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Governments Must Co-Opt Bitcoin to Avert Disaster

When the news spread that Archduke Franz Ferdinand of Austria was assassinated in Sarajevo, few, if any, had the foresight to envision the colossal consequences that topped all previous global conflicts. But this spark ignited the horrific chapter in world history known as World War I.

Ninety-nine years later, on an island not too far from Sarajevo, the European Union pulled off a money grab against bank depositors. And within a week an obscure term "Bitcoin" has nearly become a household name, rising in value by a large multiplier.  Digital money has made a grand entrance.

The events that will be unfolding from now on will relate to Cyprus much as the events of 1914 to 1918 and beyond stemmed from Sarajevo.

Bitcoin, and digital money in general, are made up of a bit-string that carries value and identity intrinsically – just via the sequence of the bits, independent of any media these bits are expressed in.

"Hackers will have a field day," worried bank depositors. "It is too risky to keep money as 'bits' on your phone," they argued. But when the Cypriot banks unilaterally declared that a big chunk of all deposits accounts would be snatched, the premise of deposit security came up for re-evaluation; and not only in Cyprus and in Europe, but also in the U.S. and elsewhere. 

The Federal Deposit Insurance Corp. insures American depositors, but banks can still limit withdrawals, replace money with IOUs – they hold the money!

The Sarajevo-like spark of Bitcoin is noteworthy because for the first time it occurred to a large number of people that bit-money (Bitcoin or otherwise) can be kept, stored, and safeguarded without handing it over to the banks. Unlike bricks of gold, or bundles of banknotes, bits are stored on tiny microchips, they flow through the air, and they swim smoothly in the new cross-continental ocean called the Internet.

And as for security – hello! Didn't the banks themselves tell us that modern encryption technology can keep hackers prying for hundreds of years before cracking the walls of modern crypto castles?  Cryptography works everywhere it is used:  In every bank, and in every phone. Its protection is not based on legions of sentries armed with guns, but on mathematical certainty, and on logical immutability.  Bits are what cryptography works on. Bit money can be backed up multiple times, it can be encrypted for free, it can be stored on the fly, and it can be paid – cut and dried.

Before our eyes, technology reforms the institutions that have evolved linearly since the Medici family used benches (the original "banks") to disburse loans in the 15th century.  Banks stand to lose their utility for security and convenience in favor of crypto-protected "bitted" money, and the only leg left for them to stand on is interest payment – which is how they started!

The technology is there. Bit money is ready to roll. The market has just opened: The meteoric rise in the exchange rate of Bitcoin (even after a sharp correction) is a shouting proof that people are eager for a means to store, guard and secure their financial wealth without using the banks as safe keepers.

Banks will need to adapt to having to offer threshold interest to attract depositors – sufficient interest to counter the perception of Cyprus-risk. In return, banks would need to lend money at higher rates. As money becomes more expensive, economic activity chokes... the ball is rolling, the Cyprus-Sarajevo spark is catching fire.

Bitcoin is bad news on many levels. The most obvious concern was proven after the Cyprus crisis erupted: stability. What if people start lending and borrowing bitcoins? If your debt is denominated in the digital currency, and then its price soars, your burden in dollars will be off the chart. How would the debtors ever pay back their debt if overnight it multiplies by a factor of three?

And let's remind ourselves that credit extension and repayment is the mechanism for societal growth.  Bitcoin is rogue. It offers no recourse to those whose accounts are hacked or who lose their shirts investing in the currency or simply misplace their passwords. There is no central authority to lay blame to, and its cryptography is too deep for most traders to follow. Thus most Bitcoin traders are not aware that its crypto foundation erodes at a pace which accelerates the greater the success of this currency.

Like all other mainstay ciphers and crypto products, Bitcoin relies on assumed "mathematical intractability" – the believed difficulty to solve a certain mathematical problem. There is no proof of such intractability, just an assumption that since academic cryptographers haven't easily cracked the code, nobody can. Remember the Enigma in World War II: the German cryptographers were sure that no one would be smart enough to crack it. But Alan Turing and his team eroded the crypto defense and shortened the war by about two years. The more valuable Bitcoin becomes, the richer a target it is for crypto hackers and the harder and longer they will work at it.

The powers that be have two options on the table: one is to try to roll back history, to uninvent digital currency, to scare people from what technology brings about, and re-fit the genie into the bottle. Good luck on that route.

