gold accounts were anonymous. (That perception was erroneous, as is the similar belief that Bitcoin is anonymous.) e-gold accounts were “pseudonymous”, ^[10] allowing the creator of the account to use any name or label he wished to use. However, the account history was permanent, and e-gold could in most cases correlate a person’s real identity to an e-gold account when they funded or liquidated an account with G&SR, e-gold primary exchanger to US Dollars.

Unfortunately, e-gold users did not enjoy the same ability to determine the real identity of the owner of an e-gold account, and this is what facilitated the explosion in auction fraud and other types of identity fraud using e-gold accounts.

Fourteen Flavors of Fraud

Various fraud artists from Western countries were also able to take advantage of the e-gold system as a means of funding their schemes, enabling for the first time in history, international ponzi schemes, calling themselves “High Yield Investment Programs” or HYIPs. ^[11] DGC Magazine Editor Mark Herpel identified the probable source of e-gold’s mysterious micropayments as automated interest payments made by ponzi schemes to their tens of thousands of members. ^[12]

Perpetrators of auction fraud on e-bay who were based in Eastern Europe and would sell fake or non-existent items on the site. These criminal syndicates preferred their victims to pay in e-gold because it was the fastest and easiest way for them to move the funds overseas. ^[13]

The wave of online crime that engulfed e-gold led to a steady stream of complaints to government authorities by defrauded account holders, who often did not understand the difference between e-gold and the fraudulent person or company that encouraged them to open an e-gold account and wire money to fund it. ^[14]

The Systemic Problem

As an online transactions system with exchange agents worldwide, e-gold enabled criminals and hackers in Eastern Europe the ability to quickly and easily move money from victims in America back to the country from which the attacks were originating. Several of the cyber crime gangs that plagued and used e-gold were based in Râmnicu Vâlcea, Romania. ^[15]

e-gold was unknowingly part of a larger systemic problem with the banking system. The banking and credit system in the United states were not designed for a digital environment, and are therefore fundamentally insecure and highly vulnerable to identity theft and check fraud, as well as trust based attacks such as phishing. The willingness of credit card companies to allow people to apply for a card without being identified in person enabled the massive growth of identity theft. ^[16] (Ironically, not verifying the identities of account holders would be one of the main criticisms raised against e-gold.)

The Internet made it possible for organized crime networks outside the United States to used strategically placed members in financial institutions in the United States to perpetrate billions of dollars worth of financial crimes, primarily through identity theft. ^[17] The money from these crimes then needed to be laundered and transferred back to the headquarters of the perpetrators in Eastern Europe. This is normally done through bank wires from big american banks, such as Bank of America, ^[18] and traditional money transmitters like Western Union. ^[19] However, e-gold and other digital gold systems, with their low cost instant clearing payments and international network of exchange agents, provided a much faster and cheaper conduit for getting the already laundered money back home. Therefore, certain crime gangs started using the digital golds as the return conduit for part of their operations.

The Public Relations Problem

In 2001 Goldmoney.com was founded by James Turk and became a competitor to e-gold. Turk, who had filed patents on a digital gold payment system in 1993 but launched his system five years behind e-gold, took a two-pronged strategy to outmaneuver e-gold. First, he sued e-gold for patent infringement. ^[20] Though this action failed in court, Turk had successfully positioned himself in the market as the “inventor of digital gold” even though Jackson was the one who had taught himself how to program and written the first version of e-gold himself. (Turk sat on his patents for several years, and eventually hired a software company to build his “invention” because he is not a computer programmer.)

Second, Turk recognized the e-gold crime problem and began positioning Goldmoney as the “white glove” gold system that required identity verification to open accounts, versus e-gold as the irresponsible “wild west” operator riddled with crime. ^[21] This marketing strategy worked very effectively for Goldmoney as it drove e-gold founder Jackson to entrench himself in defense of his libertarian principle that the user is responsible for his behavior and the courts are the way for disputes involving allegations of fraud to be resolved. Ten years later, e-gold would be out of business, shut down by the US government, but Goldmoney would be sitting on USD 1 billion worth of gold and millions of users. ^{[22] [23]}

While Goldmoney succeeded in becoming the world’s largest gold storage system, and held four patents for a gold payment system, ^[24] they were never able to replicate e-gold’s success as a payment system, because they were so fearful of replicating e-gold’s success as a magnet for criminal activity. Goldmoney prohibited the development of independent exchange agents, which greatly limited their global reach. In January 2012 Goldmoney turned off the ability to make payments from one account to another citing “insignificant” demand for P2P metal transactions as not justifying the high cost of regulatory compliance. ^[25] It was e-gold’s usefulness and ease for payments combined with their international network of exchange agents that made it a magnet for crime.

