Are Bitcoins The Future Of Anonymous Campaign Donations?

As the conversation on Bitcoins — the controversial cryptocurrency that has been the center of a number of federal government seizures — continues, the realities of this curiosity continue to steal headlines. After a 15 percent nosedive in the Bitcoin’s exchange value after the FBI seized the Silk Road — a hidden Internet marketplace for illicit goods — the virtual currency hit an all-time exchange high of $358, as of 11 a.m. EST on Friday, as traded at Mt. Gox. This is reflective of consistent growth post-Silk Road.

This growth, in part, is coming from abroad. With BTC China — a newly-developed exchange in mainland China — now accounting for just under 26.5 percent of all Bitcoin trades, and with an expanding base of foreign exchanges, such as Slovenia-based Bitstamp, taking root, Bitcoin demand and value have continued on an upward path that experts are split on calling a bubble or a trend.

“There is absolutely no way to value Bitcoin, which means there is nothing constraining its price other than supply and demand. As long someone new can be convinced to buy Bitcoin, its price can keep rising. Bitcoin prices could literally go to 1,000 or 10,000 or 100,000 or 1 million per coin, and there would be no way to prove that these prices were ridiculous,” wrote Henry Blodget for Business Insider. “What’s more, even if Bitcoin is a bubble, prices could keep rising for years.”

“I think the Chinese really look to bitcoin as an excellent digital store of value, sort of like the new electronic version of gold,” said Bobby Lee, founder and CEO of BTC China. “The Chinese like the idea of buying bitcoins to allow for deferred gratification from their savings.”

 

Bitcoins as a campaign financing tool

The positive growth and attractiveness of the Bitcoin has even forced the federal government to draft policies surrounding the currency’s use. In September, attorneys for the Conservative Action Fund PAC asked the Federal Election Commission for a ruling on if and how political candidates and outside groups could use the currency to contribute to campaigns. Due to the inherently anonymous nature of Bitcoins, the currency can be donated to campaigns without a money trail being immediately obvious.

“Bitcoins are a new form of money. Based on the concept that money can be ‘any object, or any sort of record, accepted as payment for goods and services,’ an anonymous creator designed this purely digital currency,” wrote Dan Backer in his request to the FEC. “Bitcoins, designed as ‘electronic cash,’ allow users to make online, peer-to-peer transfers of assets without utilizing a bank or other third party financial institution.

“As increasing numbers of individuals trade in Bitcoin, political parties and candidates also wish to accept and spend this new currency. The Libertarian Party now accepts Bitcoin contributions. Mark Warden, a recently re-elected New Hampshire State Representative, accepted Bitcoins in his recent campaign.’ Two former candidates also set up systems to accept Bitcoin contributions online: Eric Olson, a Libertarian candidate in North Dakota, and Jeremy Hansen, an independent state Senate candidate in Vermont. CAF, a political action committee, wishes to do the same—while complying with all relevant campaign finance regulations.”

“We see a real future for this, especially among libertarian-minded supporters,” Backer concluded.

In a Nov. 7 draft, the FEC ruled that political campaigns can, indeed, receive Bitcoins as campaign contributions, but cannot spend them in that form for campaign activities. Recognizing Bitcoins as an “in-kind” contribution, such as a stock or bond — reflecting a recent Federal Reserve ruling that stated that Bitcoins are not currency subjected to money control rules, as it is applied to end-users — the FEC recognized that the receipt of Bitcoins does not in itself breach any campaign finance limits.

“Because Bitcoins are neither the currency of any country nor negotiable instruments, Bitcoins are not ‘money’ under commission regulations,” the committee concluded. “Therefore, a political committee that receives Bitcoin contributions may not treat them as monetary contributions.”

While the draft still needs the vote of the full commision for it to become official, the possibility of Bitcoins being used as a legal anonymous filter for campaign financing has gave Bitcoins a seemingly undeniable and unexpected ally for its continued use. The value of the Bitcoins must be disclosed when the Bitcoins are exchanged for real capital, but as they would be pooled and randomly distributed by that point, it would be nearly impossible to say where any one Bitcoin came from, and when.

 

Ghosts from the past

Despite this new demand and popularity, ghosts from the Bitcoin’s past continue to plague it. The introduction of a new Silk Road Marketplace under the helm of a new “Dread Pirate Roberts,” for example, threatens to reignite past associations with the currency and its criminal use. “It is with great joy that I announce the next chapter of our journey,” wrote the administrator of the new site, which has been dubbed “Silk Road 2.0.” Like the old Silk Road, it will sell drugs and other forms of illegal paraphernalia, but will also guarantee Bitcoin deposits to the site and will use a stronger encryption system than its predecessor. “Silk Road has risen from the ashes, and is now ready and waiting for you all to return home.”

This “stunt” not only raises the speculation that Bitcoins are once again funding the criminal underworld — a perception that Bitcoin officials are desperate to shed — questions on who exactly is running “Silk Road 2.0” are leading many to think that this is just a “honeypot” the federal government has set up to track the actual paraphernalia buyers and sellers. These rumors are bolstered by calls from Sen. Tom Carper (D-Del.), chair of the Homeland Security and Governmental Affairs committee, to hold hearings later this month on the use of virtual currencies and strategies to combat black market websites.