The other option is to ride the tide. Bitcoin has flushed out the public readiness to deal with bits as carriers of tradable currency.

The policy conclusion is clear. Bitcoin should be disqualified as a functional tradable currency. However, a properly regulated, digitized option for the prevailing currency should be rushed to market. If not, Bitcoin will reign, suck in an enormous amount of wealth, and eventually implode, unleashing a financial tsunami of unimagined proportions.

Central banks and national treasuries should come forth with a requirements definition, or spec sheet, for a robust, trustworthy, durable and stable solution to digitize the national currency.

The benefits are enormous: for one, paying with a digital coin is much more secure than paying, like today, by exposing both the payer and the payee account. All payments today are account-based:  what flows between payer and payee is not money per se, but a software instruction that increases the figure representing the payee's money by the transacted amount while the figure that represents the payer's money is reduced by the same amount.  The two accounts are hacking targets, regardless of how small the transaction. With digital money, the most that can happen is that the transacted sum is stolen. No accounts are exposed for further hacking.

Digital money can be paid as an email attachment. It could be tethered to an intended purpose by means of "terms of payment" embedded in the bit string. So, for example, aid disbursed to developing countries need not end up in some corrupt bureaucrat's offshore bank account. And of course, digital money may be safeguarded with greater security than ever before.

Let commercial interests compete against one another, following the guidance set by central banks, and offer the public the advantage of digitized fiat currency to stave off the rogue alternatives.

Gideon Samid is the the chief technology officer for BitMint LLC, which is testing digitized U.S. dollars, and teaches computer science at Case Western Reserve University and the University of Maryland.


(17) Comments



Comments (17)
If a person makes a statement "X" why does it matter in which interest a statement was made and who the person was ? In particular I would be curious to understand why it makes a difference in scientific statements and comments. Is the analysis of the CTO of a digital money company less true because he is not a winner of a nobel prize? I prefer to go for the content not for the person, nor the class even not his personal ambition or interest. I thought that is what science was supposed to be and so I do not understand much why it matters that the author has his own ideas on the realization of digital money as mentioned in some of the previous notes.

There's another thing I don't understand... Many people pretend as if BitCoin was a (digital) currency. If stock shares are currency then I would agree. If collection items are a currency (like years ago the telephone cards in Germany which you could buy and trade at extensive prices) then I would also understand. But if I can buy anything, being it telephone cards, the first 10.000 prime numbers, or shares on the stock and it can change its value from $90 to $260 (and vice versa) in one night ... and if is not issued by a central bank - what makes this thing different from telephone cards, stock exchange or anything you can gamble with?

BitCoin seems to be something that changes its value over night. It is not issued by a central bank. It is intentionally not supposed to be the representation of any existing currency. It simply does have a value that people are willing to pay for. Like telephone cards. Like stock exchange. But it comes with the face of a currency - why? Because the name contains 'coin'? Can I sell the first million prime numbers, name it 'PrimeCash' and any of that gets a particular value? What makes that different from Bitcoin? Does BitCoin feed its attractivity from having the reputation to be rebellic? People like to believe that they can get around (central) bank's domination on currency by creating their own value system (I cannot say currency).

Of course they can ... the can even do so with pearls and shells. I have no objections. Yet - I wouldn't buy any pearl, shell or BitCoin since I am not gambling on the stock exchange. And if I wanted to gamble ... I would go to the stock exchange, that seems to be much more fun because I have many more gadgets to play with than only one thing like BitCoin. Is BitCoin an excuse of gamblers to their wife because it steals some honest reputation from the word 'currency' - which it doesn't deserve? But why do we hear in the press that people put their money in BitCoin? They believe in BitCoin (changing value every day) after they do no more believe in other currencies? What is their answer on the price drop from $260 down to $90 in less than 24 hours? This cannot be honest. I remember cyber bucks. They are very comparable BitCoin - who buys cyber bucks today? You can buy today if you offer from $25.000.

And finally - reading about BitMint ... I cannot see any comparable aspect to BitCoin. BitMint is a representation of existing currency. Its value is 1:1 connected to the associated currency. No gambling - no value change - no rebellion - sorry ! What it does, however, with respect to what we (and banks) would want from digital money - is quite remarkable. I am in security technology for more than 20 years, editor of the digital signature standard EN14890 and I have been following digital money for more than the last 20 years. For me BitMint is something special and the first thing that seems to qualify for my 'impossible list of feature for the ideal digital representation of currency'. I will speak about 'Finding the ultimate digital money' on the Chip-To-Cloud conference 2013 in Nice (Sept. 25). I will not mention BitCoin for more than 30 seconds, it is neither digital money, nor is it a currency or a representation of one.

