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    International Monetary Fund Asserts Bitcoin Not a Currency in Draft Report

    August 12th, 2014 by bcohen

    Original (dhimmel), accidently modified with intial edits:

    NOte From BrianL Not sure what impact the above statement has on article but I ##have made a few modification on original to 8/13

    The International Monetary Fund (IMF) is currently drafting Monetary and Financial Statistics Manual & Compilation. The document has a Draft watermark and a meta-data creation date of June 26, 2014.

    Chapter four of the manual is entitled "Classification of Financial Assets and Liabilities" (PDF) which includes in part classifications of "Monetary Gold and SDRs" and "Currency and Deposits."

    Under Currency and Deposits we find section 4.36 with Footnote 13:

    Not all electronic payments involve electronic money. For instance, credit cards or debit cards are not electronic money because no monetary value is stored on them; and store cards or internet-based currency (such as Bitcoins [13] or gaming money) are not electronic money because these are not widely accepted as a medium of exchange.

    Scrolling down to the referenced footnote 13 we find:

    Bitcoin also does not meet the definition of a currency as it is not issued or authorized by a central bank or government.

    Therefore we must assume that the IMF presently defines currency as issued or authorized by a central bank or government. Oddly at the same time, the manual states that Bitcoin is and is not a currency. The author chose the term "internet-based currency" rather than the more common terms "virtual currency" or "digital currency." Maybe the IMF is confusing Bitcoin with "Internet-based payment services" which is a commonly used term (and Bitcoin is a payment network in addition to being a virtual currency). The G7 connected FATF (Financial Action Task Force) prepared a document in June 2013 entitled "Guidance For A Risk-based Approach Prepaid Cards, Mobile Payments and Internet-Based Payment Services" (PDF).

    I was able to find reports from 2011 and 2012 from the IMF that define currency in part as "..consist{ing} of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government."

    July 27, 2012, IMF Staff Discussions Note "What Lies Beneath: The Statistical Definition of Public Sector Debt An Overview of the Coverage of Public Sector Debt for 61 Countries"(PDF) defines "Currency and deposits":

    Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government. Although all government subsectors hold currency, generally only the central bank issues it. Deposits are all claims, represented by evidence of deposit, on the deposit-taking corporations (including the central bank) and, in some cases, general government and other institutional units.

    On May 27, 2011 "Public Sector Debt Statistics: Guide for Compilers and Users (Google Books) was issued by the IMF Inter-Agency Task Force on Finance Statistics which provided the following definition of "Currency and deposits":

    Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government. In some countries, commercial banks are able to issue currency under the authorization of the central bank or government, Currency constitutes a liability of the issuing units. Unissued currency held by a public sector unit is not treated as a financial asset of the public sector or a liability of the central bank. Gold and commemorative coins that are not in circulation as legal tender, or as monetary gold, are classified as nonfinancial assets rather than currency."

    The IMF definition of currency appears to be a derivative work of the European System of National Accounts from the European Commission in 2008. This document (Google Books) was drafted by European Commission, IMF, United Nations, World Bank and the Organization for Economic Co-operation and Development and defined currency as follows:

    "Currency consists of notes and coins that are of fixed nominal values and are issued or authorized by the central bank or government. (Commemorative coins that are not actually in circulation should be excluded as should unissued or demonetized currency.) A distinction should be draw between domestic currency (that is, currency that is the liability of resident units, such as the central bank, other banks and central government) and foreign currencies that are liabilities of non-resident units (such as foreign central banks, other banks and governments.) All sectors may hold currency as assets, but normally only central banks and government may issue currency. In some countries, commercial banks are able to issue currency under the authorization of the central bank or government."

    The Manual provides some history on this document and states that:

    In 2000, the International Monetary Fund (IMF, or the Fund) published the Monetary and Financial Statistics Manual (MFMS), which was the first volume of its kind in the field of monetary and financial statistics.

    The IMF appears to recognize the difficulty in defining or "classifying" certain financial instruments:

    This Manual contains additional discussions on borderline cases in the classification of financial assets and liabilities.

    Further, the IMF is willing to reclassify (i.e. redefine) some of these instruments:

    An important revision concerning financial instruments is the reclassification of the special drawing rights (SDR) allocations to the Fund's member countries, from equity to long-term foreign liability. The change was introduced in August 2009 in the monetary data compiled by countries, with historical data having been revised correspondingly. Previously, SDR allocations were recorded as a unilateral transfer from the IMF to its member countries, and in monetary statistics recorded as part of equity.

    This change is particularly interesting as we have seen headlines such as "IMF Bailout for Ukraine and a New World Currency" from the New American in regards to the April 30th Announcement by the IMF "IMF Executive Board Approves 2-Year US$17.01 Billion Stand-By Arrangement for Ukraine, US$3.19 Billion for immediate Disbursement"

    Robert Wenzel of Economic Policy Journal was quoted by New American as follows:

    It signals fear on the part of U.S. government officials that the dollar is slowly losing its luster as a reserve currency. U.S. officials are trying to nudge the SDR as the alternative to the dollar because they will still maintain significant influence with regard to the SDR, as opposed to some other currency taking hold in parts of the world as a reserve currency (the [Chinese] renminbi?) or gold returning as an important reserve. China and Russia are both presently accumulating gold.

    In an IMF blog post from September 24, 2009 entitled "Reserve Currencies in the Post-Crisis International Monetary System" (brought to my attention from Bitcoin Magazine article "

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    Categories: Guest Blog

    Overstock to Cryptostock

    August 12th, 2014 by daniel

    Orignal (dhimmel):

    The crypto-currency industry has been abuzz ever since Wired published an article entitled Overstocks Radical Plan to Reinvent the Stock Market With Bitcoin. Patrick Byrne, CEO of Overstock.com, has seen firsthand how Wall Street has been corrupted to the core, and hes eager to do something to fix it. He has identified two primary sources of corruption: centralized clearing (exchanges) and fractional reserve banking. These systems enable unscrupulous insiders to sell shares in companies that dont exist while allowing investors to exploit loopholes in stock settlement, such as naked short sales, harming public companies and the economy as a whole.

    The primary question Byrne has been concerned with is, How might a public company go about issuing a crypto-security? Earlier this year, he and others at Overstock held discussions on this very subject with developers of Bitshares and Counterparty, platforms that aim to extend Bitcoin technology to enable securities issuance and trading without the need for third-party brokers or centralized exchanges. To foster discussion on what might be involved in issuing a cryptosecurity, Overstock recently launched a web page editable by anyone. The new webpage has sparked a wiki-war over the merits and drawbacks of a dozen or so Bitcoin 2.0 crypto-security platforms either on the market or close to launch. In my opinion, two systems, NXT and BitShares X, appear to have emerged as the leading contenders in the Overstock wiki arms race. Both of these systems provide built-in, decentralized exchanges that allow users to issue their own assets (though the SEC may call the assets securities, depending on whether issuers make any promises with respect to the assets).

    Do any of the existing technologies offer a ready-to-go solution with which a public company could list a new crypto-security? At the current time, none of the existing systems seems to meet all of the regulatory and business requirements for a successful crypto-security issuance. Even if a satisfactory platform did exist, a crypto-security issuer would no doubt need to work closely with developers to customize their blockchain to fit their particular circumstances and goals.

