The Silk Road Takedown and the Future of Cryptocurrency

The US government is officially on “shutdown” at the moment, but that didn’t stop the FBI raiding and shutting down the underground drugs site “The Silk Road”.  Operated through TOR it enabled people to buy illegal drugs online.  Critically the currency in use on the Silk Road was bitcoin, a cryptocurrency that is gaining in both legitimacy and stature.  In addition to shutting down the site and arresting its mastermind on charges which include murder, they also seized 26, 000 bitcoins and potentially have access to 600K more.  This has quite substantial ramifications for its future if it is to challenge government backed fiat.

Bitcoin is a crypto-currency – a virtual currency which exploits the rarity of prime numbers and uses them as a base for a medium of exchange.  The prime numbers are akin to “gold” – in that they exist and they are very rare.  There are less than 21 million of them.  This isn’t the place to go into the technicalities but essentially these numbers are “mined” by computers doing lots of very hard sums, and then when those numbers are found, a coin is generated which corresponds to that number.   These hard sums get harder the less numbers there are to be found, so mining becomes increasingly difficult.  Just over half have already been mined, and it is expected that the final coin will be found around 2140.

The inspiration for bitcoins comes from a paper by a rather mysterious figure, Satoshi, in 2008, the first coin was mined in 2009.  The first transaction in Bitcoins in May 2010 was famously for a pizza, where someone bought one with 10,000 bitcoins.  At the current exchange rate, that pizza cost £100,000 – possibly the most expensive pizza ever.  These days its a whole lot easier to buy a pizza with bitcoins, not to mention considerably cheaper.  That initial transaction however established bitcoin as a trading currency, rather than just a speculative vehicle.

The price or money-form of commodities is, like their form of value generally, a form quite distinct from their palpable bodily form; it is, therefore, a purely ideal or mental form

Karl Marx, Das Capital, Vol 1:3

Unlike Government issued currency, bitcoin isn’t centrally controlled.  It is at one and the same time completely anonymous (there is no necessary link between an individual and a bitcoin wallet, like cash), and completely public (all transactions can, as part of the design and security of bitcoin, be seen on the blockchain, like bank transactions), making it effectively pseudo-anonymous.  The hard limit on bitcoins, and the increasing difficulty of mining makes for some interesting economic effects, primarily that it is intrinsically deflationary; a distinct contrast to government currency, which tends towards inflation as a means of promoting economic growth.  As governments are in charge of the money supply it is in their interests to continue to grow it, where there is a demand for their currency.

The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy.

Karl Marx, Das Capital, V1; 35

In Marxian economics, money is a store of value, and value is a solidification of labour – effectively money is embodied labour.  You exchange your own labour for money in order that you may use that money to purchase the embodied labour of others in the form of goods and services.  Under government fiat currency, additional money is added to the supply.  Sovereign debt is effectively the sale of aggregate future labour extracted through the promise to extract taxes from labourers either domestically or through imperialist means.  Government control over the money supply and the ability to create sovereign debt, including the ability to nationalise debt as was seen in the banking crisis of 2008, where the bailouts to the banks effectively transferred debt from the banking entities onto the state, pledging that in cases where banks may have difficulty recouping the money that they had lent, the state would step in and do the job for them through the state taxation system.  If…

Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks. The time during which the labourer works, is the time during which the capitalist consumes the labour-power he has purchased of him.

Karl Marx, Das Capital, Vol 1:10

…then sovereign debt is cancer.  Once the capitalist has consumed the blood, sweat and tears of the worker, and the surplus value has been extracted, the state then steps in, zombie-like, to feed upon the remaining flesh.  Taxation is for little people – the rich pay very little proportionately; the poor are taxed wherever they go -for their bedrooms; for failing to find suitably profitable work; for failing to work for free when it is demanded of them; for being insufficiently demonstrably disabled.  No offshore bank-accounts can hide their income and the poor have no accountants.   “Tax the rich!” is a common cry of socialists, but is frequently misunderstood.  It is not that socialists should desire high taxation, but that they should desire that the burden of state taxation – in all its many forms be lifted from the poor, who through their labour are already taxed in the form of extraction of surplus value, and that the beneficiaries of this surplus value are taxed instead and the revinue raised returned to those who produced the wealth.

And so to bitcoins.  As a pseudo anonymous currency scheme it is very difficult to tax, although no-doubt should it become popular enough, methods will be found.  But unlike government issued currency, it is easier to hide a transaction as an individual than it is as a major corporation.  A large scale transaction on a block chain is worth tracing and can be relatively easily traced where small transactions can be hidden more effectively in the general noise. The hard upper theoretical ceiling of bitcoins is subordinate to its relative temporal practical ceiling – the point at which the investment in hardware and electricity consumption required to mine a bitcoin is worth more than the goods and services that the bitcoin can buy.  Right now, that practical ceiling has already been reached, although an expansion in the bitcoin economy would be it lifted.