Helmut Scherzer, Fraunhofer SmartCard Prize 2002, Germany
Posted by scherzer | Thursday, May 09 2013 at 12:30AM ET
Gideon, I find your insecurities in Bitcoin quite real. The current cryptography implementation of Bitcoin will be broken one day for sure.

But another thing is the current risk of it happening in the near future.
As my personal opinion, I quite believe it is much more probable that by bank savings get swap away due to a technical error, fraud, or theft by some bank employees, and this does not even consider the bank breaking or funds seizing due to State crisis. Not that I am expecting that anyway (I wouldn't have any bank savings if I did).

And so, for centralised digital currency schemes, I find it too can have its failures.
But one must pounder the risks. I quite like Bitcoin odds better, but who knows.
Posted by projas742 | Tuesday, April 30 2013 at 2:20AM ET
Alchemy morphed into Chemistry;
Bitcoin Should morph into BitMint.

Alchemy was overly ambitious, and unrealistic, but it laid the foundation for an attainable practical goal. A ringing analogy for Bitcoin.

Alchemy failed to convert lead into gold, and Bitcoin is overshooting when it aims to replace fiat money and gold. Chemistry built on alchemy to effectively reshape naturally existing substances into useful forms; BitMint builds on Bitcoin to effectively reshape politically existing currencies into useful digital forms.
Posted by Gideon | Tuesday, April 23 2013 at 10:04AM ET
Thank you paultroon for your constructive comment. Bitcoin relies on one-way functions which are only assumed to be 'hard' (intractable) because no 'easy solution' has been published -- so far. To assume that they would stay hard is to bet against innovation, and to discount the vast majority of cryptographers working for cyber-war ministries around the world, and never publish. Unpublished weaknesses may be smartly applied to milk the system 'under the radar'. And when weaknesses will be suspected, who will have the authority to replace the prevailing algorithms? Given human nature, the mavens will disagree, and soon enough there will be a split: Bitcoin1 and Bitcoin2.

My fundamental question to Bitcoin cryptographers is: will you compensate the millions of Bitcoin traders if they lose their money owing to an "oops" factor in the algorithms? You may be good with number theory, and you may get a kick out of scaring central banks, but are you in a position to assume global financial responsibility? The quantity of money in circulation must fit the level of economic activity. It cannot be left to happenstance success in gold mining, nor in digital mining. We cannot outsource this responsibility. You don't like Bernanke -- vote for a president that would replace him.

And finally, why not start with digitizing fiat money: it has so much potential. Look for my new book: "Tethered Money: Digital Currency & Social Innovation" on sale soon: digital money can be dis-universalized, tied to intended purpose, resist abuse and combat fraud. A noble cause for the socially minded Bitcoin crypto-geeks -- let's start there!
Posted by Gideon | Saturday, April 20 2013 at 2:16PM ET
Gideon, your central claim against Bitcoin is that its security relies on algorithms that suffer from "erosive cryptographic intractability." That is not a term the appears common in the literature. Perhaps you can point us to your academic work on the subject.

There are two main cryptographic primitives that Bitcoin relies on. The first is public key encryption used for wallet addresses. The second is the proof of work hash that uses SHA-256. Both are commonly used cryptographic algorithms and if a weakness were found with either then a next generation version of the algorithm could be substituted before any value were lost.

More discussion of possible weaknesses in the Bitcoin system, and how they will be addressed, can be found here:

