The Worst Money to Steal
In 2011, Senator Chuck Schumer held a press conference to alert the world to the dangers of narcotics trafficking on the dark web and the new money-laundering technology that made it possible: Bitcoin.
The Silk Road marketplace on the dark web allows dealers "to sell illegal drugs online, including heroin, cocaine, and meth…hiding their identities through a program that makes them virtually untraceable," Schumer warned.
All made possible, he said, by cryptocurrency, "an online form of money laundering used to disguise the source of money, and to disguise who's both selling and buying the drug."
The senator subsequently sent a letter to the DEA to inform them that the "only method of payment for these illegal purchases is an untraceable peer-to-peer currency known as Bitcoins."
But all PR is good PR, so the immediate effect of Schumer's breathless warnings was predictable: A surge of traffic onto the Silk Road to buy drugs and an even greater surge of traffic onto Mt. Gox to buy Bitcoin.
As related in Andy Greenberg's new book, Tracers in the Dark, "In the days following Schumer's letter and press conference [buyers] pushed the cryptocurrency's exchange rate on Mt. Gox from less than $10 in early June of that year to a peak of nearly $32 as they scrambled to purchase this purportedly "untraceable" — and newly notorious — coin of the dark web. In attempting to shut down the Bitcoin black market, Schumer had inadvertently given it its best publicity yet."
The key to that passage is the quotation marks around the claim that Bitcoin is "untraceable."
It isn't, of course.
Just this month, the Department of Justice announced the seizure of $3.36 billion worth of cryptocurrency in the arrest of James Zhong, who is accused of stealing 50,461 bitcoin from Ross Ulbricht's Silk Road all the way back in 2012.
"Thanks to state-of-the-art cryptocurrency tracing," IRS criminal-investigation special agents were able to unravel a "series of complex transactions" and follow "the money through cyberspace."
They followed the cyber trail all the way back to Zhong's house in Gainesville, Georgia, where they found the digital keys to the stolen bitcoin in an underground floor safe, "on a single-board computer submerged under blankets in a popcorn tin stored in a bathroom closet."
I know what you're thinking: The IRS has special agents??? They do, indeed. And they carry guns!
(You're probably also thinking, that's a pretty good hiding spot! And also, Gainesville, Georgia? Really?)
Those were my thoughts, as well. But what we should be thinking is that bitcoin is really the very worst money to steal.
If your stolen money is still traceable after spending ten years on a circuit board kept in a popcorn tin under some blankets in Gainesville, Georgia, it truly was not ever worth stealing in the first place — even if you were stealing it from drug dealers.
Show me the money
How much of Bitcoin's early popularity was based on the misconception that it offered anonymity and not just pseudo-anonymity?
The Bitcoin network is transparent by necessity: The only way for Satoshi to solve the double-spend problem was to make every transaction visible to everyone.
But the long, seemingly indecipherable string of account numbers involved in those transactions gives the impression of full anonymity: Enough so that US Senators, drug dealers and the people who steal from drug dealers all thought Bitcoin was a money launderer's dream come true.
With the increasingly sophisticated data analytics available — and the IRS special agents making full use of them — that narrative is now well and truly shot.
This might be a problem for Bitcoin. And perhaps a bigger problem than the recent loss of the inflation-hedge narrative.
Why? Because Bitcoin's long-term security model is based on incentivizing miners with the fees paid to the network. And right now, not many fees are being paid.
Bitcoin's security is dependent on its utility — and it no longer has utility to those seeking to keep their transactions anonymous.
If you're reading this newsletter, chances are you're not a drug dealer, so that may seem like no great loss to you.
If you're reading this newsletter and you own Bitcoin, you're probably in it for its monetary policy, which can be considered a type of utility as well.
But it's not the type of utility that generates much in fees: HODLers don't transact often, which means they don't pay much in fees, which means they don't do much to secure the network.
Who else might transact enough to do so is an open question.
On a recent episode of Empire, Nic Carter said that if the Bitcoin network doesn't start generating more in fees, it "will soon be time to sound the alarm bell."
We might want to sound that alarm sooner rather than later, because the solutions (lowering the block size, raising the 21 million cap, finding new use cases), while all doable, are not exactly quick fixes.
Any of the obvious candidates are likely to take years of debate and development.
That debate should start now because the only thing that happens quickly in Bitcoin is following the money — and that took 10 years.
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