A libertarian nightmare: Bitcoin meets Big Government

The hype has never been hotter for the Internet's No. 1 virtual currency. Is this the beginning of the end?

Published March 22, 2013 11:45AM (EDT)

                  (<a href='http://www.shutterstock.com/gallery-215950p1.html'>ppart</a> via <a href='http://www.shutterstock.com/'>Shutterstock</a>/Salon)
(ppart via Shutterstock/Salon)

What's not to like about Bitcoin, every libertarian's favorite crypto-currency?

For starters, Bitcoins are as cyberpunk as William Gibson's wildest dream: a form of monetary exchange invented in 2009 by a mysterious character who called himself "Satoshi Nakamoto" but then disappeared from view after unleashing his virtual currency upon the world. Bitcoins are undeniably cool: marvelously "mined" from the ore of computer processing power and electricity; more ready for prime time than any previous experiment in purely digital money. And Bitcoins, increasingly, are a success. At a Thursday afternoon all-time-high valuation of $72 per Bitcoin, there were around $700 million worth of Bitcoins in circulation. People are using Bitcoins to buy real goods and services, to hedge against European financial calamity, and to score drugs. That's money.

Over the years, Bitcoin has experienced ups and downs; the currency has been targeted by hackers and thieves and botnets and been victim to more than one embarrassing software glitch. But it has persevered, and this week, one can fairly say that Bitcoin came of age. On Monday, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) released its first "guidance" as to how "de-centralized virtual currencies" should fit into the larger regulatory regime under which currencies of all kinds are required to operate. The word "Bitcoin" is never mentioned in FinCEN's release, but that's just a technicality. Everyone in the Bitcoin community knew who the guidance was aimed at. Bitcoin is a big boy now. The State is paying attention.

But while some observers have applauded FinCEN's guidance as acknowledgment that Bitcoin isn't illegal or considered a "threat" by the government, not everyone is cheering the news. Because there's a problem here. Bitcoin isn't just an elegant way to create money using peer-to-peer networks and cryptography. Bitcoin is a currency with an ideology. From the beginning, Bitcoin was envisioned as a form of monetary exchange that didn't need third-party financial institutions or central banks or even governments to validate it or back it up. Bitcoin is the fulfillment of a libertarian dream, a currency created out of the workings of the free market, unaffiliated with any state authority, respectful and protective of user privacy and anonymity, and designed to resist inflationary pressures. By its very nature, Bitcoin is made for people who don't want other people to know what they are doing.

"Bitcoin," says financial pundit Max Keiser, "is the currency of resistance."

That's all fine and dandy, but then here comes the government with its strong suggestion that any organization that facilitates the exchange of Bitcoins into other non-virtual currencies needs to register with the proper authorities and start keeping a lot of bureaucratic paperwork. How does that fit in with the idea of "resistance"?

Not very well, as we can learn from one Redditor who chastised his fellow Bitcoin fans for celebrating the legitimacy conferred upon Bitcoin by FinCEN's guidance.

From this situation to total government tracking of money flows and zero possibility to escape their theft, it is but a small step. The tax farmers have co-opted all of you into even more total servitude. But you celebrate that. How servile.

Sigh. Slave-minded idiots, nearly all of you, naively happy because the eye of Sauron has finally locked its sight on you, celebrating defeat as if it was a victory, cheering like mad cows as your farmers line all of you up at the slaughterhouse. May you get the cages you foolishly cheered for.

Mr. Eye of Sauron might be a little overheated, but there's a nugget of sense buried in his rage. There's a contradiction at the heart of Bitcoin. The more popular Bitcoin gets, whether as a symbol of resistance or a perceived safe haven in financially troubled times, the more government attention it will inevitably draw, and the more inexorably it will be sucked into existing regulatory structures. Incomes denominated in Bitcoins will be taxed. Efforts at money laundering will be cracked down upon. It's the price of success. Resistance is futile.

* * *

The Bitcoin moment is right now. Two weeks ago, at the very end of a SXSW presentation on 3-D gun printing, Defense Distributed founder Cody Wilson encouraged his audience to take a look at what was happening with Bitcoin. Just in the last two weeks, he said, Bitcoin had "exploded."

And it's true, over the last four weeks, Bitcoin has repeatedly broken its all time record in terms of how much a single Bitcoin can be exchanged for another currency. Some observers have attributed this to the growing number of vendors -- including Wordpress and Reddit -- that are willing to take payments in Bitcoins. Others point to the financial distress in Cyprus: Bitcoins are the new gold -- a hedge against inflation and government appropriation. Others see what's happening as little more than a classic bubble in the making, and are scrambling to get out before it pops.

Whatever the explanation, Bitcoin's profile has never been higher, and the overheated rhetoric is keeping pace.
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Cody Wilson, who reportedly raised $17,000 in Bitcoins to help fund his organization's purchase of a high-end 3-D printer, was clearly delighted at Bitcoin's surge when he spoke at SXSW. For him, there's an obvious synergy between the virtual, non-government affiliated currency and his own plans to undermine the power of the state everywhere and enact practical anarchy in the world by distributing the power to 3-D print your own assault weapons. In one of his most recent over-the-top promotional videos, Wilson declares that to realize his organization's goals, "we'll need the Bitcoin. These days holding dollars is a political choice." Elsewhere, he has described his vision as "a future of federal communities and slowly disintegrating and reactionary states. It is imperative to begin using cryptocurrencies and private commerce to starve these beasts."

You won't find a more explicit call to see Bitcoin as a technology for liberation than Wilson's. You would imagine, then, that he would be disappointed to hear about FinCEN's "guidance" suggesting that all Bitcoin entities that exchange Bitcoins for non-virtual currencies must register with the government. So much for starving the beast -- a few more steps down that trail, and Bitcoin will be in the belly of the beast!

But Wilson's faith in the free market and the Internet is so profound that he shrugs off any accommodation that Bitcoin might make with the government by expressing his faith that "when the currency becomes captive to regulatory interests, a competing currency and genesis code will take the lead." Just as the Internet's structure makes it impossible to stop the sharing of code or music or 3-D gun printing designs, so too will it enable the endless upwelling of alternative currencies.

But that view seems to miss something fundamental about what makes a currency work. Enough people have to buy into it, so to speak, that people and entities will accept it in exchange for goods and services, or convert it into other forms of legal tender, or employ it as an investment vehicle. It has to be useful, in other words, and true usefulness requires scale.

But scale inevitably attracts attention. Like it or not, the state will not sit idly by if vast sums of drug money start getting money laundered through Bitcoins, or if a significant enough stream of tax dollars starts getting diverted into the Bitcoin ether. Just try to avoid paying taxes on the proceeds of those 3-D-printed guns you are selling to all and sundry. The Eye of Sauron will come looking. In fact, it already has, as proven by FinCEN's Monday release.  Welcome to the real world, Bitcoin.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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