PS> Thank you for updating your bio to include your financial interest in a fiat based digital money system.
Posted by paultroon | Saturday, April 20 2013 at 10:19AM ET
Jon, only that a vegan is not going to respond by shooting my cows... Most of them would gladly engage me in an intelligent conversation. But then again, vegans don't get rich eating lattice... The hack against BitMint is either juvenile or greedy.
Posted by Gideon | Friday, April 19 2013 at 1:47PM ET
Gideon, have you ever considered that instead of touching a raw nerve, it's more like selling steak to a vegan?
Posted by Jon Matonis, The Monetary Future | Friday, April 19 2013 at 1:04PM ET
The BitMint site is still down. Good show, very smart, very effective attack on BitMint money exchange form. We are still sorting out through the code-splinters, and we acknowledge your intelligence. Bravo. Is that how you refute my crypto arguments against Bitcoin? For how long? I am sure you know that this method of using simulated traders to shut BitMint down, can be used by a Bitcoin attacker to simulate fake trades, and dummy traders that would cooperate to co-opt the chain of hash-based proof-of-work. There are no more than 7 billion individuals on this earth. There are many more dummy traders... The attack suggests that this article touched a raw nerve. I call upon you to renounce cyber-violence and to collaborate with your critics: thesis and antithesis, leading to a synthesis, as Hagel would say. The crypto basis of Bitcoin may serve as a powerful global voting mechanism, so we all know what the majority of us thinks, without allowing corrupt vote-counters to skew the result. May do more against oppression than the current version. In fact BitMint, that is not based on erosive intractability like Bitcoin, (based on durable equivocation) actually plans to adopt some of the P2P brilliance in Bitcoin. Pray, lay down the cyber-weapons, and instead let's find a whiteboard, lots' of coffee and pizza, and a few nights to spare. Would you take my challenge? My place or yours?
Posted by Gideon | Friday, April 19 2013 at 12:39PM ET
My dear Bitcoin friends, Denial of Service attack on the BitMint site (now down) is no way to refute my arguments against Bitcoin. I welcome any civilized counter-point on the blogosphere, and let's keep it there. You cannot erase core crypto-vulnerability by preventing BitMint from dealing out digitized dollars. One wonders why are you so alarmed by an embryonic product like BitMint, is it because it offers the convenience of digital payment without the instability of exchange, and because of the intrinsic fear that "no apparent central authority" as in Bitcoin, implies "a non-addressable money manipulator" as in chaos.
Posted by Gideon | Thursday, April 18 2013 at 4:52PM ET
Editor's note: The author's bio has been updated. Thanks to all the commenters for the lively and fascinating discussion.
Posted by Marc Hochstein, Editor in Chief, American Banker | Thursday, April 18 2013 at 12:08PM ET
BitMint is not Bitcoin2, and no more a competitor to Bitcoin than Google Wallet, or EBT. BitMint expresses the good old US dollar as a string of bits. The point, the lure, and the controversy of Bitcoin is in the fact that it challenges, and defies the US dollar, and all other fiat currencies. It has an unstable exchange rate against the dollar. If "shame" needs to be assigned then what about hiding the killer crypto-vulnerability of Bitcoin as discussed in my former comment. I used my 'academic hat' with this article because its arguments are not subjective, nor emotional, but academic, factual, mathematical. I have related to BitMint in my former comment, and will amend my bio herein. All this out of the way -- the crypto-vulnerability of Bitcoin still stands!
Posted by Gideon | Thursday, April 18 2013 at 10:47AM ET

Thanks for addressing some of the issues I raised.

If "Bitcoin is to payment what Napster was for music", then history tells us that Napster morphed into a completely decentralized system we have today with Bittorrent. True, there are centralized systems of media distribution like itunes/pandora. I therefore see two pedigrees of parallel digital cash systems in the future: one distributed/unregulated/global, and the other regulated/centralized like Bitmint/Mintchip/Ripple.

My guess is that from the amount of bittorrent traffic generated over the internet, that one will dwarf the other. If projects like Bitmint are embraced by authorities then I only see these facilitating the rise of Bitcoin as it will allow for non-revocable transactions facilitating the job of Bitcoin exchanges. Getting funds in and out of the legacy banking system is one of the major Bitcoin bottlenecks today.

The barriers to entry into Bitcoin are inexistent which will play a major role in its exponential worldwide adoption by merchants. Bitmint & co. will progress much slower as it'll have to jump through regulatory hoops along with its adopters.

"if ever the crypto-foundation of Bitcoin yields to a smart assailant -- all the "Bitcoinized" money will melt away". Let's take the premise that such a flaw were inbuilt (and somehow not yet uncovered) into bitcoin or unearthed later due to advances in cryptography. Since the blockchain ledger is available for all to see, the Bitcoin community could decide to fork the blockchain at an agreed upon block where the crypto flaw was discovered. All funds would remain untouched. Admittedly this would be a painful transitory step, as the Bitcoin-clone Solidcoin did, but it is not an intractable flaw for Bitcoin to deal with.