    In my opinion, the primary difficulty with existing platforms is that, in most jurisdictions around the world, it is illegal for a public company to issue shares that function effectively as bearer shares. The essence of bearer shares is that they are freely transferable securities that are owned by whomever holds them, and by possession alone they demonstrate participation in a company. By contrast, with registered or conventional shares, the name of the owner is included with a share and will also be entered in the registry of company shareholders. Changing the ownership of conventional shares requires a change in the share endorsement and registry.

    With bearer shares, since no name is included, any person who holds them in their possession is recognized as the owner. If an owner of bearer shares wishes to transfer them to a third party, it suffices to just hand over the relevant certificates. There is no need for any paperwork or changes to the registry of the company (except for anti money-laundering measures in certain jurisdictions) because only the amount of bearer shares that were issued to create the company and their numeration are shown, without making any reference to their owners. Thus, transference of bearer shares is similar to the operation of a cashiers check, whereby any person presenting it can collect the amount contained therein.

    The legal and regulatory measures many countries and organizations have been enacting against money laundering and tax fraud have created a significant stigma around bearer shares. Pressure on the governments of widely-used tax havens has forced most offshore jurisdictions to restrict the use of bearer shares. Normally, these constraints take the form of rules that serve to immobilize securities. That is, bearer shares are required to be in the custody of banks, trust firms, or a registered company agents who usually must maintain a record of the owners. The objective of such measures is to keep track of any change in ownership of the company and to be able to determine at all times who holds the legal ownership. With such restrictions, not only is the raison-detre of bearer shares lost, but they are often not in the hands of their rightful owners, making their transmission more complicated.

    How to Legally Issue a Crypto Security

    The solution to Byrnes problem lies in finding a crypto-system that supports the issuance of registered or conventional shares for which the owners names are included and tracked in the register of company shareholders. In effect, the crypto-systems blockchain itself would serve as the register of shareholders.

    While some crypto platforms, such as BitShares with its TITAN technology, already enable users to transfer shares to other users by account name rather than account number, no system currently in use supports the restriction of share ownership to certified identities. The BitShares system aims to be the first to provide the market with a practical, easy-to-use solution to this critical problem.

    The solution implemented in the BitShares system would be very simple. An Identity Authority would be required to sign a BitShares account with a certification that the owner has provided the necessary Know Your Customer documentation. Then, the BitShares account would need to digitally sign the shareholders agreement and release the shareholders identity information to Overstock. After these signatures were place, then--and only then--would the blockchain allow a particular account to buy, sell, send, or receive the relevant securities. Such a system might not seem ideal from a crypto-anarchists point of view, but from the perspective of a company like Overstock it would help them achieve a primary goal: the creation of an honest and transparent securities market, one that would be provably free of fractional reserves, naked short sales, and high-frequency trading.

    Better Market Algorithms

    Byrne says that one of the things hes trying to eliminate is high-speed trading that serves no real purpose

    In todays world of computerized trading on Wall Street, the markets move at nearly the speed of light, with trades executed in milliseconds. This type of speed is not possible in a decentralized system because, even moving at the speed of light, information would need 200 milliseconds or so to circumnavigate the globe.

    The speed barrier faced by decentralized systems is no problem for Byrnes vision; indeed, it is consistent with his goal of eliminating high-frequency trading. In fact, trading speed is not the real issue facing decentralized trading systems. The critical issue instead is how to remedy a fundamental flaw in the order-matching algorithm that traditional stock exchanges use. What is a market price, really? It is fundamentally a collective judgment about the value of a company. As such, it should only change when new information becomes available and can be processed by the shareholders themselves. Human judgement cannot possibly operate at 200 milliseconds, and it is challenged to operate on the shortest time intervals (10 seconds) currently supported by BitShares or other decentralized blockchain systems.

    High-speed trading is the result of Wall Street insiders attempting to front-run orders placed by people who have access to real information. When someone learns some news that causes them to want to buy, a high-frequency trader can quickly see the buy orders within milliseconds, enabling them to place automated trades to scoop up any asks lower than the buyers bid and then sell to the buyer with almost no risk. This is just one of the many games that high-frequency traders may engage in.

    BitShares confronts this problem by implementing a new matching system that effectively eliminates front running by insiders. All executed orders always receive the price that was requested--nothing more and nothing less. There is no opportunity for high-frequency traders or front-runners to squeeze risk-free profit out of market participants by executing orders that steal some of the overlap between the bid and ask. Traditional order-matching algorithms that promise to give a trader the best price below his bid are an illusion because anyone else located physically closer to the exchange can capture much of the gains with little or no risk, leaving the buyer with little more than he asked for.

    In essence, the blockchain becomes the ultimate insider. What this market algorithm does is take all of the surplus that could have been earned by front running (the overlap between bid and ask) and collect it as fees for the network. This algorithm ensures that market participants place orders at exactly the prices they are willing to pay based upon their opinion of fair value. As a result, market participants now face less price risk in the execution of their orders. By removing the profit potential from front-running, BitShares is the only system to date that is less likely to be vulnerable to attacks by high-frequency traders attempting to squeeze risk-free profits out of bid/ask overlap.

    A beneficial side effect of the BitShares matching algorithm is that traders attempting to manipulate the market by walking the book in a single trade will face a much higher cost than traders who walk the book at a slower pace. Thus, once again, the trading algorithm implemented by BitShares punishes fast traders and rewards value traders.

    Eliminating Fractional Reserves

    There is one other aspect that companies looking to list their shares on a decentralized exchange must consider: what will the newly-listed shares be traded against? In the case of all existing crypto-security systems (except for the soon-to-be introduced BitAssets in BitShares X), the only thing that new company shares can be traded against is shares in the system (e.g, units of NXT) or shares in other assets listed on the system. This means that if Overstock wanted newly-issued shares in a crypto platform to trade against USD, then someone would have to issue bearer bonds denominated in USD on the platform. These bearer bonds would be a promise to pay $1 on demand and thus would no doubt be a second highly-regulated security.

    In this scenario, Overstock would likely have to issue its own Overstock USD bond to trade on the system against the own shares. This once again opens up an enormous regulatory challenge centered around Know Your Customer laws. If Overstock USDs are not part of the solution, then the only alternative would seem to be USDs issued by some exchange that is subject to regulations and potential fractional reserve issuance.

    Fractional-reserve issuance is one of the primary issues Patrick Byrne has identified that needs to be resolved. It is counterproductive to rely on crypto-IOUs for users to trade in a newly-issued crypto-stock. After all, using a blockchain for order matching would seem to be of little advantage if management of IOUs still requires relying on third parties. Furthermore, absent crypto-dollar IOUs, the only assets left for Crypto-Overstock shares to trade against would be other crypto-assets that would have market capitalizations equaling only a small fraction of Overstocks.

    Eliminating the need for cyrpto-IOUs is where BitShares X, with its internal BitUSD asset collateralized by shares in BitShares X itself, provides a unique advantage over all other crypto systems on the market or in public development. BitUSDs are not an IOU issued by a central party. Rather, they are a crypto-asset that has no counterparty, is not a security, and confers no legal obligation to any party. They are created by free market forces, and by design each unit of BitUSD is collateralized, i.e., backed by 1.5 to 2 dollars worth of BTSX and fully backed by the Bitshares network.

    With BitShares X, companies like Overstock can allow their shares to trade against trust-free assets pegged to the dollar, gold, silver, or other national currencies. This provides a significant advantage over all other systems known at this time.