There were early reports where e-gold had actively helped to catch and collar cyber criminals, such as the one who stole Cisco Systems’ firewall code and offered it for sale to be paid in e-gold. ^[26] And Jackson claimed to have “aided 300 investigations and reported 3,000 suspected kiddie porn buyers to the National Center for Missing and Exploited Children.” ^[27] However, Turk’s PR strategy was highly successful, as first Goldmoney, and then federal law enforcement agencies began to characterize e-gold as the payment system of choice for criminals, terrorists and child pornographers. ^[28] (In reality, the US Dollar is by far the most popular transaction medium for criminals of all types. ^[29] US Banks are the most popular institutions for money laundering, on the order of USD 500 Billion per year, dwarfing e-gold’s transaction volume by two orders of magnitude. ^[30] )

Criminal Prosecution

The Changing Definition of a Money Transmitter

The USA Patriot Act, passed in the wake of the 9/11 terrorist hijackings more than five years after e-gold had been launched, made it a federal crime to operate a money transmitter business without a state money transmitter license in any state that required such a license. At the time a “money transmitter” was in most states defined as a business that cashed checks or accepted cash remittances to send from one person to another person across international borders, such as Western Union or MoneyGram. For example, prior to 2010, California regulated money transmitters under the “Transmission of Money Abroad Law”. ^[31] One of e-gold’s competitors, the e-Bullion company, applied for a money transmitter license from the State of California in 2002, but was informed by the State of California that their business which dealt in gold accounts did not fall under the state’s definition of a money transmitter.

In 2004 G&SR (the parent company of e-gold) requested that the US Treasury Department conduct a compliance examination in order to clarify what regulations, if any, e-gold fell under. ^[32] The Treasury issued a report on January 11, 2006 confirming that e-gold accounts were excluded from the definition of “currency” under the USC and CFR definitions. The Treasury did not want e-gold to be acknowledged as money, which made it impossible to obtain a money transmitter license.

However, in its actions from 2006-2008 the U.S. Treasury Department in conjunction with the DOJ stretched the definition of money transmitter in the USA Patriot Act to include any system that allows transfer of any kind of value from one person to another, not merely national currency or cash. Using this new interpretation they then proceeded to prosecute the USA-based gold systems, e-gold (and later e-Bullion) under the USA Patriot Act for not having money transmitter licenses, even though these companies had previously been cooperating with regulatory authorities and told they did not fall under the definition of money transmitter. (Although the charge of not having a money transmitter license was eventually dropped against e-bullion.) Several years later FINCEN further expanded this definition to apply to foreign companies allowing US persons to open accounts, which forced Jersey based Goldmoney.com to suspend the ability to transfer value from one holder to another in December 2011. ^[33]

e-gold The Black Sheep

e-gold was in many ways the philosophical predecessor of Bitcoin. Unlike PayPal, which ran on top the USA banking system and therefore posed no competitive threat to the banking system, e-gold was a maverick outsider with no allies in the banking establishment, whose founders self-consciously viewed themselves as offering an alternative to the banking system. While banks suffer from the same problems with criminal activity, phishing, ponzi schemes and money laundering on a much larger scale ^[34], and some of the biggest banks have even knowingly participated in money laundering with apparent impunity ^[35], e-gold’s iconic status as a controversial alternative currency system loved by cypherpunks and libertarians made it an attractive target for US law enforcement agencies, with a big pile of assets to seize and few political allies.

While e-gold had begun implementing much stronger controls against abuse by users of the system by 2005, and was actively combating the use of its system for child pornography as a founding member of The Financial Coalition Against Child Pornography ^[36], the Justice Department had apparently made a high level policy decision to blame e-gold themselves for the malignant activities of a small minority of their users. ^[37] In 2007 the proprietors of the e-gold service were indicted by the United States Department of Justice on four counts of violating money laundering regulations and knowingly allowing a transaction to purchase child pornography. ^[38]

The government also claimed that e-gold was a ponzi scheme that did not have the gold to back the accounts. However, that claim was later shown to be false when judge rejected any charges of fraud regarding the e-gold user agreement and confirmed the veracity of the company’s gold reserve audit – showing that e-gold was fully reserved.

Resolution

The case against e-gold was brought under Title 18 USC section 1960 in UNITED STATES OF AMERICA v. E-GOLD, LTD, District of Columbia court. e-gold filed a motion to dismiss the case on the grounds that they did not fit the definition of a money transmitter. The court ruled against e-gold, stating that “a business can clearly engage in money transmitting without limiting its transactions to cash or currency and would commit a crime if it did so without being licensed.”^[39] This ruling enshrined in case law the Treasury Department’s expansion of the definition of a money transmitter to include any system by which stored value of any kind may be transferred from one person to another, even if the stored value is not cash, or national currency.

After vigorously contesting the charges for a year, in July 2008 the company and its three directors accepted a bargain with the prosecutors and plead guilty to one count of “conspiracy to engage in money laundering” and one count of the “operation of an unlicensed money transmitting business”, in exchange for the other charges against them (allowing a transaction to pay for child pornography) being dropped. ^[40] The company was ordered to pay fines of $3.7 million.

In November Gold & Silver Reserve CEO Douglas Jackson was sentenced to 300 hours of community service, a $200 fine, and three years of supervision, including six months of electronically monitored home detention.^[41] He had faced a maximum sentence of 20 years in prison and a $500,000 fine. Judge Rosemary Collyer said the men deserved lenient sentences because they did not intend to engage in illegal activity. Jackson’s lawyer claimed Jackson was spared the heavier fine because he is deeply in debt – the Judge said “Dr. Jackson has suffered, will continue to suffer, and may never be successful with E-Gold”. Reid Jackson, Douglas Jackson’s brother, and E-Gold director Barry Downey were each sentenced to three years of probation, 300 hours of community service, and ordered to pay a $2,500 fine and a $100 assessment.