I'll have to read your paper about durable equivocation to get a better understanding. Taking the premise that Bitmint is totally secure, one's funds are still at the fancy of a centralized body. This goes against the very essence of Bitcoin. Bitcoin is not just a form of digital cash (as I said we already have that today with credit cards/paypal) but a decentralized monetary system immune to centralized seizure or inflationary policies.

To some extent, I hope Bitmint succeed by going "the legal route" as it will only lead to higher adoption of Bitcoin (or its descendants).
Posted by hendry2 | Thursday, April 18 2013 at 10:44AM ET
Gideon, this is a shameful article. Aside from the misapplied economic realities and fanciful notions of regulatory legitimacy, there was no proper disclosure of the author's affiliation with BitMint.
Posted by Jon Matonis, The Monetary Future | Thursday, April 18 2013 at 3:34AM ET
Gideeon, is it not customary to mention when for an author to mention any financial stake they have in the topic they are writing about? A reader would certainly find relevant your CTO position at Bitmint, a competitor to Bitcoin, when considering your arguments against Bitcoin.
Posted by paultroon | Thursday, April 18 2013 at 2:27AM ET
Thank you commentator, for your civilized tone -- way to go. I believe, like many, that Bitcoin is to payment what Napster was for music. The spark that lit subsequent fire. I have indications that much as our product, BitMint, offers the benefit of digital currency, many others are working on the same idea, and of course, like you said, the marketplace will have its say. However, I am calling for a federal guide to be complied with, and indeed we talk to the various central banks -- first.

Cryptography -- my point needs elaboration: it's true that Bitcoin relies on cryptographic primitives which are commonly used for heavy duty cyber-security communication. Alas, the hush-hush, whispered reality is that all these algorithms are subject to "erosive intractability" -- increased mathematical insight, and faster computers constantly erode their efficacy. Serious crypto users have replacement algorithms in place since no one knows when a cracking-method will be posted online, and instantly invalidate a working cipher. It's not big deal for communication. But it is a catastrophe for cyber-wealth: if ever the crypto-foundation of Bitcoin yields to a smart assailant -- all the "Bitcoinized" money will melt away! In fact, one of the running rumors is that Bitcoin was secretly 'cooked' by a hostile cyber-war service bent on luring Americans and others into buying into it, only to lose their money in a sudden crypto meltdown. CyberWar today is so cut-throat that no such rumor should be dismissed.

BitMint, by contrast, is not based on "erosive intractability" but on "durable equivocation" -- a crypto foundation that does not erode with time. See more at:

Bitcoin has proven that the public is ready for digital money. But like many pioneers - their historical credentials notwithstanding -- their vision will be carried out by others. Yes, BitMint is this race, but the race has just begun!
Posted by Gideon | Thursday, April 18 2013 at 12:22AM ET
The author is trying to promote its own version of Bitcoin, called Bitmint. The fact that it is centralized, means it is more likely to go the way of other failed digital cash initiatives before it such as egold/digicash - except if it is official sanctioned. But in that case, it is no different to national fiat currencies which are already mostly digital.

Of course, the author is aware that his alternative cannot compete with Bitcoin as it would "reign, suck in an enormous amount of wealth" therefore he suggests "Bitcoin should be disqualified as a functional tradable currency" because he is aware no one would voluntarily opt for his digital currency. If Bitmint or Mintchip (Canadian central bank's project) are worthwhile, why not let it compete on the free market?

He also criticizes that Bitcoin relies on cryptography and therefore will be broken. Bitmint, the entire banking industry and military also use cryptography, so the issue does not only apply to Bitcoin and would have a much bigger societal impact. In any case, bitcoin's protocol is evolving constantly, so any advances in cryptographic hash functions can be incorporated.

"Bitcoin will [...] eventually implode, unleashing a financial tsunami of unimagined proportions." The author does not explain why it will.

Bitcoin is not a "rogue alternatives". It is just a currency that people are voluntarily trading with. If they choose not to follow the Fed's guidance, then let them have it. It is the "Fed's guidance" that has overseen a 98% reduction in the purchasing power of the USD and countless crashes since its creation.

Posted by hendry2 | Wednesday, April 17 2013 at 4:55PM ET
"First they ignore you, then they laugh at you, then they fight you, then you win." -- Mahatma Ghandi

This article proves that Bitcoin is in phase 3 of Ghandi's paradigm for overcoming an entrenched power.
Posted by paultroon | Wednesday, April 17 2013 at 4:14PM ET
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