    In the near future, the BitShares X system, with its certified accounts and collateralized assets such as BitUSD, will be able to meet the regulatory, philosophical, and business requirements outlined by Mr. Byrne. BitShares X will resolve the problems arising from fractional reserve banking, naked shorting, and high-frequency trading manipulation. An equally important advantage of BitShares is that its developers are not simply faceless identities hiding behind anonymity on the internet; the leaders within the BitShares ecosystem are real people who will be able to draw upon their expertise to help customize solutions to suit the needs of Overstock and other public companies.

    As exciting as it would be to see Overstock or another company issue a crypto-stock in the next few months, I think it would do far more harm than good. Careful evaluation of the various issues and risks from regulatory and business perspectives can help ensure that the amazing potential benefits of being able to issue shares on a crypto-ledger are realized.

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    Banks Issue Bitcoin Report: Bitcoin Community Absent

    August 11th, 2014 by bcohen

    only publish between 3PM and 4AM Pacific Time

    Recently I took out Twitter to note my surprise that only a handful of folks have bothered to watch the "Conference of State Bank Supervisors Public Hearing on Virtual Currencies" on YouTube which was part of a "CSBS Emerging Payments Task Force Public Hearing on May 16, 2014". This was a week after the Federal Advisory Council and the Board of Governors of the Federal Reserve met and discussed Bitcoin at great length at their quarterly meeting. The speakers were announced on May 5. This becomes even more surprising as the U.S. Government Accountability Office linked to the the hearing in its blog report "Risks of Virtual Currencies" in its "Watchblog: Following The Federal Dollar." I guess its a Watchblog with no one watching?

    Only 30 Views - YouTube : Conference of State Bank Supervisors Public Hearing on Virtual Currencies? https://t.co/4IdtSNSipR

    — Brian Cohen (@inthepixels) August 8, 2014

    At the public hearing, Megan Burton, Chief Executive Officer, CoinX noted the overwhelming obstacles that they encountered with banking institutions. Though you probably wouldnt know this if you read the transcription of the hearing (PDF) which erroneously credits Annemarie or Annemarie Tierney, EVP Legal and General Counsel, SecondMarket with the comments:

    ... We've actually been turned down by about 61 banks now. That's overwhelming. We never get to the word cryptocurrency. We state the word MSB and the conversation halts...

    And further,

    I wouldn't say that it's specific to this panel that you see before you today. I think it stems specifically to us being put in a category of high risk. In this meeting, what was fascinating was the fact that when I talk about the transaction flow that we could potentially have, the sheer volume of what would go through...A community bank is typically not equipped to be able to handle that level of transaction volume, nor do they have the insight into my business to know how to gather enough information at the KYC process to know who we're touching and what we're doing.


    There needs to be a bridge between where we are as a MSB in a high risk category and where the banks are and how they're being regulated to be able to facilitate better communication between the two.

    Burton's comments on community banks is interesting. When larger institution are rejecting Bitcoin companies applications they are putting additional pressure on smaller banks, i.e. community banks who are being approached to fill this void.

    And what can community banks use as guidance when dealing with these newfangled Bitcoin companies?

    Well, on June 23, five weeks after the Conference of State Bank Supervisors Public Hearing on Virtual Currencies, the ICBA or Independent Community Bankers of America Clearing House and The Clearing House (TCH) issued a thorough twenty five page white paper entitled Virtual Currency: Risks and Regulation (PDF). This report is also available as a PDF through short URL at www.icba.org/virtualcurrency.cfm as well as the TCH website.

    The Independent Community Bankers of America is the nations voice for more than 6,500 community banks with nearly 5,000 members, representing more than 24,000 locations nationwide and holds $1.2 trillion in assets, $1 trillion in deposits, and $750 billion in loans to consumers, small businesses and the agricultural community.

    And further, ICBA member community banks create symbiotic relationships with the communities they serve, favor local decision-making, while adhering to the highest business practices and ethical standards, and support a democratically governed association where each member bank has a voice and a vote&

    The Clearing House according to its website was {e}stablished in 1853 by the nations leading banks, The Clearing House originally functioned as the de facto central bank for banks in the United States long before the Federal Reserve was formed&

    and as noted in the white paper,

    The Clearing House is the oldest banking association and payments company in the United States. It is owned by the worlds largest commercial banks, which employ over 2 million people and hold more than half of all U.S. deposits. The Clearing House Association L.L.C. is a nonpartisan advocacy organization representingthrough regulatory comment letters, amicus briefs and white papersthe interests of its owner banks on a variety of systemically important banking issues. The Clearing House Payments Company L.L.C. provides payment, clearing, and settlement services to its member banks and other financial institutions, clearing almost $2 trillion daily and representing nearly half of the automated clearinghouse, fundstransfer, and check image payments made in the U.S.

    The white paper also makes reference to the Conference of State Bank Supervisors:

    ...A large number of U.S. states currently participate in the Nationwide Mortgage Licensing System (NMLS), a web-based utility operated by the Conference of State Bank Supervisors State Regulatory Registry, through which participating states and the federal government ...has recently been expanded to permit states to utilize the system to administer licensing of payday lenders, money transmitters, check cashers, and other types of consumer financial service providers...The existing NMLS infrastructure could be expanded to include licensure of virtual currency market participants..

    Perhaps it is a bit surprising that ICBA was involved in drafting the report because while it was being drafted, Cary Whaley, Vice President of payments and technology policy for ICBA told Bloomberg news in Bitcoin Breakthroughs Studied by Banks the Currency Is Out to Replace that they had no interest in using Bitcoin:

    That reputation makes banks reluctant to use the digital currency directly, said Cary Whaley, a vice president at the Independent Community Bankers of America. While virtually none of the groups members are interested in using the digital money, a small number are examining its concepts, he said&

    However, the regulatory scrutiny that community banks face has been compared to that of virtual currency upstarts in Informationweek Bank Systems & Technology How New York State Is Looking to Regulate Bitcoin as well as PaymentsSource New York Sees Bitcoin as a Catalyst for Modernizing Regulation; both of which use NYDFS as a reference. And shortly after the report was released there were grumblings on BitcoinTalk about banks and in particular community banks interest in Bitcoin.

    Too big too fail doesnt mean too small to succeed. Community banks importance to the financial system became clearer during the 2008 financial crisis which illustrated what happens when banks become too big to fail. In July, the Senate approved an amendment to reserve a seat on the Federal Reserve Board of Governors for an individual with community banking experience. It is interesting to note that OTC Markets Group Inc which operates financial marketplaces for 10,000 U.S. and global securities recently announced the first banks to trade on the OTCQX marketplace under a new streamlined qualification process for U.S. community and regional banks. This also happens to be where SecondMarket (i.e. Bitcoin Investment Trust) is proposing to launch a bitcoin investment fund for ordinary investors in competition to the Winklevoss Bitcoin ETP commonly referred to as an ETF.

    A statement of purpose for Virtual Currency: Risks and Regulation succinctly explains the goal of this document:

    The purpose of this white paper is to promote consideration of how existing regulatory regimes in the U.S. may be applied to virtual currency, virtual currency system participants and products, and virtual currency transactions.

    I hand picked some additional quotes from the paper and found the footnotes particularly interesting:

    Under the current federal regulatory regime, players in the Bitcoin system are not subject to safety and soundness oversight, and no entity in the Bitcoin system is yet large enough to be subject to oversight as a systemically important institution or utility, even were such regulations applicable.