Gold Seizure

Initially the US Attorney’s Office of the District of Columbia entered a motion to seize and liquidate the entire gold reserve of e-gold under asset forfeiture law. This would have allowed the law enforcement agency to add the proceeds of the sale to their operating budget. At the time e-gold held more gold in its vaults than the bottom third of the countries on the IMF list of central bank gold reserves, which would have made it one of the largest asset seizures in history, comparable to invading a small country and seizing its gold reserves. However, the federal judge in the case denied the motion and ordered the reserves to be held and liquidated for the e-gold account holders who could prove the origin of their funds.

e-gold was placed into receivership and the gold reserve was liquidated for USD 90 million. The court ordered “Rust Consulting”, a private company in Maryland, to organize refunds to account holders who could prove legitimate sources for the funds. The balance of unclaimed funds will be claimed by the US Attorney’s Office for the District of Columbia under the asset forfeiture law. A three month window has been set from June 3rd, 2013 to October 1, 2013 for e-gold account holders to submit a claim on their funds. ^[42]

Aftermath

After the e-gold and e-Bullion cases, California (2010) ^[43] and several other states amended their regulations to follow the federal precedent to define all digital value transfer systems as money transmitters. However, California’s new law is so broadly worded as to define a very wide range of Internet startup companies, such as the room booking service AirBnB, as “money transmitters”. ^[44] If the law were consistently applied many more Internet start-ups might be subjected to the same kind of prosecution that e-gold experienced.

After the resolution of the criminal case, the directors of e-gold Ltd vowed to continue operations following the new Federal KYC guidelines. They applied for a money transmitter license for the company, but it was denied because the directors are now convicted felons. Jackson and Downey have continued trying to find a way to sell the company to persons eligible for a money transmitter license in order to recoup some value from their once wildly successful internet payment system.

Conclusions

e-gold was one of the first, if not the very first pioneer of Internet payments. While e-gold received a lot of bad press due to the criminal case against them, it is important to recognize e-gold’s place in Internet history as the world’s first successful online payment system which pioneered many of the systems and techniques that e-commerce users now take for granted, including making payments over an SSL encrypted connection, and offering an API to enable other websites to build services using e-gold’s transaction system.

e-gold presaged Bitcoin as an alternative internet transaction system that operated completely outside of and independent of the legacy banking system. This proved that alternate financial systems were possible and that a significant number of people would enthusiastically use such a system.

Though e-gold was ultimately shut down by the US government, the federal judge on the case ruled that the founders of e-gold “had no intent to commit illegal activity.”

Founder Douglas Jackson failed to foresee the ways in which criminals and hackers could exploit an internet payment system by manipulating the appearance of identity (identity theft and fraud). Their payment model failed to include a web of trust that would enable users to have some degree of confidence of whom they were dealing with, and to eliminate bad actors. In retrospect e-gold’s tardiness in addressing the identity issues allowed the criminal syndicate to grow so large that the resulting crime wave ruined the company.

e-gold’s failure was ultimately due to the inability of their business model to provide a system of reliable user identification and the failure to provide a workable dispute resolution system to identify and cut off illegal and abusive activity in their user community. Other transaction systems such as Webmoney.ru ^[45] and Goldmoney.com ^[46] learned from e-gold’s mistakes and were able to successfully field similar systems with low rates of abuse by addressing these deficiencies. While PayPal has done a better job of addressing abuse than e-gold did, they now suffer from ^[47] and battle against the same crime wave that took down e-gold. ^[48] Financial cryptographer, Ian Grigg, has observed that Bitcoin has repeated the same fundamental errors that e-gold made and that despite its decentralized nature the cyber crime-wave may bring Bitcoin to a similar ending.^{[49] [50]}

]]> http://www.dgcmagazine.com/the-e-gold-story/feed/ 0 http://www.dgcmagazine.com/zerocoin-a-potential-bitcoin-extension-aims-to-improve-anonymity/ http://www.dgcmagazine.com/zerocoin-a-potential-bitcoin-extension-aims-to-improve-anonymity/#comments Sun, 14 Apr 2013 05:52:34 +0000 Julia Dixon http://www.dgcmagazine.com/?p=1368 Continue reading →]]> Bitcoin is pseudonymous, but not exactly anonymous. A group of Cryptographers out of John Hopkins University are aiming to change that. The group, led by Professor Matthew Green, has been working on Zerocoin, a proposed Bitcoin extension that would increase Bitcoin’s anonymity.

In an interview with Forbes, Professor Green says, “You can feel like you’re private using Bitcoin, but there are going to be companies like Google and Facebook and [Google-owned ad firm] DoubleClick looking at the data and pulling personal information out of it. There may be already, … It’s not wrong to be paranoid about privacy when it comes to Bitcoin.”

From the Forbes piece…

“The Johns Hopkins’ team’s system would work by allowing any Bitcoin user to convert a Bitcoin into an anonymous token–a Zerocoin. Zerocoins would theoretically mesh seamlessly with the Bitcoin network, could be traded and spent in the same way as Bitcoins, and could be redeemed for a Bitcoin at any time. But thanks to some mathematical tricks, a Zerocoin would be both unique–it couldn’t be forged or duplicated–and yet also be impossible for an observer to identify as the same Zerocoin between the moment it substituted for a Bitcoin and the moment it was traded back for one.”

