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Bitcoin: Virtual Currency Challenge

Digital currency is gaining ground in anti-censorship initiatives. While recent events have showcased the precarious reality of centralized information systems and censorship, anti-censorship and anonymity projects are responding in kind. In December 2010, Amazon refused their hosting service to WikiLeaks after an anti-counterfeiting raid by the US Department of Homeland Security, highlighting the need to protect speech on the internet.

Projects such as the Tor Project and bitcoin, which focus on decentralizing systems and hardening infrastructure and apps against censorship is an ongoing process. This article discusses how bitcoin, a relatively new attempt at a decentralized internet currency works.

What are Bitcoins?

In 2009, Satoshi Nakamoto created bitcoin, a peer-to-peer digital currency system that aims to re-establish privacy and autonomy by avoiding banking and government middlemen. The bitcoin system allows individuals and merchants to generate and exchange modern money in a direct manner. Bitcoins are a type of “virtual” currency, which can be thought of as the virtual currency in online games, where people outside the game are able to trade it for physical money.

How does Bitcoin work?

Bitcoins are generated by users on the internet running a bitcoin miner, which is a free application. Mining bitcoins requires a certain amount of work per block of coins. The amount is automatically adjusted by the network to ensure that bitcoins are created at a predictable and limited rate. Bitcoins are then stored in an online wallet, and can be transferred to other individuals. Currency services exist in order to exchange bitcoins for hard currency.

The first step is to download the official bitcoin client, which runs on Windows, Mac and Linux. It will create an online wallet and download transaction history automatically. Once the wallet is set up, the user will be ready to receive bitcoins. Bitcoins can be received for products and services. The following are merchants that will trade coins for cash or credit card payments:

-          bitcoinexchange.com – this allows users to buy and sell bitcoins using euros through SMS/Phonepayment or bank transfer

-          bitcoin4cash.com – this offers bitcoins for cash sent through the mail. There is also a service to pay for bitcoins through bank wire.

Some advantages of using bitcoins include:

-          Transferred from person to person, eliminating the need for banks or clearinghouses

-          Service fees are much lower than traditional transfer methods

-          Bitcoins can be used in any country

-          No prerequisites

Growth of Bitcoins

The use and value of bitcoins continues to increase. In fact, in October of 2010, each bitcoin was worth about $0.06. By March 2011, each bitcoin was worth about $0.87 and as of June 1, 2011, one bit coin was worth about $8.67. The places bitcoins are accepted are increasing as well. For example, the following websites accept bitcoins as donations:

-          Electronic Frontier Foundation (EFF)

-          Freenet Project

-          Singularity Institute

-          I2P Anonymous Network

Since its introduction, the following services have been developed, in order to provide new ways of buying and selling bitcoins:

-          CoinPal – Uses PayPal to purchase bitcoins.

-          CoinCard – Allows the use of bitcoins for the purchase of gift cards.

-          Mt. Gox – The leading bitcoin exchange.

-          BitcoinUSA – Complies with all US government regulations on financial exchanges.

-          bitcoin-otc – an “over-the-counter” marketplace that conducts trades between parties in the channel.

Bitcoin Concerns

As of June 2011, bitcoin is being targeted by two US senators, after suspicions that the currency is being used to buy drugs anonymously. Democratic senators Charles Schumer (New York) and Joe Manchin (West Virginia) wrote to the US attorney general and the head of the Drug Enforcement Administration (DEA) regarding the untraceable nature of the currency.

According to Dawn Dearden, a DEA spokesperson, the DEA is “constantly evaluating and analyzing new technologies and schemes perpetrated by drug trafficking networks. While we won’t confirm or deny the existence of specific investigations, DEA is well aware of these emerging threats and we will act accordingly.”

Many observers fear that the government might then decide to shut down bitcoin exchanges, such as Mt. Gox, which would significantly hurt the bitcoin economy. Some argue that the value of bitcoins is artificially inflated by speculators, so if these speculators panic, the value of the currency will probably crash. Users point out that it is unlikely that government institutions would completely eradicate the use of bitcoins. Since it is a decentralized system, all it takes is two people running the open-source client software to keep bitcoins going.

Summary

This article takes a look at bitcoins, a peer-to-peer currency introduced in 2009. The bitcoin system is decentralized, which means there is no single authority that issues currency or tracks transactions. Bitcoins can now be used to purchase products and services and they can be exchanged for dollars, euros or other currency. As of June 2011, bitcoins are at the center of a scandal suggesting that they are being used to anonymously purchase black market goods.

CIPP Exam Preparation

In preparation for the Certified Information Privacy Professional/Information Technology (CIPP/IT) exam, a privacy professional should be comfortable with topics related to this post, including:

-          De-centralized architectures (III.B.b.)

-          Privacy-enhancing technologies (III.B.c.)

-          Anonymity tools – applications and payment processing (III.B.d.iii.2.)

 

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