    Live market capitalization of 158 convertible virtual currencies can be viewed at https://coinmarketcap.com 


    Primary sources for this section {The Bitcoin System and Bitcoin Transactions.} are the Nakamoto paper cited at fn. 7, above; CoinDesks A Beginners Guide to Bitcoin (available at http://www.coindesk.com/information/); and Blockchain.info, which hosts the publicly searchable blockchain database and technical information regarding Bitcoin mining.


    Given the lack of international consensus regarding classification and treatment of virtual currencies, the regulatory approach ultimately adopted by the U.S. is likely to have a significant influence on the shape of the global virtual currency economy in years to come.


    Notwithstanding the use of the term wallet, it is not necessary that users store their Bitcoins in their wallets. In fact, for security reasons, users are often advised to store a list of their Bitcoin serial numbers [sic] on paper, a USB key, or a non-internet-connected hard drive (all of which are referred to as cold storage or cold wallets) rather than in an online (or hot) wallet. The user must then load the Bitcoin into the wallet prior to using it for a transaction.


    ...in some cases, there will be no wallet provider associated with a Bitcoin wallet. Where there is no wallet provider, there is no entity that can be subject to regulation other than the user. Regulating the user would not likely be viewed as furthering the consumer-protection policy that motivates much of the existing payments regulatory framework.


    Given the limited size of the virtual currency economy, no virtual currency exchange or wallet currently is likely to satisfy the requirements that must be met to be eligible for designation as a systemically important FMU {Financial Market Utility} or as engaging in systemically important PCS {payment, clearing, and settlement} Activities.


    It is unlikely that exchanges that accept and maintain fiat currency accounts would be deemed to be taking deposits for purposes of U.S. banking laws, as (i) most exchanges that engage in such activity use a bank custodian model and (ii) most virtual currency exchanges are either located outside the U.S. and/or have established banking relationships with non-U.S. depository institutions.


    ...a team of core developers, led by developers allegedly appointed by Satoshi Nakamoto, has a leadership role in proposing changes to the Bitcoin protocol. However, that team has no authority to force the Bitcoin community to accept such changes.


    ...one existing unregistered virtual currency exchange advertises that it will be offering customers the ability to earn interest on the Bitcoins those customers deposit with the exchange at an attractive rate. In this regard, the exchange could be seen as offering a security (an investment contract) to its customers&


    ...While virtual currency market participants may eventually develop an insurer similar to the FDIC or SIPC, or may even be able to obtain insurance coverage from private insurers in a more de-centralized fashion, in the absence of a meaningful insurance fund, regulators should ensure that consumers and others engaging in transactions on virtual currency exchanges receive adequate warnings of the risks involved in that activity (e.g., that trading in virtual currency products on an exchange is unregulated and risky, and may result in the loss of the consumers investment), similar to disclosures required for penny stocks or even the Surgeon Generals warning regarding use of tobacco products.

    The white paper in part concludes that:

    This white paper has described certain of the risks faced by consumers and others that hold or transact in convertible virtual currencies, and has evaluated certain ways in which U.S. regulatory authorities may consider regulating virtual currency transactions, products and marketplace participants based on their functional similarity to other transactions, products and marketplace participants that are regulated. The failure of Mt. Gox earlier this year, and the value that may have been irretrievably lost in connection with that failure, serves as a perfect backdrop for this white paper. The aggregate number and value of virtual currency transactions and holdings in the U.S. is small relative to most other regulated payments transactions and trading markets. However, the emerging nature of the virtual currency marketplace creates an opportunity to develop and implement a regulatory framework to mitigate risk to consumers and others without unduly burdening innovation and while the structure of the marketplace remains malleable.

    Image Credit: Cigarette Box is an altered Flickr Image

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    Categories: Columns

    The Bitcoin Economy: Global, Connected, and Cooperative

    August 11th, 2014 by Buzzdron
    The Bitcoin EconomyGlobalConnected and Cooperative
    The Bitcoin economy represents many things, including a multitude of global and transformational triumphs. The best symbol of this combination – the example that sets the standard for Bitcoin, and is a reminder of the credibility of this alternative form of currency – starts with the virtual network of investors, mentors, executives and entrepreneurs responsible for this international phenomenon.
    Indeed, if you seek to contrast these benefits with the conventional world of venture capital and the subculture of Silicon Valley, if you want a clear alternative to the status quo and the financiers headquartered on San Hill Road – the multibillion-dollar backers of brands like Facebook and Twitter – my suggestion is simple: Redirect your attention from the bulldozed apricot orchards, long since converted into office complexes and parking lots off Interstate 280 in Northern California, and look at your laptop, smarphone or tablet, instead.
    There, in this digital domain, you will find the rise of innovative trading platforms, virtual wallets (for the transmission and receipt of Bitcoin) and ways to send remittances to friends and family throughout the Americas – all of it underwritten by experts with an appreciation for the union between technology and convenience.
    This model, which I have alluded to in previous articles, is one I champion not out of self-interest or monetary gain; it is one I support – and shall continue to do so – because it works. I refer, specifically, to Seedcoin (http://www.seedco.in), a virtual Bitcoin-incubator with a worldwide portfolio of investments.
    Again, I celebrate this organization because, given its proven record of success (more about anon) and dynamic nature, it signifies an important milestone involving the popularity of Bitcoin and the power of modern technology.
    Concerning the latter, and the ability to rapidly adapt to changing circumstances, it is this very characteristic – the freedom to call upon the wisdom of business experts and mentors – that transcends borders, nationalities and the traditional politicking for influence and guidance.
    According to Eddy Travia, Co-Founder and Chief Startup Officer for Seedcoin: 
    "As a global incubator, Seedcoin unites entrepreneurs with established leaders, who provide their counsel and assistance for newly launched companies. Our emphasis on fast-growing, Bitcoin-centric businesses – enterprises with the agility to succeed, and the infrastructure to rapidly respond to demands from traders, merchants and consumers – is a sign of the revolutionary developments underway in this virtual landscape."
    I second this comment because it redefines the way all companies should pursue financial support, business tutelage, and an international framework of marketing and promotions. 
    So, in lieu of making a pilgrimage to the denizens of Sand Hill Road, and in comparison to the physical limitations of geography (where location, not the superiority of the best ideas, trumps a group's likelihood to raise money), the Seedcoin ideal should inspire all manner of entrepreneurs.
    The Virtual Model in Practice: A Platform for Everyone
    A strong illustration of this point involves BTC.sx, a platform for the trading of Bitcoin derivatives. (This company is a personal favorite of mine because of two reasons: Transparency and flexibility. One governs all communications between BTC.sx and the public, while the other proves the assertion about the skill necessary to accommodate the swiftness of aglobal marketplace.)
    It is this nimble approach to technology and commerce that defines the Bitcoin economy, where freedom – the liberty to hedge against fluctuations in the price of Bitcoin, and enjoy adjustable rates of leverage when trading Bitcoin derivatives –  that underscores the vitality of this new word.
    In the words of George Samman, COO of BTC.sx:
    "The legitimacy of Bitcoin rests with its international influence and wealth of business opportunities, in which innovation is often well ahead of corollaries from Wall Street or other run-of-the-mill economic features. As a global platform, with a strong presence in Asia, we can immediately respond to and make adjustments for any number of events."
    I return to this theme about agility – I choose to repeat its importance – because it articulates the why and how of theBitcoin economy, which crosses countries and unites cities at the speed of the electron. 
    It is not the prisoner of dollars, yen, yuan, pesos or euros. Nor is it captive to the capriciousness of a market clouded by obscurity and overrun by manipulation.
    In the Bitcoin economy, at least the one actualized by Seedcoin and BTC.sx, there is, indeed, a level playing field. With openness and choice, there is a venue to succeed. 
    That promise encapsulates the essence of this issue, for the good of all and the satisfaction of a global audience. For these individuals – diverse in their interests, steadfast in their expectations and laudatory in their comments – now is a time of great excitement.
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    Categories: General, LTB News, Columns
    Categories: Columns

    Decentralized DNS: Politics of the Domain Name System

    August 8th, 2014 by mdw

    The Domain Name System (DNS) has become such a fundamental part of the Internet over the years, and yet it has also become more political than ever. In our introductory piece we introduced the main themes for this series, and in this article we explore the the specific issues of censorship, domain seizures, thefts and privacy. Decentralization can address these important issues in a direct way.