“The result would be that Bitcoin would essentially have its own, built-in laundry system. ‘In fact, you can think of Zerocoin like the world’s biggest laundry — one that can handle millions of users, has no trusted party, and can’t be compromised,’ Green writes in a blog post explaining Zerocoin posted Thursday. ‘Once a user converts her bitcoins into zerocoins, it’s very hard to determine where she took them back out. Their funds are mixed up with all of the other users who also created zerocoins. And that’s a pretty powerful guarantee.‘”

“Getting Bitcoin users to adopt Zerocoin may not be easy. To have its intended effects, nearly all Bitcoin users would have to add the Zerocoin code, which the Johns Hopkins researchers are releasing next month, to their Bitcoin client software. In the mean time, the system could be adopted incrementally, Green says. But until it’s integrated into the Bitcoin protocol, Zerocoin would require third-party services to act as issuers of its anonymizing tokens, introducing some of the same trust problems that currently exist with laundry services.”

“Zerocoin also takes about 50 times more computational power than Bitcoin, which could cause delays and glitches in the system. But on that front, Green argues that the code only needs to be honed by the Bitcoin community to increase its efficiency.”

Professor Green’s motivations are the protection of privacy. “This isn’t about hiding transactions from governments…privacy is important. And people have a right to it.”

The group plans to present the software at next month’s IEEE Security and Privacy conference in San Francisco. Until then you can read the full paper on Zerocoin here.

“Services such as M-Pesa in Kenya, allows account-holders to transfer legal tender electronically to fellow account-holders by entering commands on a mobile phone. Popular though such services are, they have not stopped an older form of mobile money flourishing. This sort uses pre-paid mobile-airtime minutes as a de facto currency that can be transferred between phones, exchanged for cash with dealers who rent out phones, or bartered for goods and services.”

“Pre-paid minutes can be swapped for cash or spent in shops most easily in Côte d’Ivoire, Egypt, Ghana and Uganda, says Chris Chan of Tranglo, a Malaysian firm that facilitates ‘airtime remittances’ to mobile phones. Airtime is commonly used as money in Nigeria, too. Hannes Van Rensburg, Visa’s boss for sub-Saharan Africa, says this is partly because regulators there have made it difficult for banks to offer the newer form of mobile money.”

“But even in places like Kenya, airtime minutes are still being used as currency. Unlike mobile money, airtime’s value does not rely directly on a government’s stability or ability to hold down inflation by, say, showing restraint printing money. Opening a mobile-money account typically requires waiting for days after showing your ID. In contrast, airtime can often be purchased and sent immediately and anonymously. Because many telecoms firms in Africa and elsewhere transfer minutes nationwide free of charge, airtime is especially useful for settling small debts.”

“In Zimbabwe, for example, American banknotes have largely replaced the hyperinflation-ravaged Zimbabwean dollar. American coins are scarce, however, so pretty much everybody in Zimbabwe transfers airtime in their place at least occasionally, says Oswell Binha, president of the Zimbabwe National Chamber of Commerce in Harare.”

“Yo! Time, a Harare-based start-up that simplifies these retailer-to-shopper airtime payouts, processes more than 9,000 payouts a day for clients; six months ago the figure was 2,000.”

“Some authorities are concerned about airtime’s use as money. As one industry executive puts it, network operators are, in effect, ‘issuing their own currency’ and setting its exchange rate; central banks tend to dislike such things.”

]]> http://www.dgcmagazine.com/the-economist-airtime-is-money-pre-paid-mobile-phone-minutes-as-currency/feed/ 0 http://www.dgcmagazine.com/introducing-the-dgc-digital-currency-wiki/ http://www.dgcmagazine.com/introducing-the-dgc-digital-currency-wiki/#comments Wed, 09 Jan 2013 23:26:10 +0000 Julia Dixon http://www.dgcmagazine.com/?p=1068 Continue reading →]]> In keeping with our goal of being the best source for news and information on monetary alternatives, we have created the DGC Digital Currency Wiki.

We plan for this wiki to be a source of information on different digital currencies, currency providers, supporting technology, terminology, digital currency structures and business models, etc.

The plan had been for the Wiki to contain a large amount of content prior to announcing it. However, it seems that I have a chronic problem with dramatically over estimating the amount of time in the day. As such, we are introducing it now and will continue to add content when we can.

Editing can only be done after registration for spam avoidance purposes.

-Julia

“We have this position where as we know knowledge is power, and there’s a mass transfer as a result of literally billions of interceptions per day going from everyone, the average person …  all the infrastructure has been built for absolute totalitarianism It’s just the matter of turning the key.”

Interview transcript:

RT: So you’ve written this book ‘Cypherpunks. Freedom and the Future of the Internet’ based on one of the programs that you’ve made for RT. In it, you say that the internet can enslave us. I don’t really get that, because the internet it’s a thing, it’s a soulless thing. Who are the actual enslavers behind it?

Julian Assange: The people who control the interception of the internet and, to some degree also, physically control the big data warehouses and the international fiber-optic lines. We all think of the internet as some kind of Platonic Realm where we can throw out ideas and communications and web pages and books and they exist somewhere out there. Actually, they exist on web servers in New York or Nairobi or Beijing, and information comes to us through satellite connections or through fiber-optic cables.

So whoever physically controls this controls the realm of our ideas and communications. And whoever is able to sit on those communications channels, can intercept entire nations, and that’s the new game in town, as far as state spying is concerned – intercepting entire nations, not individuals.

RT: This sounds like a futuristic scenario, but you are saying that the future is already here.

