Bitcoin will fund, not end, the State.
Whenever I talk about use of force in the fight for liberty, those who reject the argument often respond with a one word answer. Bitcoin! Not surprisingly, the people who say this tend to be heavily invested in the cryptocurrency. It is in their best interests financially to see it gain wider acceptance, driving up the demand, and with it, the value, of their assets. So they tend to make outrageous claims about its magical powers, not unlike any common pump and dump stock scam.
For certain, Bitcoin is amazing and is doing a lot to advance free markets. I have a Bitcoin wallet, and it presently has more money in it than my leather one, not that this is saying much. The BlockChain.info markets page is in my bookmarks toolbar in my web browser, and I regularly follow news about the virtual currency. To make a long story short, I love Bitcoin. I’m not writing this to bash on it, but I’m going to put a few holes in the absurd expectations some people have for a few megabytes of open source code.
What Bitcoin Is
Bitcoin is an open source program.
Being open source means anybody can see the original, human readable code of the program. Most of the programs running on your computer are probably closed source. Microsoft products for example. When a computer program is created, the programmer manually types instructions into a text editor. Those instructions can be analyzed or changed by a third party. Unless the application is open source, that code is kept a secret by the program’s creator.
Before a closed source application is released, it is compiled. Compiling changes the human readable code into machine readable code. While applications exist to reverse engineer this process, they are far from perfect, and the original human readable code becomes unrecoverable.
The upside to open source is that it has no secrets, and that’s why open source matters to Bitcoin. If there are flaws or backdoors in the code, they are identified by the open source community and fixed. Unlike Microsoft applications which need to be constantly updated as hackers exploit holes in their security.
Bitcoin is peer to peer.
Being peer to peer means there is no central Bitcoin authority. That makes it very difficult for governments to control. The decentralized nature of peer to peer protocols means they live or die based on user acceptance alone. No swat team can raid Bitcoin headquarters and force an administrator to hand over funds or identify users, because no such headquarters or administrator exists.
Bitcoin is an asset.
There’s no shortage of disagreement on exactly what sort of asset Bitcoin is. Some call it money, some call it property, some call it an investment, some call it a barter tool. Whatever you call it, Bitcoin is a thing of value.
What Bitcoin Is Not
Bitcoin is not untraceable.
Each Bitcoin wallet has a public and a private key. The private key is kept secret, and is used only for spending Bitcoin. The public key is used for accepting payments, and is the public identifier of the wallet. Using the public key, anyone can view the balance of the wallet, and every transaction said wallet has ever engaged in. In this sense, Bitcoin is more traceable than traditional banking, where the transaction information is at least hidden from public view.
Bitcoin is not (entirely) anonymous.
In order to accept payments, you must make your public key known to the payer. If you accept donations from the public or run any sort of open to the public business, this means making your public key, public, associating it with the identity accepting the payments. If you send invoices to clients, this means listing the public key on the invoice.
From there, it is possible to obfuscate where the funds went, but you can never erase the trail. A little forensic accounting by anyone willing to take the time to do it, will eventually spot patterns and locate the funds. Even without locating the funds, it is still possible for taxing authorities to hold you accountable.
Bitcoin is not untaxable.
The Bitcoin protocol itself is outside the reach of government, but protocol is not what the government taxes. Governments tax value. All this crap you’ve heard from the sovereign citizens about taxes only being owed because you trade in Federal Reserve Notes is nonsense. The banking system makes taxation easier for the government, but that’s just a convenience. Taxing authorities want their cut of everything, and it doesn’t matter if you trade in FRNs, Euros, gold, silver, copper, or Bitcoin. Even if you trade haircuts for lawn maintenance, as far as the IRS is concerned, you are supposed to attach dollar values to each side of the barter and report them to the IRS.
The IRS officially announced yesterday that Bitcoin was taxable as property. So as far as taxes are concerned, Bitcoin is going to do about as much to set you free as the stock market is, and the stock market has been around quite awhile. Surprisingly enough, there are people who think this is good news. They always expected to pay taxes on their Bitcoins, so the announcement that it is taxed as property instead of money means they can pay the lower capital gains rate on their winnings, and write off their losses as deductions.
Bitcoin Forensics in Action
As a little exercise, let’s look at Derrick J’s Donate page (I got his permission to do this, but all of this information is publicly available)
Derrick’s public key is 1PeaceUVNF3zoFXjMPoTN6S3ssDrhgxTEJ
We can view this on the Blockchain.
This wallet has engaged in 126 transactions, and has received a total of 118.08955384 BTC, which at the current market rate of $583.05 would equal $68,852.11. His first transaction took place on 2013-06-02 at 02:33:33UTC, so we know he acquired all these funds in under 1 year.
We don’t need to start off with the identity of the investor. If we find a transaction on the blockchain, and want to identify those involved, we can simply do a Google search for the public key. Here we find all the 3,380 places where Derrick’s public key is posted on the web. Including his website, YouTube videos, tweets, and all the rest.
This is all the IRS needs to conduct an audit of Derrick. In a tax court, the IRS simply claims money is owed, and a defendant is burdened to prove the money is not owed. The IRS can clearly see that Derrick has exchanged a good deal of funds here, and when the IRS comes to get him, his options will be limited to explaining each of those transactions, paying the IRS, going to prison, running away, or killing his abductors.
I’m not breaking any new ground here. It only took me a few minutes to find all this information. This is part of how Charlie Shrem, Robert Faiella, Pascal Reid, and Michel Abner Espinoza all got caught.
Bitcoin is a useful tool. It’s a great way to obfuscate transactions, to increase one’s wealth, to transfer funds, and more. If you never show up on the government’s radar, you might well be able to trade in Bitcoin your entire life and never pay a penny in taxes.
On the other hand, the moment the government decides it wants to bust you, they will, and all the information they need to do it will be publicly listed on the internet for all to see. They don’t even need a warrant. Bitcoin is property, and like all property, the government wants a cut, and they will kill you to get it.
While it is true that the State cannot end Bitcoin, it is also true that Bitcoin will not end the State. The State will cease to exist when a large enough percentage of the population is willing to use force to defend themselves against it, and no sooner.
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