    Much of what is wrong with the status quo stems from the centralized structure of our DNS. From a political perspective it is a three-tired hierarchy. ICANN is in charge, at the center of it all. On the second level are the registries, like Verisign, who are in charge of Top Level Domains (TLDs) like .com.

    On the bottom tier are registrars, who provide retail services like domain registration to customers. They are proxies who typically present an assortment of TLDs for consumers to register. There are currently around 1000 registrars accredited by ICANN, and many have networks of resellers working with them. Think of registry operators as the wholesalers and registrars as the retailers.

    All these are eliminated or at least marginalized with a decentralized solution - there is just no need for them. People and companies are now empowered to register their domain names without going through intermediaries, and without being forced to adhere to the rules set by political bodies like ICANN.

    The hacker inside me likes decentralization architecture. It could be argue that much of the "political problems" we have today derives from the centralized nature of the DNS with the root. So technology like namecoins or other decentralized identifier system intrigues me. 
    - James Seng, March 2014 draft from ICANN's Technology Innovation Panel

    Vint Cerf explaining who controls the DNS

    Protecting Freedom of Speech

    Censorship is an important issue for us all. National governments are the primary concern here, with many exerting as much control as they can. Extreme examples include North Korea and Iran, where authoritarian regimes control virtually all available information.

    In countries where political speech is stifled, dissidents are often prevented from publishing anti-government opinions. The use of Tor in Turkey nearly tripled this past March in the wake of videos on youtube implicating government officials of trying to stage an event as pretext to declare war on Syria. Government officials also banned twitter in March by redirecting DNS queries, after leaked recordings surfaced with the prime minister apparently instructing his son to dispose of large amounts of cash.

    The situation in most countries is far more nuanced. It is all too easy to single out countries like Turkey and Iran for what many consider to be draconian censorship. But some level of censorship takes place pretty much everywhere, including less oppressive Western nations. Google, the world’s largest search provider, now discloses the number of requests they receive to remove search results.

    Luckily no matter the current level of censorship in a country, blockchain systems can provide a solution. Namecoin’s .BIT domains and BitsharesDNS upcoming .p2p domains cannot be seized or pointed to government sites against the will of the registrant. Even if a government seized control of the network through a 51% attack, it does not appear possible to change ownership of a blockchain-based domain name without being in possession of the corresponding private key.

    Next generation DNS like Namecoin are immune to censorship! People can now publish political content without worrying about government censors seizing their domain names. We cited political dissidents but this is a critical assurance used by journalists operating in hostile environments as well. This freedom to speak out will certainly be used by bad actors too, but the benefits are indisputable.

    Domain Thefts

    People often believe that theft of domain names is rare, because there is a lack of supporting evidence. There is anecdotal evidence, and a few high profile cases like sex.com (video). There was even a conviction in the much publicized case of the P2P.com domain name theft.

    Most people own very few domain names and have never experienced domain theft firsthand. No reliable data on domain thefts seems to be available. The registrars are in a position to have information about this, but have a strong disincentive to publicizing incidents that might damage their reputation.

    "As far as I know, no one has a really good handle on just how much of a problem domain theft is. We hear of occasional instances of high profile thefts that catch everyone's attention, however I'm sure the vast majority of thefts go unreported." 
    - Ron Jackson, Editor and Publisher, DN Journal

    It is typically registrars that engage in bad behaviors which result in lost or stolen domain names. However, both registry operators and registrars can both behave in questionable ways, like registering domain names right after their customers search for them.

    Registrars have been caught stealing users' domain names too. Bad actors lose their accreditation when caught, but that is small consolation to a person or company that no longer has their domain names. If only these domain names had been registered on a blockchain! Domain name theft in the world of crypto-DNS requires stealing a private key. Theft of a .bit or .p2p domain name cannot occur as result of a company abusing its authority.

    Domain Name Seizures

    Registrars commonly seize domain names at the behest of government agencies or judicial systems. There are instances when many people feel it can be considered appropriate, but again this comes loaded with the potential for abuse. As mentioned earlier, although there is a nearly universal consensus on the undesirability of domains being used to host child pornography, it is less clear in matters involving intellectual property rights or political speech.

    The DNS pecking order goes something like this. The U.S. Department of Commerce has had the authority to approve changes to the Root Zonefile since it was inherited from the U.S. Department of Defense in 1998. ICANN awards contracts for management of TLDs to registry operators, who enter into contractual relationships with registrars.

    Individual domain names are sometimes seized as result of court orders when the domain is operated by a registry which operates in that jurisdiction. The .COM registry for example, is run by Verisign, a U.S. Corporation, and can therefore be compelled to comply with U.S. federal court orders.

    The U.S. Department of Homeland Security has seized domain names on several occasions, when illegal activities are alleged. And in fact, other nations routinely seize domain names as well when a registry is located within their jurisdiction.

    Thus the rationale for blockchain-based DNS, where domain names are independent of national jurisdictions. If a government agency wants to take control of a Namecoin .bit domain name, for example, how can they do it? It's basically impossible for governments, courts, registries or registrars to seize domain names in a decentralized system.

    Department of Justice took down 130 websites, Thanksgiving 2011

    Seizing Entire Namespaces?

    There are several types of extensions, and they are not treated the same. The two letter country code domains (ccTLDs) like .DE (Germany ccTLD) are administered entirely as the national governments decide. This is in stark contrast with how Sponsored Top Level Domains (sTLDs) are forced to abide by very restrictive terms and conditions.

    Yet a U.S. federal court is currently being asked by plaintiffs in a lawsuit to compel ICANN to seize control of the ccTLDs of Iran (.IR), Syria (.SY) and North Korea (.KP) to satisfy judgements against those nations. At stake is the fate of three entire namespaces, despite there being virtually no functioning websites in North Korea.

    This raises legitimate questions about Internet governance. In blockchain-based DNS, federal courts have no agency. Even in the case of BitsharesDNS, where the underlying technology is being developed by a for-profit company, it seems that they cannot be compelled to intervene because they simply don't have that capability.

    Protecting Privacy

    Who is that domain name registered to? It's a question many would like to know. Registration data is generally stored by the registry operator, and can be accessed using a protocol called WHOIS. Providing accurate information including name, street address and phone number is required by ICANN. Failure to comply is grounds for forfeiting the domain name.