JA: The US National Security Agency has been doing this for some 20-30 years. But it has now spread to mid-size nations, even Gaddafi’s Libya was employing the EAGLE system, which is produced by French company AMESYS, pushed there in 2009, advertised in its international documentation as a nationwide interception system.

So what’s happened over the last 10 years is the ever-decreasing cost of intercepting each individual now to the degree where it is cheaper to intercept every individual rather that it is to pick particular people to spy upon.

RT: And what’s the alternative, the sort of utopian alternative that you would put forward?

JA: The utopian alternative is to try and gain independence for the internet, for it to sort of declare independence versus the rest of the world. And that’s really quite important because if you think what is human civilization, what is it that makes it quintessentially human and civilized, it is our shared knowledge about how the world works, how we deal with each other, how we deal with the environment, which institutions are corrupt, which ones are good, what are the least dumb ways of doing things. And that intellectual knowledge is something that we are all putting on to the internet – and so if we can try and decouple that from the brute nature of states and their cronies, then I think we really have hope for a global civilization.

If, on the other hand, the mere security guards, you know, the people who control the guns, are able to take control of our intellectual life, take control of all the ways in which we communicate to each other, then of course you can see how dreadful the outcome will be. Because it won’t happen to just one nation, it will happen to every nation at once. It is happening to every nation at once as far as spying is concerned, because now every nation is merging its society with internet infrastructure.

RT: And in what way are we, as sort of naïve internet users, if you like (and I exclude you from that, obviously), kind of willingly collaborating with these collectors of personal data? You know, we all have a Facebook account, we all have telephones which can be tracked.

JA: Right. People think, well, yeah, I use Facebook, and maybe the FBI if they made a request, could come and get it, and everyone is much more aware of that because of Petraeus. But that’s not the problem. The problem is that all the time nearly everything people do on the internet is permanently recorded, every web search.

Do you know what you were thinking one year, two days, three months ago? No, you don’t know, but Google knows, it remembers.

The National Security Agency who intercepts the request if it flowed over the US border, it knows.

So by just communicating to our friends, by emailing each other, by updating Facebook profiles, we are informing on our friends.

And friends don’t inform on friends. You know, the Stasi had a 10 per cent penetration of East German society, with up to 1 in 10 people being informants at some time in their life.

Now in countries that have the highest internet penetration, like Iceland, more than 80 per cent of people are on Facebook, informing about their friends. That information doesn’t [simply] go nowhere. It’s not kept in Iceland, it’s sent back into the US where it IS accessed by US intelligence and where it is given out to any friends or cronies of US intelligence – hundreds of national security letters every day publicly declared and being issued by the US government. 

RT: So do we risk kind of entering a scenario where there are almost two castes of people: a safe minority who are very savvy about the workings of the internet and the things that you described, and just people who go online for kicks?

JA: We have this position where as we know knowledge is power, and there’s a mass transfer as a result of literally billions of interceptions per day going from everyone, the average person, into the data vaults of state spying agencies for the big countries, and their cronies – the corporations that help build them that infrastructure. Those groups are already powerful, that’s why they are able to build this infrastructure to intercept on everyone. So they are growing more powerful, concentrating the power in the hands of smaller and smaller groups of people at once, which isn’t necessarily bad, but it’s extremely dangerous once there is any sort of corruption occurring in the power. Because absolute power corrupts, and when it becomes corrupt, it can affect a lot of people very quickly.

Bill Binney, National Security Agency whistleblower, who was the research head of the National Security Agency’s Signals Intelligence Division, describes this as a ‘turnkey totalitarianism’, that all the infrastructure has been built for absolute totalitarianism It’s just the matter of turning the key. And actually the key has already been turned a little bit, and it is now affecting people who are targeted for US drone strikes, organizations like WikiLeaks, national security reporters who are having their sources investigated. It is already partly turned, and the question is, will it go all the way?

RT: But has it been built really by corporations and kind of unwittingly subscribed to by people, in order to advertise products to make money, or has it been built deliberately by governments for the sole purpose of surveillance?

JA: It’s both. I mean the surveillance infrastructure, the bulk surveillance infrastructure – there are hundreds of companies involved in that business. They have secret international conferences, they have prospectuses that they give to intelligence agencies that we have obtained and published this year together with Privacy International and the Bureau of Investigative Journalism. Also, The Wall Street Journal has done some good work on this. They are building devices that they advertise to intercept entire nations, to install the data from those intercepts permanently – strategic interception, because it’s cheaper. 

So it’s a combined corporate/government amalgam. That’s one of the problems, one of the reasons it’s so unaccountable is that it crosses boundaries. Companies don’t just sell to their home country, they sell to companies overseas. There are shareholdings held in BVI, and the company might be British-registered, like BIA, but actually a lot of research and development is done in Sweden, etc.

And then you also have Google and Facebook, who started up predominantly serving the public, but also have developed side projects to service the US intelligence complex. And individuals are constantly pushing their thoughts into Google as each thing that they want to research; it is pushed via emails, and on Facebook, through their social relationships. That’s an undreamt of spy database.

Facebook is completely undreamt of even by the worst spying nation, given the richness and sophistication of relationships expressed.

RT: And willingly contributed to.

JA: Well, no. But not with informed consent. People don’t actually know. When on Facebook it says “share this to your friends,” that’s what it says. It doesn’t say “share this to state agencies,” it doesn’t say “share this to friends and cronies of state agencies.”

RT: Who do you think has the organized power to stop these things that you are talking about?