At the moment, the bitcoin economy is tiny.   Bitcoin came into its own on the Black Market.  Most notably guns and drugs.  Both are available via the anonymous TOR router.  The most well used site to buy drugs was The Silk Road, which traded exclusively in bitcoins.  The Silk Road, and its founder Dread Pirate Roberts, effectively offered a brokerage scheme where suppliers and buyers could be linked up; a rating system mean that there was a level of confidence in the trustworthyness of the supplier; the anonimity of bitcoin meant that transactions didnt go through regular bank accounts, while drugs were shipped or couriered to the buyer, eradicating much of the uncertainty, danger and violence associated with in-person drug deals.  Most of the overage in the mainstream press has concentrated on the more lurid aspects of the Silk Road, TOR and Dread Pirate Roberts.  Drugs!  Guns!  Assassinations!   But TSR is only one of many vendors, and within hours several had sprung up to take its place, again trading in bitcoins, thoroughly establishing it as the first choice of currency for dodgy purchases.

But the bitcoin economy is bigger than just the Black Market. The currency has seen major growth in Africa, Latin America and Asia.  The unavailability of electronic transfer services, such as paypal in many parts of the world have left people looking for alternatives, and bitcoin fills this nieche perfectly, cross-country transfers of money are much simpler and cheaper through bitcoin than through Western Union and the ability to send very small amounts of money at minimal cost is very attractive.   In countries where the domestic currency is unstable, bitcoin despite its erratic value compared with what Westerners are familiar with, has been comparatively stable over the past year. One in three Kenyians and one in nine Tanzanians now hold a bitcoin wallet.

Although TSR was thought to be the largest market using the currency,more and more small vendors, particularly those who trade over the internet are accepting it, generally at a rate slightly above their dollar rate.  The Cyprus banking crisis in April this year saw a flurry of interest into the currency as a safe investment haven and the shutdown of the US senate a few days before the TSR takedown was expected to strengthen its appeal as the deadline for the lifting of the US’s debt ceiling approached with all the consequent uncertainty for the dollar.  The TSR takedown was intially thought to have been a potential death knell for the currency, and indeed it dropped 25% compared to the US dollar on the news, yet within 48 hours it was again trading at pre-takedown levels, proving its resilience.  Bitcoins are here to stay.

Bitcoins and their sibling cryptocurrencies are fundamentally different from government issued fiat currency, they have their own issues and challenges, but as a partial solution to solving some of the problems that such fiat imposes, they are worth a second look.   The fundamentals of government issued fiat is based on confidence in the issuing state; the fundamentals of  bitcoin are based on confidence in mathematics, and given a choice of who I would rather trust – Western governments or prime numbers – as the backer of the currency, there is really no competition.

Yet there are a number of problems with bitcoin.  The hard limit of 21 million is unbreachable, around 14m (or two-thirds) have already been mined.  The early miners, those who started in 2009/10, were able to virtually pick up bitcoins off the streets, consequently they were able to amass huge bitcoin fortunes, while those later miners, particularly those who started after the first block rewards halving in December 2012.     The mysterious founder of Bitcoin, Satoshi Nakamoto is estimated to have a personal bitcoin wealth of one million bitcoins – that’s  5% of all the bitcoins there will ever be and around 7% of all those which have currently been mined, just under half of all the bitcoins currently circulating are in the hands of 2,300 people.  They are the new bitcoin aristocracy.

Yet these 2,300 people are heavily invested in bitcoin, and not just in a monetary sense.  Mostly they are early miners, who saw bitcoin as the first feasible alternative crypto-currency – they have an ideological affinity with it as well as a financial stake, and bitcoin only gains in value if it is used as a medium of trade.  Excessive hoarding is detrimental to its overall success, but none the less the power that over half of a globally used currency being held in the hands of a few thousand people should not be underestimated.    Should bitcoin ever take off, the purchasing power that these individuals will have will make it look as if Peter Minuit got ripped off when he bought Manhattan for 60 Dutch guilders.

The seizure of 26,000 bitcoins from the user accounts of TSR by the FBI, coupled with the potential 600,000 that is estimated to be held in the personal wallet of DPR, now puts the FBI and the US government among the ranks of the bitcoin aristocracy.  Unlike the early miners, the guy who made a mint selling a pizza, and those who invested in it early on, the US government has no interest in its success, but now potentially holds around 5% of all bitcoins – if, of course, it can access the Dread Pirate’s treasure –  but it would seem that for now he is keeping that map pretty close to his chest, but .  Most people are focusing on the dollar value of the seizure, but the dollar value of bitcoin at the moment is very little compared to its potential, and if that potential was realised, perhaps spurred on by a currency crisis – such as a default by a major economy, or a shock to the Euro, such as Grexit – then an awful lot of bitcoin power is transferred into the hands of exactly the entity that most bitcoin users seek to free themselves from.

Note:  People are currently trolling the FBI’s wallet by sending them tiny amounts of money together with a public message about how much they hate them.  Anyone who hates this post is very welcome to follow their lead and troll me at 1LM8aeDd27EUUVHQSaSDQVRfs5Q7jLphb3.  Or then again, you could just be old fashioned and leave a comment below.

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