    The status quo is convenient for law enforcement to help locate lawbreakers. It also makes life easier for intellectual property holders to identify those who they believe to be infringing. The current system is also of great benefit to prospective buyers who wish to negotiate a domain name sale, or potentially anyone interested in contacting the domain owner. But the status quo offers no good options for individual registrants to protect their private information.

    In fact, the current scheme has serious disadvantages for individuals. We make this distinction between individual and corporate registrants because the latter can use corporate contact info and no personal information is exposed. Individual domain owners are often targets for scammers because their personal information is required to be public. For example, an easy way to bootstrap a botnet intended for mass spamming is to harvest the millions of email addresses publicly available in WHOIS records.

    Over the years registrars began to sell private registration services. This service typically involves replacing the ownership data on the official WHOIS record with that of the registrar. This scheme unfortunately requires even more trust be extended.

    Technically these registrars are in a position to make an ownership claim, which might be important if the owner disappears from public view. More troubling still is the notion that they keep the real ownership info in their database. Those private details must be kept hidden from both misbehaving employees as well as hackers.

    Two Systems Going in Different Directions

    ICANN wants to replace the current system with one where more detailed contact information is required from registrants, but data lookup would be granted only for "permissible purposes" to authenticated and approved users. Despite thoughtful objections of the sole privacy advocate on the working group which came up with this proposal, both registrants and agents looking up information would need to be clearly identified in the latest proposed scheme.

    Namecoin requires no information from the registrant to simply reserve a domain name. Possession of the private key corresponding to that domain’s address on the blockchain is the only thing required. Registrations are pseudonymous in that no identifying information is available by default except that particular tokens can be tracked through the blockchain. With some effort, a registrant could come to posses tokens which could not be traceable back to any personal identifier.

    But this is not an anomaly. According to project lead Nikolai Mushegian, "all domains are anonymous by default" in BitsharesDNS, meaning that personal identifiers are only public record if the registrant chooses to provide that info. In their soon-to-be launched system domain names will be pseudonymous, meaning that they are by default only associated with internal identifiers.

    A registrant in either the Namecoin or BitsharesDNS systems can put in specific contact details entirely at their discretion. Meanwhile ICANN steadily continues down the path of eroding user privacy in order to appease the interests of big business.

    A quick reminder, this is a multipart series on decentralizing the Domain Name System. Stay tuned for the next installment as we explore how decentralized DNS allows us to solve some of the most pressing online security issues we face today.

    If you enjoyed this article and want to show your gratitude you can do so by signing up to Lets Talk Bitcoin using my referral code: http://letstalkbitcoin.com/?ref=52b52db8

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    Categories: General, Guest Blog, Columns

    Bitcoin and Intrinsic Value

    August 6th, 2014 by Tron

    Warren Buffett, generally a shrewd investor, surely knows the financial definition of intrinsic value, but inexplicably he does not understand Bitcoin. How do I know he does not understand Bitcoin? Because he called it a "mirage," said it had “no intrinsic value,” called it “a joke,” and compared it to a check. A check? Bitcoin, the network, can be compared to the entire banking system that processes a check, which includes the clearing system, the image scanning system, the ATM network, the credit and debit system of the Automated Clearing House, the SWIFT financial messaging system, and ultimately the institutions that we trust to safely track our balances and return our deposited funds upon request.

    Warren’s uninformed and off-the-cuff remark sparked a conversation about the intrinsic value of Bitcoin. We need to begin by defining "intrinsic value," because it has a different definition for a financial investor than it does for most noninvestors. Investors look at the book value and add the discounted cash flow to arrive at the intrinsic value, which is often different from the market value. Most noninvestors think of intrinsic value as the value of a thing itself. Noninvestors often cite the example of gold, or of a knife that can cut, splice, and dice. Gold can be used for industrial purposes. It is extremely malleable, shiny, and contains other unique physical properties. I posit, however, that gold’s real value lies in its scarcity and in its worldwide acceptance as a store of value. Knives, on the other hand, are great tools of utility value.

    Mr. Buffet’s ability to calculate the difference between intrinsic (or fundamental) value and market value gives him a real investing edge. I respect his investing acumen and I mean no disrespect for him when I declare he is wrong about Bitcoin.

    Perhaps if Warren thought about Bitcoin differently, he might come to a better conclusion. He regularly purchases stocks, so he understands that market. A stock, based upon the investor's definition of intrinsic value, represents partial ownership in an ongoing business that holds assets (book value) and makes money, which can be included in its value when discounted for time. Once Mr. Buffet learns a bit more about Bitcoin, I hope he will realize that upper-case Bitcoin, the network, holds tremendous value because it can be compared to a banking system, or a worldwide collection of banks and all of their systems. While lower-case bitcoin, the currency, can be compared to an index fund or an exchange-traded fund, which would indlude all the bitcoin companies in the Bitcoin ecosystem.

    Value is subjective and contextual. It is subjective because it depends on the feelings and opinions of the person doing the valuing. It is contextual because it depends on the circumstances and setting of that person.

    Let’s explore this with a simple example. Imagine you are stranded alone on a desert island with no internet connection. You are hungry, thirsty, and you cannot get off the island. Three things wash ashore -- a laminated-paper bitcoin wallet that gives the private key for an address that holds 100 BTC, a shoebox full of freshly printed US $100 bills, and a crate containing a knife, some flint, nine hens, a rooster, and several large sealed bottles of crystal-clear purified water. Which has the most value -- to you?  

    Now change the context, and imagine you just polished off a meal at a five-star restaurant and you ate too much dessert. You’re faced with the choice between the same items, but now you might want to count the $100 bills and check the public bitcoin address to decide whether you would rather take the bitcoin or the shoebox full of cash.  

    OK, one last example. This time you have eaten a nice meal while reading about China and Russia striking a deal to use their native domestic currencies to settle trade and purchase energy in the form of gas, oil, and coal. You are faced with the same choice of food, bitcoin, or dollars. But now you’re rattled. You think, “What if the dollar is losing its status as the global-reserve currency? What if dollars come flooding back to the United States as other countries choose not to hold them? What if government numbers for inflation are being blatantly manipulated?” You give it more thought, and you reason that you could take the dollars and buy stock in global companies in order to protect yourself. Then it hits you: “This is why the stock market is doing so well. It is not in recovery at all. People are shifting to stock assets in the face of a manipulated and devalued currency.” Your choice now comes down to buying global stocks, or taking the bitcoin. You look at the history of Bitcoin over the last few years, compare it to the S&P 500, and you make your choice without even needing to count the dollars in the shoebox.
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    Categories: Columns

    Using Bitcoin in Patagonia

    August 5th, 2014 by arturodelia

    With Argentina in the news a lot, it's hard to ignore the need they have to find a better way to do business. Especially when printing more pesos just isn't going to make the problem go away. One small store owner in the Patagonia has taken the opportunity to accept bitcoin instead of the depreciating Argentine peso.

    So I headed down to the beautiful town of San Carlos de Bariloche, famous for its mountains, enormous fresh water lake and Swiss style town, to make my first purchase with bitcoin. Besides, I've been studying bitcoin for over a year now and I hadn't made my first bitcoin purchase yet!

    I bribed my family with a promise to get them goodies from the store to come with me so they can not only see how cool it is to use this new international money, but finally see in action the very technology I was bragging about for so many months. The downtown located Maxikiosco is a quick stop for snacks on the go. Just a few blocks from where we were staying so it was perfect.