JA: If there is political will, everything is possible. So if we get the political will, then of course those agencies can be dismantled. Very aggressive legislation, policing can be pushed upon them. In some regions of the world, such as Latin America, perhaps that’s a possibility. There is a certain democratic tendency, which Ecuador is part of that might do that. But in general I think the prognosis is very grim. And we really are at this moment where it can go one way or the other way.

To a degree, perhaps the best we can be sure, if we work, of achieving is that some of us are protected. It may only be a high-tech elite, hopefully expanded a bit more – people who can produce tools and information for others that they can use to protect themselves. It is not necessary that all of society is covered, all of society is protected. What’s necessary is that the critical accountability components of society that stop it from going down the tubes entirely, that those people are protected. Those include corruption investigators, journalists, activists, and political parties. These have got to be protected. If they are not protected, then it’s all lost.

RT: Is there a way that I can protect myself without knowing all about computers?

JA: Well, a little bit. But the first thing to be aware of is how much you are giving away. The first way to protect yourself is to go, “OK, I’ll discuss that in person, and not over Facebook chat,” or, “OK, I will discuss this using some forms of encrypted chat, like OTR, and not on a Facebook chat.” You can go to torproject.org and download encrypted anonymizing software. It is slower than normal, but for things like internet chat it’s fine, because you are not downloading very much at once. So there are ways of doing this.

What is really necessary, however, for those to be properly developed, there needs to be enough market demand. It’s the same situation as soap and washing your hands. Once upon a time, before the bacterial theory of disease, before we understood that out there invisibly was all this bacteria that was trying to cause us harm – just like mass state surveillance is out there invisible and trying to cause society a large harm, no one bothered to wash their hands. First process was discovery; second process, education; third process, a market demand is created as a result of education, which means that experts can start to manufacture soap, and then people can buy and use it.

So this is where we are at now, which is we’ve got to create education amongst people, so there can be a market demand, so that others can be encouraged to produce easy-to-use cryptographic technology that is capable of protecting not everyone, but a significant number of people from mass state spying. And if we are not able to protect a significant number of people from mass state spying, then the basic democratic and civilian institutions that we are used to – not in the West, I am no glorifier of the West, but in all societies – are going to crumble away. They will crumble away, and they will do so all at once. And that’s an extremely dangerous phenomenon.

It’s not often where all the world goes down the tube all at once. Usually you have a few countries that are OK, and you can bootstrap civilization again from there.

RT: We just passed the second anniversary of Cablegate, and since then this war on whistleblowers and this state surveillance seems to have got worse. Do you think something as large as Cablegate could ever happen again and it would have a similar impact?

JA: Yes, yes. Hopefully next year.

RT: What sort of time next year?

JA: I won’t go into it, but hopefully earlier rather than later.

RT: Do you feel that when WikiLeaks is making these releases you’re having as large an impact as you’ve had before?

JA: Well, Cablegate was extraordinary. It was published over a period of 12 months. It’s the most significant leak. Our previous leak, on the Iraq war, was also 400,000 documents, showing precisely how over 100,000 people were killed. That was also very significant. But yes, no one has done anything as significant as that since, but yes, hopefully, that will continue.

The successes of WikiLeaks shouldn’t be viewed merely as a demonstration of our organization’s virility or the virility of the activist community on the internet. They are also a function of this hoarding of information by these national security [agencies]. The reason there was so much information to leak, the reason it could be leaked all at once is because they had hoarded so much. Why had they hoarded so much? Well, to gain extra power through knowledge. They wanted their own knowledge internally to be easily accessible to their people, to be searchable, so as much power could be extracted from it as possible. WikiLeaks attempts to redress the imbalance of power. By taking what’s inside these very powerful institutions and giving them to the commons, people in general, so we can understand how the world works and stop the takeover by these powerful institutions. But it’s a function of how much knowledge these powerful institutions have accumulated.

RT: You’ve obviously written this book while you’ve been here in the embassy. But is it affecting your ability to work, this being cooped up constantly?

JA: It’s affecting my ability to meet with other people in different countries and to proselytize and things like this. But we should keep it in perspective. There are others who have been in prison also in the past few years. I know that it is a much more serious condition than the one I’m in, and I am fortunately able to give interviews and so on. So at least I have a voice. Prisoners rarely even have a voice. Why is that? Well, because the prison system doesn’t want to permit them to complain about their conditions.

RT: And what are you going to do, Julian? You said that you won’t leave the Ecuadorian embassy until the US drops any charges and any investigation against you. Are you just going to stay here forever?

JA: Well, I hope that there is enough political pressure and that the US government sees that it is destroying any goodwill that remains towards it as a result of its persecution and investigation of WikiLeaks and its associates. I think it really does have to drop the investigation. And you know, over the past six months in particular you can see a sort of the arrow of history – and the US DoJ and Eric Holder are going to end up on the wrong side of history. I don’t know that they want that on their record.

RT: I think there’ve been reports on the media that over the last day or so about your lung condition, but you’ve released a statement that it’s actually not the case at all. But has it shown you what would potentially happen if you did have a health scare? Do you think you would be able to get treatment?

JA: You know, my particular personal condition is not very interesting. Obviously, this circumstance in the embassy is difficult. And over a longer term, I suppose, it could be very difficult. But, you know, I’ve had worse problems.

