Weekend Economists Examine the Root of All Evil: February 28-March 2, 2014

[Demeter]

9. The Whole Bitcoin Blowup Continues--Tiresome As It Is

I think the main reason Bitcoin gets any press is that the Banksters and the Neoliberals see a way to skim large profits off the public, should the public start to abandon the established ways for Banksters and Neoliberals to skim off public wealth: fiat currency issued by national entities.

So, here's what's happening in the world of Digital:
................................................................................................................

The Mt Gox bitcoin scandal is the best thing to happen to bitcoin in years Heidi Moore, Guardian

http://www.theguardian.com/money/us-money-blog/2014/feb/25/bitcoin-mt-gox-scandal-reputation-crime?CMP=ema_565

It may take a giant scandal to make Bitcoin respectable.

Bitcoins, the esoteric digital currency that enthusiasts believe will one day take over the world, may one day be used everywhere from supermarkets to 401k retirement plans, but right now it is in a temporary shambles. Bitcoins are traded by digitally savvy geeks on several exchanges, the same way that Wall Street traders use exchanges to make bets on the US dollar and the Japanese yen. Today, Bitcoin’s biggest and most important exchange, known as Mt Gox, suddenly just disappeared. The scandal is this: 774,000 bitcoins – worth $409m and a decent outstanding percentage of all bitcoins in existence – are missing. There are no clues as to where they might be. Bankruptcy looms. Bitcoin advocates are turning their backs on the currency as it falls into disgrace. Investigations cannot be far off.

The whole debacle is one of the biggest scandals to happen in the bitcoin world, which knows scandal could create a “disastrous spiral of disbelief”, in the words of Henry Farrell. This could mark the end of bitcoins as we know it – which is great news, because bitcoins as we know it were doomed...Bitcoin was born in disgrace, in the internet’s back rooms, invented as the favored currency of people who didn’t trust the government and often wanted to make transactions that the law would prohibit. Bitcoin was exceedingly popular with online drug dealers, who favored a now-defunct black market known as Silk Road, which was in turn run by a shadowy young hacker who called himself the Dread Pirate Roberts. It’s the stuff of thrillers, and it will probably be a great movie one day, but all that back-alley hacker drama was keeping Bitcoin mostly as a punchline instead of a serious currency. Mt Gox, for instance, started as a trading venue for enthusiastic nerds who loved fantasy games; its name, Mt Gox, stands for Magic the Gathering Online Exchange, where users traded cards for the game, giving bitcoins a place in the fringe-culture Venn diagram between Dungeons & Dragons and Renaissance faires. Fun stuff, but not really the stuff of mainstream legitimacy. The entrance of the bionic Winklevoss brothers – Mark Zuckerberg’s arrogant nemeses – as they accumulated 1% of all the bitcoins in existence only added to the circuslike atmsophere. Then the government cracked down on Mt Gox, seizing $5m from its coffers.

All of this added up to one thing: Bitcoin, for all the hype about its future as the next big digital currency, was operating in an amateur-hour ecosystem of wannabes. It was as relevant to society as the old, forgotten Harlem Shake meme of last year. And Bitcoin’s perceived appeal to criminals kept it from going further. In hearings in Washington in November, regulators couldn’t think of many things they hated about Bitcoin except its past connections to the unethical: druggies, dictators and money launderers. Then the first cord was cut between Bitcoin and its past: Silk Road collapsed. Look what happened afterward: bitcoins have been winning more and more influence. After Silk Road, bitcoins’ price may have suffered briefly, but its reputation soared. Bitcoin has slowly become more accepted as a currency, from dating site OK Cupid to car company Tesla. If you’re a consumer, you’ve probably seen jokey invitations to use bitcoins instead of money scattered all around the web. California and New York even have bitcoin ATMs.

Big-name supporters popped up. From the beehive of Silicon Valley wunderkinder, venture capitalist Marc Andreessen took to tweeting pro-bitcoin pronouncements with the tireless persusasive conviction of Cicero addressing the Roman senate. Larry Summers, a former Treasury secretary, even came out this week as a supporter of bitcoins, particularly to spur some activity from the underachieving financial system we have in place. This is why Mt Gox’s collapse is a boon for bitcoins. It clears out another attic full of ethical cobwebs from Bitcoin’s past. There are plenty of other bitcoin exchanges – who declined to bail out Mt Gox, according to Tim Fernholz at Quartz. The powerful Second Market, a regulated exchange, is now ready to create a standalone bitcoin business. Second Market’s move is a major one; the company has hurdled financial regulators in the past and acts as a bridge to the Silicon Valley community, with which it already has strong relationships.

To function as a currency, bitcoins need one thing: legitimacy. The further it gets away from its shady, fantasy-currency roots, the closer it will get to practical reality. Bitcoin has been a lively theoretical playground for wonks and nerds. Once it becomes powerful, it will become interesting to consumers. And that’s the real test of a currency.

Bitcoin Foundation vice chair arrested for money laundering FROM END OF JANUARY

http://www.theguardian.com/technology/2014/jan/27/bitcoin-foundation-vice-chair-arrested-money-laundering

A senior figure in the Bitcoin Foundation, which lobbies on behalf of the digital currency has been arrested for conspiracy to commit money laundering and “knowingly contributing” to anonymous drug sales.

Prosecutors announced on Monday that Charlie Shrem, the organisation's vice chairman, was arrested at John F Kennedy airport in New York on New York Sunday.

The news comes as a major blow for the digital currency lobby group and its supporters including Tyler and Cameron Winklevoss. The twins, famous for the early involvement with Facebook, have become big backers of the digital currency. They said in a statement on Monday that they were “deeply concerned” by the news....

US prosecutors investigate businesses dealing in bitcoins

http://www.theguardian.com/technology/2014/feb/26/us-attorney-mtgox-bitcoin-investigation-cyber-legality?CMP=ema_565

Manhattan US attorney Preet Bharara’s office is seeking information from businesses dealing in bitcoin on how some of them handled cyber-attacks that hamstrung several exchanges in recent weeks, a source familiar with the probe told Reuters on Wednesday. Subpoenas have been sent to numerous businesses, including MtGox, once the largest bitcoin exchange, as well as other firms that did business with the Tokyo-based company, the source said. Prosecutors want to know more about the nature of the cyber-attacks on MtGox and other exchanges and how those exchanges dealt with them. MtGox halted customer withdrawals on 7 February in response to what it termed unusual activity, and on Tuesday the exchange went dark, leaving customers unable to recover their funds.

Mark Williams, a risk management expert who teaches finance at Boston University, said the investigation is a positive step in regulating virtual currency. “If bitcoin is going to be a currency then it needs to actually play by the rules,” Williams said. “At this point, there’s been no regulation in this sector.” Regulators have faced some hurdles in regulating bitcoin, which has not been designated as a currency or asset in the US economy. Williams expects that the rumored investigation and resulting decisions by the US government will have a global impact on the virtual currency industry. He also expects a short future for MtGox because they’ve broken trust with their customers. “They’re done, they’re toast, they’re Enron – they can’t resurrect themselves,” Williams said.

MtGox’s apparent closure or hiatus also follows the leak of what is alleged to be a “crisis strategy document” from the company, which says that almost 750,000 bitcoins (currently worth more than £200m) are “missing” due to theft which went unnoticed for several years.

A second man, Robert Faiella, has also been arrested and charged for the same crimes relating to his operation of a small bitcoin exchange under the name BTCKing...