    I opened the "Aceptamos Bitcoin" branded door and right away in an Argentnian tone and look spoke to the owner asking in spanish, "So you really are accepting bitcoin?". A slow smile came to his face. Little did I know that his store was becoming popular with clients paying with bits.

    He confirmed and we selected our items. So I put all the goodies on the counter and he counted quickly the final sum in pesos... and that's where the ease of bitcoin came to a screeching halt.

    If you don't yet, Argentina has two rates. The oficial and the "blue" rate. The first is the oficial rate of the peso to the dollar (and any other fiat for that matter). The second is the "black" market rate that fluctuates depending on the actual demand on the dollar (Mycelieum has confirmed with me that they are planning to put a blue rate in their wallet soon).

    Bitcoin is exchanged at the blue rate of course, so that means converting the peso to the blue rate to the bitcoin. After a few minutes of this, we confirmed how many bitcoins... or milibits... and that's the thing, he hadn't moved over to milibits yet, even though the small purchases he sells would be more convienient for him. But that was easier than trying to scan the small QR code on is small iPhone4 (even my 4.9" android is too small for me!). He was going to dictate the account to me but I halted him. I have a strict rule of no manual inputs.

    That's just rediculous in this day and age. So he wanted to text me the address to my cell phone so I can copy and paste it. It took me a second but I did notice eventually I had no cell signal in his store... which meant I also needed wifi to confirm the transaction with him. My family looking at me now is doubting they were going to get their promised drink and snacks.

    "Fear not! Over 20 years in the IT industry, I've seen worse!", I exclaimed. He had wifi. I tried to connect to it. No luck. I had seen this before, cell phone hung, waiting for an IP address. I wasn't about to try to start troubleshooting his wifi router no matter how easy it could be. I wanted my drink now.

    He said he knew another wifi (possibly the neighbor's?)... and success! Alright, now back in busines. I noticed he was using bitpay on his laptop. At this point, I took over and said to him to just show me the QR code from his laptop screen. I scanned that in a jiffy and then sent him the milibits.

    I was not expecting the speed of which the propagation occured, for no faster than me entering my pin to confirm the sending amount, did I hear a beep on his laptop. That was fast. He gave me a huge "We Accept Bitcoin" spanish sticker as a gift. I had my first bitcoin transaction, and it was as cumbersome as all the podcast stories I've heard everyone has had for their first time as well.

    Now my bitcoin address had an output. Not a virgin anymore. We both agreed no need to wait for any confirmations, that's just more peace of mind than a necessity for these kind of transactions.

    I had to thank my family for their patience and even going back there again later in the day and made another transaction much smoother (saved wifi and bitcoin address helped!), I realized that there is a much better setup small business owners can have if they do the following:

    1. Open wifi called "bitcoin". If we all set aside an open SSID (seperate from your corporate/home network), we could have also the largest open network that not only advertises for free the bitcoin network, but as well, help previous bitcoin cutomers automatically connect to a network for propergation confirmation.

    2. Screen facing customer with the requesting QR code. Best if it would itemize each purchasing item with a total in the fiat/bitcoin amount. The store owner should make the requesting amount and have that displayed in large on the screen so that the customer only needs to scan it and confirm the send. That would make for a much smoother transaction and even faster than credit cards or cash (if you need change). I have other ideas for multiple checkouts with one cashier but that's another post.

    3. Discount for using bitcoin. Although he is the only one accepting bitcoins, passing on the savings the merchant would have had to pay had the customer used a credit card, would help in their own marketing and also for the paying customer to opt in to pay for a miner's fee. I like the idea of paying the miner's instead of these multi-billion dollar companies.

    The bitcoin scene is growing in the south of Argentina. The best thing we can do is convert fiat slowly to it as a savings account (to avoid these rollercoaster violatilities), use it when possible (to encourage the economy to stay in BTC), and help others understand and use it. I average about 2 hours per new adopter in helping them understand, setup their new account, back it up, erase it, restore from backup and then do the first transfer. I remind everyone to have a method for your accounts to be accessed in case of your death so to not see the funds lost forever.

    Arturo D'Elia has been working in the IT industry for the last 21 years. He's currently volunteering freely and independantly in the Argentinian Patagonia to help people learn and understand bitcoin. Any donations for this cause is greatly appreciated! His profile can be found here: https://plus.google.com/+ArturoDElia

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    eBay and Microsoft Eye User-Created-Value Platforms Similar to LTB

    August 5th, 2014 by bcohen

    Original (dhimmel):

    !!!!! SENSITIVE TITLE - PASTE IN PLACE BEFORE PUBLISHING: eBay and Microsoft Eye User-Created-Value Platforms Similar to LTB !!!!!

    On July 9th, 2014, EcommerceBytes reported that eBay is considering "Compensating Users to Post on the eBay Boards. This was revealed when eBay held a Weekly Chat with the eBay Community Team on July 2nd:

    This week, the eBay Community team wants to hear your ideas about rewards & recognition for Community participation.

    EcommerceBytes noted that:

    In response to a question about what the eBay moderator meant, the moderator replied, For example, if eBay were to reward members for their Community participation, what types of participation should we consider? Number of posts? Number of correct responses?

    While EcommerceBytes said the move smacks of desperation, I will offer a different perspective. This is a paradigm shift whereby users will actually create and share value of the network and not just transfer (i.e. reallocate) value across it.

    The scope of eBays reward program eBay Bucks could expand beyond purchasing products into the realm of rewarding message board users. While eBay bucks is currently a walled garden it is possible that we could see it float through the gift token that I discussed over at Bitcoin Magazine in eBay Files Patent Application for Programmable Money. Or less likely but still possible, eBay could let Bucks be freely traded on a platform such as that proposed by IBM (see IBM Building e-Currency Platform, including Bitcoin.

    In what seems to be synchronicity, eBay posted the weekly chat announcement on June 30th which was just a couple days after Lets Talk Bitcoin! (LTB) launched LTBcoin (see the announcement at Introducing LTBCOIN, our new crypto-rewards program for LTB Creators and Community. LTBcoin according to the tokens website is a brand new kind of thing. It is a crypto-rewards system where people who help LTB to be useful are rewarded for their efforts. And its built on Bitcoin! In describing LTBcoin (LTBc), I have said Purchase not required. Participation is (Twitter). In fact, you cant buy LTBc from Lets Talk Bitcoin! However, everyone and anyone who participates in the Lets Talk Bitcoin Network (LTBn) is rewarded and distributed LTBc based on their participation in the network. Content creators receive the most amount of LTBc for their efforts but anyone can submit content (blog posts, podcasts and videos). Similar to eBays value proposition, 2.25 million LTBc were initially distributed to LTB community members with five or more forum posts and that registered a LTBcoin Compatible Address. LTBn is continually innovating and released Magic Words on July 17th in which a magic word is spoken on the podcast and listeners redeem the word on the Lets Talk Bitcoin website and are rewarded five times as many LTBc if they had read an article on the Lets Talk Bitcoin website...Yes, even reading an article on the website is worthy of an LTBc reward.

    According to the LTBcoin website, LTBcoin is a

    user-defined asset using the Counterparty protocol. Counterparty is built on Bitcoin and is secured by the Bitcoin network. Because of this, LTBcoin addresses are exactly the same as Bitcoin addresses. LTBcoin can be traded on the Counterparty distributed exchange for Bitcoin, XCP or other user-defined assets.