]]> http://www.dgcmagazine.com/assange-tells-rt-that-the-internet-has-become-a-tool-for-totalitarian-rule/feed/ 0 http://www.dgcmagazine.com/voucher-safe-a-next-generation-digital-currency-part-i/ http://www.dgcmagazine.com/voucher-safe-a-next-generation-digital-currency-part-i/#comments Tue, 20 Nov 2012 09:04:11 +0000 Julia Dixon http://www.dgcmagazine.com/?p=710 Continue reading →]]> Digital Gold Currency is a fantastic idea. Gold enjoys thousands of years of history as an excellent currency and store of value. It is a form of money that is constantly chosen by the market and that needs no legislation to support its value. Gold is stable, solid and cannot be pulled out of thin air. With modern technology gold can be used as a currency online without any more effort than it takes to check your email. Brilliant!

But as DGC’s were starting to take off and be recognized for their many benefits, the rug was pulled out from under the industry with the prosecution of e-gold. The old DGC business model is centralized and vulnerable to seizure, censorship and prohibitive regulation.

The Voucher-Safe system allows for a more decentralized, Anti-Money Laundering compliant way to anonymously exchange value. It’s DGC 2.0, a more flexible and resilient system where anything can be money. “The idea behind voucher-safe is that it isn’t about making just one thing money. Money  can be gold, it can be existing national fiat currencies, it can be bitcoins, it can be silver, it can be anything of value that people want to exchange.”

I recently had some very in-depth discussions with Sidd, Voucher-Safe’s founder (also co-founder of Pecuinx) and Kevin, the principal developer. Voucher-Safe is software and a network that allows for the anonymous and very affordable exchange of the encrypted representation of value. DGC readers will be familiar with Voucher-Safe from the 2011 Industry Overview Issue.

Sidd and Kevin began designing the system when they ‘saw the writing on the wall’ soon after the demise of e-gold.  As Kevin put it, they began discussing how it would be possible to “operate one of these businesses without getting an ankle bracelet like Doug Jackson’s.”

The problem with the old DGC model is that they are account based and centralized.  Kevin recalls “seeing footage of Doug Jackson testifying before congress and actually boasting about how he was able, because it was all in one database, to track every little flake of gold from the first time it was put in the system to every account it had ever been in and so on.“ With an account based system the operator has a record of all transactions and can be held liable for their clients’ illicit transactions. E-gold’s ability to track all transaction through the system was used against them. Having records of all transactions is “absolutely a sucker’s game, particularly if you’re talking about an alternative currency that’s not going to be in good standing to start with simply because it is alternative. You have to separate the payment system from the store of value”

The Voucher-Safe system is designed to do exactly that. The Issuer, who hold the assets, is separated from the rest of the system and has no knowledge of the transactions taking place with the ‘cash’ that it has issued.

The system is modelled after gold backed “claim checks” or receipts. A good analogy would be a gold backed paper currency where you have gold sitting in a vault somewhere and the “claim checks” on this gold then circulate as cash. In this situation, those looking after the gold in the vault have no idea whose wallet that claim check is sitting in. Their only concern is the safe keeping of and accounting for the assets that back those claim checks.  “And that situation has been recreated technologically with Voucher-Safe where the vouchers are a circulating bill and you have digital wallets where different kinds of vouchers representing different assets can circulate.”

It is a complicated process to replicate this situation in the digital world. To understand how Voucher-Safe works you need to understand who the players are. There are three primary players in this system, the Issuer, the Publisher and of course, the users.

The Issuers are the entities holding, maintaining and accounting for the assets that back a particular issue of vouchers. The Issuer is AML compliant. Anyone wishing to purchase assets from the Issuer will need to provide identification and information in accordance with Know-Your-Customer rules. The Issuer is responsible for maintaining those assets and assuring that the amount of vouchers issued is always less than or equal to the assets that they hold. However, the issuer has no knowledge of what their customers may or may not do with those vouchers once they have been issued to them.

The Publisher works with one or more Issuers, facilitating transactions and is an essential part in the payment system. Publishers join the Voucher-Safe network to earn tokens which are in essence mini-vouchers. (This arrangement will be discussed in the next part of the series.)

The users are anyone who is using the Voucher-Safe software to exchange value with other users.

The Publishers and the exchange process are the heart of the Voucher-Safe network. To achieve the goals for the system, it was necessary to find a way for transactions to take place without centralized receipt signing, accounts or transaction records, all while maintaining anonymity. Not an easy task.

Because this process is so important to the functioning of the system, I’ll list the steps in the process. But, for those who don’t want to get bogged down in the technical details, here is an analogy that will hopefully be helpful in understanding the process.

Issuer A is a respected bullion vault and you would like to own an ounce of gold stored in their vaults. You go to Publisher A, who works with Issuer A, you give them $1,700 and you receive a receipt for one ounce of gold. (You can think of the Issuer and Publisher as a private Mint and Treasury.)

You owe Joe some money for some services he has provided and the two of you decide to settle your bill by passing the receipt for one ounce of gold stored in Issuers A’s vault on to Joe.

Joe gives you a lock for which only he has the key.

You then take this lock to Publisher A’s office and ask them to please place your receipt for one ounce of gold in a safety deposit box and give them Joe’s lock to put on the box.

Joe then stops by Publisher A’s office and notices his lock on one of the boxes.

Joe is able to open the box with his key and retrieves the receipt.

You and Joe then give each other receipts for the transaction.