“This new website – launched barely a month after Federal agents shut down the original Silk Road — underscores the inescapable reality that technology is dynamic and ever-evolving and that government policy needs to adapt accordingly,” Carper said in a statement Wednesday. “Rather than play ‘whack-a-mole’ with the latest website,  currency, or other method criminals are using in an effort to evade the law, we need to develop thoughtful, nimble and sensible federal policies that protect the public without stifling innovation and economic growth. Our committee intends to have that conversation – among others — at our hearing this month on virtual currency.”

“I for one do not trust the new [Silk Road],” wrote one user on the site’s forums. “I just get an eerie feeling from the whole idea of it, right now i will steer clear…only time will tell, i want to dive head first into it, but i want to see it play out for a little bit before i slap down another 500 bucks, an investment i made the day before [Silk Road] was closed.”

Even if “Silk Road 2.0” is legitimate, recent events — including the abrupt announcement that another black market site, Atlantis, is going offline, with all of the Bitcoins saved in its user accounts lost if they were not immediately removed — forced many to reconsider the Bitcoin’s use on the Darknet.

With Silk Road’s alternative, Project Black Flag, folding, with its administrator admitting to stealing the Bitcoins held in the site’s accounts after “panicking” and with Black Market Reloaded, a Silk Road competitor, leaking the site’s source code on the web and possibly compromising the site’s security, many feel that the Darknet procurement trend is over. This spells an uncertain future for the Bitcoin, as its Darknet trade constituted the majority of its usage.

 

A broken currency

The biggest doubt about the Bitcoin’s future, however, comes from Cornell University, where two computer science researchers have found that the Bitcoin has a flaw so fundamentally grave, it could undermine the entire currency. The problem comes from the process of Bitcoin “mining” — the computer process in which an increasingly complex equation is worked out to form the hashtag that will constitute the Bitcoin. This equation is so intense and time-consuming, however, that it would take an exceptionally powerful computer a long period of time just to make one Bitcoin. This was created as a control on the availability of the currency.

However, a group of “miners” could pool their computers together to “mine” together and create a monopoly over the system. “The problem is intrinsic to the entire way Bitcoin works … a minority group of miners can obtain revenues in excess of their fair share, and grow in number until they reach a majority. When this point is reached, the Bitcoin … is no longer decentralized; the controlling entity can determine who participates in mining and which transactions are committed, and can even roll back transactions at will,”the researchers wrote.

As the researchers pointed out, if the pool grows too large without some type of control from the system, these pools could become the de facto central bank in a decentralized currency — controlling exchange values by increasing or slowing production or by withdrawing Bitcoins from trade.

“Conventional wisdom has long asserted that Bitcoin is secure against groups of colluding miners as long as the majority of the miners are honest,” the researchers continued in a blog post. “Our work shows that this assertion is wrong. We show that, at the moment, any group of nodes employing our attack will succeed in earning an income above their fair share. We also show a new bound that invalidates the honest majority claim: under the best of circumstances, at least 2/3rds of the participating nodes have to be honest to protect against our attack. But achieving this 2/3 bound is going to be difficult in practice.

“The mere possibility that the system can get into a vulnerable state will be an impediment to greater adoption of Bitcoin.”

 

The future of Bitcoins

All of this begs hard questions about the Bitcoins. In weighing the bad about the currency — including the inherent flaws with its blockchain and in “mining” monopolization, a lost of faith in its use among one of its largest user demographics and a continued rash of Bitcoin thefts — the good must be considered, as well. Increasingly, the Bitcoin is being used as a payment option for small businesses who wish to avoid payment processor charges.

“Bitcoin can be cheaper and faster over commercial payments than PayPal,” said Jerry Brito, senior research fellow at George Mason University’s Mercatus Center. “It’s cheaper than Visa or MasterCard. If you’re a small business merchant and want to accept electronic payments, you first have to apply to join the network—and yes, there’s an application fee. If you get accepted, each swipe of any credit card you take costs you 0.25 cents. In addition, you have to return three to six percent of the sales total to the credit card company. That’s a lot off the bottom line, especially for a small business. With Bitcoin, you don’t need permission to start accepting it. And fees [which go to Bitcoin miners, to help run the network] are less than one percent.”

It is beneficial things like this that make it easy to argue that Bitcoins have a place in the world’s economy — even if that place is as an unusual commodity. Even if the currency was to go bust, the infrastructure built to support it will propel future innovations and bolder experiments.

“Some of the technology advances that have been taking place in the past few years since Bitcoin was embraced can surely be used for a bunch of other things in the future, especially when it come to remittances and other Western Union-like businesses,” said Shakli Khan, a Spotify investor and virtual currency expert.

Regardless if Bitcoins are the next big thing or the next big flop, one thing is certain: they are the future, and the future cannot be ignored.

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