Bitcoin gains banking access

Johannesburg, 07 Jan 2013
Read time 4min 30sec
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Amir Taaki, Bitcoin developer and exchange operator.
Amir Taaki, Bitcoin developer and exchange operator.

Paymium, which operates the Bitcoin-Central exchange, has announced a partnership with a French payment service provider. The relationship will allow Paymium and Aqoba to create payment accounts, issue debit cards, and bring many of the advantages of the banking service to the Bitcoin community.

This is a major milestone for the electronic currency, which has attracted a small but loyal user base, despite several high-profile incidents of hacking and fraud.

"Bitcoin has massive advantages over conventional payments," says Amir Taaki, a Bitcoin developer who also operates a Bitcoin consultancy and exchanges. "As Bitcoin becomes more usable due to better infrastructure and stability, we can begin to lean on these strengths. Things like the lack of friendly fraud because there is no chargeback mechanism. Bitcoin will always hold value because there are certain businesses for which only Bitcoin (or a system like it) can work through Bitcoin. Things like donating to WikiLeaks due to the fact payments cannot be stopped."

These are examples of niches where Bitcoin's unique properties have established it as a popular choice for specific types of online transactions. Unfortunately, anonymity and secrecy also attract a less savoury sort of user.

Underground trade

Online marketplaces for illegal trades such as drugs, weapons, child pornography, and human trafficking have benefited from Bitcoin. Services such as Tor ("The Onion Router") provide encrypted, anonymous networks, allowing sites to escape detection (as well as many legitimate uses).

Silk Road, for example, is a Web site accessible only from Tor connections, where a wide range of illicit material is openly advertised for sale. Bitcoin is a preferred currency for such transactions, since Bitcoin transactions are commonly held to be anonymous, a perfect fit alongside the secrecy of the encrypted network connection.

Bitcoin transactions are not strictly anonymous, though. All transactions are recorded permanently, and the passage of every Bitcoin through the system can be followed. However, tying those Bitcoins to specific individuals or organisations is not so easy, unless the party discloses its identity, like a merchant accepting payment.

If the parties involved do try to keep personal identities out of the loop, Bitcoin can become, if not wholly anonymous, then at least heavily veiled - certainly more private than a credit card payment. Whether Bitcoin transactions would withstand the focused attention of an intelligence operation remains to be seen - hacking group Lulzsec thought it was untouchable until the Federal Bureau of Investigation successfully "turned" one of its senior members, Hector Monsegur, leading to multiple arrests.

Silk Road, for all its hype, may simply be too small to attract the attention of the major agencies. As with much cryptography, the math behind Bitcoin is sound, but its users will always be a weak point.

In terms of reputation, the weaknesses in the Bitcoin network are not in the math or the users, but in the exchanges. Bitcoin exchanges have had a rocky few years, with several suffering attacks leading to hefty losses.

Asked how exchanges can restore trust, Taaki dodges the question, pointing out that banks are far from perfect themselves. And he is right, but that does not address the question of Bitcoin exchange volatility and security.

Stealing 'coins'

Several exchanges have suffered breaches. Mt.Gox, for example, one of the largest exchanges, was comprehensively hacked in 2011, sending tremors through the entire Bitcoin ecosystem. Mt.Gox survived, unlike Bitcoinica, which counted Taaki among its managers and which was hacked multiple times in 2012, resulting in lost money (43 000 Bitcoins, over $220 000 at the time), acrimony among the principals, lawsuits, and the eventual collapse of the exchange.

BitFloor, the largest US exchange, was also looted in 2012, with hackers making off with around 24 000 Bitcoins (worth around $250 000 at the time).

Where banks are tightly regulated, Bitcoin exchanges are not - there is no safety net. Many are run like open source projects - often abandoned or non-responsive in the face of adversity or criticism. Security is a major concern - many of the attacks have been traced to elementary oversights in Web security. BitFloor, for example, exposed an unencrypted backup of Bitcoin keys, allowing the attacker to initiate the transfers.

Ultimately, Bitcoin is growing despite setbacks because it aligns to a human need, Taaki (who describes himself as a 'crypto anarchist') says. "We can build our own reality. We can define our world through infrastructure we have built. It is true that a lot of classical authority has been eroded by technology, and this trend will only continue.

"We are in a silent but forceful revolution. I create technology for people to realise themselves. To create their own realities free from outside control. To experience that liberating feeling. That is freedom. Not how much money you have in the bank, or the taxes you must file."

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15 Aug
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