Note: Neither one of you have an ‘account’ with the Publisher. The Publisher never asks you for ID and has no idea who you are. The only thing Issuer A knows is that you purchased one ounce of gold stored in their vault and that they issued you a receipt for the gold. They have no idea that you exchanged this receipt with Joe

In the digital world, this process is much faster, but involves a few more steps.

It is very important to note that the single most important feature of the Voucher-Safe system is the limited information that each player in the process has. This is particularly true of the Issuer who has no knowledge of anything besides vouchers. It knows which vouchers are on the circulation list and it knows about voucher serial numbers and nothing else. It is a “need to know” system.

This limiting of information is done through encryption, so that each player only has access to the information they need, and through anonymous communication via the OFS Gateway. You can think of the OFS as a proxy that hides IP addresses. All user login and payment-related communications happen via the OFS and, of course, the OFS cannot read the contents of any of the messages traveling through its system.

Below is a step by step of the transaction process in the Voucher-Safe system.

• The Payer logs in and all the vouchers in his safe are decrypted
• When the Payer initiates the transaction the client software automatically selects a voucher for payment, starting with the oldest first
• To send a payment, the Payer will need to have the Voucher-Safe ID of the Payee. (This  looks like an email address, but is similar to a Bitcoin payment address)
• The Payer enters the Payee Voucher-Safe ID of the safe that they want payment to go to
• The software creates a message that includes the voucher(s) to be transferred and Payee safe ID and any payment details (a memo field, or baggage fields)
• If there are any payment details associated with the payment, (information in the message that is only for the Payee) then these are encrypted using the Payee’s public key.
• The whole payment message is encrypted with the Publisher’s  public key and signed with the Payer’s private key
• The message is securely transmitted to the Publisher via the OFS
• The Publisher decrypts the payment message and checks the signature from the Payer
• The Publisher looks up the Payee’s safe ID and retrieves his public key
• The Publisher verifies its own signature on the vouchers to be certain that they are unaltered and valid
• The Publisher sends a message detailing the amounts, serial number, and amounts required (if splitting or combining vouchers) to the Issuer via an encrypted communication.
• The Issuer checks that the vouchers are still on the active circulation list (this prevents double spending)
• If there are no problems, the Issuer assigns new serial numbers for the output amounts and sends this information to the Publisher
• The Publisher acknowledges the Issuer and makes the new signed vouchers using the new serial number, while the Issuer retires the old serial numbers and adds the new serial number and amount to its active circulation list
• The Publisher includes the new voucher and the original payment details in a new message which it signs and encrypts to the payee
• Publisher places the encrypted voucher & message on the DHT (Distributed Hash Table) which acts like a safe deposit box in the cloud
• The Publisher places the change voucher (should there be one) back in the Payer’s safe and returns a successful status reply to the Payer
• The message is stored on the DHT with a unique encrypted address that the Payee can find
• When the Payee logs in to his Voucher-Safe (or clicks “refresh”)the software automatically checks the Distributed Hash Table and finds the encrypted message
• The Payment message is collected and decrypted
• Payee now has the voucher, but he needs it to be stored permanently in his safe by having it revalidated and replaced with a new voucher of identical value
• The Payee creates a message that includes the voucher and the Payer’s ID
• The Payee then signs this message  with its private key
• The whole message is encrypted with the  Publisher’s public key
• The message is securely transmitted to the Publisher via the OFS
• Once again the Publisher facilitates the issuance of a new voucher and destruction of the one sent by the Payee.
• The Publisher signs this voucher with its private key and then encrypts it with the Payee’s public key
• The Publisher stores the new encrypted voucher in the Payee’s safe and sends a successful status reply
• After the successful pickup by the Payee, the transaction becomes irrevocable
• If the Payee fails to pick up the payment within the time set by the Payer, then the Payer becomes able to pick up the payment voucher himself (i.e. retrieve it)
• The Payee’s Voucher-Safe software generates a receipt for the Payer, signs the receipt with its private key and places the receipt on the Distributed Hash Table for the Payer to find
• If there were any private payment details, those are included in the receipt data signed by the Payee, along with any optional return memo text

Even this is simply an overview of the process. There is quite a lot happening under the hood, but thankfully the Voucher-Safe software makes the user experience much simpler. You can watch demo videos, or try it out for yourself at Voucher-Safe.com.

For those who are interested in the technical specifics of the Voucher-Safe system, they can be found by creating an account at Voucher-Safe.org. The client source code and API documentation for all components can be downloaded from the site as well.

Voucher-Safe is a secure cloud based system.  Unlike Bitcoin, “there is nothing actually on your phone or on your computer. If your phone should get lost or stolen or arrested by authorities, there is nothing for them to find.” All of the information in the system is encrypted, sometimes twice. “What that means is that no one, including the voucher Publisher, can see what value somebody has. They might see that there are so many rows in the table at this hash for that particular safe, but there is no way to know what those rows represent, or whether they are simply payment receipts.”

Voucher-Safe’s carefully thought out design and payment system make it vastly more flexible and resilient than previous digital currency business models. “We’ve been through generation one of digital currencies now and it’s time for generation two.“

The next parts of the Voucher-Safe special will cover Issuers and assets, the economic incentives of the system, trust in the system, the extensive security procedures, supporting apps and payment software and more.

Part II examines the Voucher-Safe economy, trust, security and software.

Part III looks at Voucher-Safe’s interaction with Bitcoin, Issuers and OnionPay.