    Ethereum is a distributed application software platform often referred to as Bitcoin 2.0. While Counterparty works on top of the Bitcoin blockchain, Ethereum is not compatible with Bitcoin (also see Overstock.coms o.info How to issue a cryptosecurity. On June 4th, prior to Ethereums ether sale, Ethereum posted a YouTube video of Chief Communications Officer Stephan Tual entitled What is Ethereum?. This video is the explainer that visitors first encounter when entering the Ethereum website. Tual explains that:

    ...another interesting application of this concept {of distributed application software} is that today on Facebook if you help identify artists that subsequently become successful by pressing the like button that value goes to Facebook advertisers not the content producers, not you. On Ethereum on the other hand both the content creator and the early adopter will be rewarded for identifying that artist. Its a brand new revenue model that never been seen before and it can completely revolutionize the way we think about revenue on the internet today.


    One has to wonder what Reddit has in store for their community after it was disclosed on Reddit to much fanfare (i.e. it made the Bitcoin sub-Reddit front page) that Reddit is hiring a couple of Cryptocurrency Engineers. While it is conjecture on my part, the shift towards users not just participating in the network but creating value based on their interaction with it cannot be dismissed.

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    Categories: General, Columns

    Intro to Decentralized DNS

    August 4th, 2014 by mdw

    The Domain Name System (DNS) is the Internet's version of a phone book, allowing computers to lookup an IP address like from a given domain name like letstalkbitcoin.com. Today's Domain Name System is sagging under the heavy weight of political and technical problems. It has held fast for years, but worsening technical issues and growing concern over governance seem implacable in a system designed with centralized control.

    In this series of articles we intend to examine the key issues more closely, and look at specific initiatives in the crypto-currency space designed to alleviate the pain points or create new opportunities. We will be outlining some of the next generation DNS alternatives being built, and talk with some of the visionaries making it happen.

    But first, it is important to identify what the most serious problems really are. Which ones are intrinsic problems that any distributed naming system will exhibit? Which ones are shortcomings of centralized systems, such as we currently have?

    Freedom of Speech

    In most parts of the world speaking out against government censorship, corruption, or government policies is a risky proposition. By speaking out, we refer to publicly voicing dissenting opinions, published on a website for the whole world to read.

    In a world where thought leaders can keep a low physical profile, electronic censorship has become the de facto weapon of choice in the suppression of ideas and ideology. Mass access to these voices, and the censorship thereof both rely on using domain names.

    Today domain names are routinely seized for various reasons. Sometimes people are indifferent, or even supportive of this - in the case of child pornography websites for example. Sites filled with hate speech, promoting violence against ethnic, religious, racial, or other minorities are routinely taken down via domain seizures. Registrars are only too happy to comply with governments to minimize citizens' exposure to the ugliness that is hatred and bigotry.

    But this is a slippery slope. It is not clear that the system benefits us all when the censorship occurs because content is alleged to be in violation of copyright law or politically threatening. Is seizure of domain names justified when sites are being used to spread malware? Is revolutionary speech too destabilizing, and when can it safely be tolerated? The answer of course, is highly subjective.


    Over the years, the Internet Corporation for Assigned Names and Numbers (ICANN) has developed processes for making decisions which are highly inclusive of a range of stakeholders. Unfortunately the loudest voices get a disproportionate share of influence, and this has contributed to an erosion of privacy for domain registrants.

    Information about who is the registrant of record for a given domain name are currently accessible via a mechanism called WHOIS. ICANN requires this information, and the penalty for non-compliance or falsifying the info can be domain seizure. This is very convenient for corporate holders of intellectual property rights, in order to identify and go after those who are perceived to be infringing on those rights.

    There is a strong case to be made against requiring such disclosure from registrants. However, ICANN's Expert Working Group on WHOIS and Privacy recently published their report recommending the expansion of WHOIS in a way which further weakens privacy for individual registrants by requiring and exposing street address and phone number data.

    Internet Security

    Identity is at the heart of many online security challenges. "Who is that, and should I trust them?" is the most basic concern in many interchanges on today's Internet. Indeed, identity and reputation management are considered by some to be the holy grail of social interactions on the Internet.

    As users interact with websites which offer services and information, each side tries to determine the likelihood that the other is sufficiently identified, and that the interaction will be conducted safely. A potpourri of technologies is employed to accomplish this today, which is another way to say that we struggle mightily.

    Trust on the web today is primarily established using digital server certificates. The entity at the other end, with whom users interact, establishes a basis for trust by providing one of these. It will be signed by an even more trustworthy certificate authority. In case it is not yet evident, this system if fraught with peril and requires a lot of trust. The current system has proven over time to be untrustworthy.

    Another area of concern is the control structures. Registry operators are the authorities for top level domains like .COM. Root servers are those lynchpins which contain the authoritative DNS data for resolving domain names. They are both prime targets for attack, as well as central points of failure. There are other central targets in the system as well, including ICANN itself, which guards a private key used to sign certificates for these root servers.

    Domain Thefts

    Aside from the domain seizures that routinely occur, the risk of theft is always present in the current domain name system. The classic scenario is the compromising of a victim's registrar account along with an email account. The specifics could involve keystroke loggers, social engineering to access registrar accounts, registrar employee collusion, or plain old inadequate password management on the part of registrants or registrars.

    However it happens, when registrar accounts are compromised, the domain names are typically transferred to countries with less mature judicial systems, or less cooperative political leadership leaving the victims with little or no recourse.

    Assets secured on a blockchain work differently. Transferring control of assets involves presenting private keys. That is all. No password management, hacking servers, etc. The security of such an asset is completely up to the person controlling the private key.

    More Problems?

    There are other shortcomings to the current domain name system. But we have outlined enough here to give our readers a sense of where we expect to see blockchain-based solutions making inroads.

    Big changes are coming to the domain name system as we know it today. Our current system has been in place since the 1980's, and is ripe for change. In fact people have been working on blockchain based remedies and replacements for this thirty year old system that we have come to depend on.

    What will our global namespaces look like a few years from now? How similar will these systems be to our current one? Stay tuned as we bring you the ideas of some key visionaries who seek to rework this aging system.

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    Categories: General, LTB News
    Categories: General, Columns

    Solution to Sybil attacks and 51% attacks in Decentralized Networks

    August 3rd, 2014 by lainfinity
    Original (dhimmels):

    In the early days Internet started as a symmetric peer to peer decentralized network of computers. As time passed by, the Internet became more asymmetric and concentrated in a few centralized data centers with billions of PCs and laptops on the edges. The reason Internet started as peer-to-peer decentralized networks are scalability, high fault tolerance and resilience to censorship. However security is a major drawback in these types of networks as it is almost a certainty that malicious nodes will be joining the network from time to time. These malicious nodes can flood the network with invalid packets, thus preventing the packets from being delivered causing a simple flood attack.

    Another common attack is Man in the Middle (MitM) attack in which an attacker places himself between two peer nodes in the network. Such an attack can remain undetected, as long as the attacker remains passive. This also enables the attacker to listen to the communications between the two nodes. As a result, the attacker can assume the identity of both the peer nodes, compromise one or both nodes and try to infiltrate the network. 

    What are Sybil Attacks and Sockpuppets?

    Sybil attack is another security vulnerability specific to peer to peer decentralized networks as it is open and anonymous in nature. The attack is named after the subject of the book Sybil which deals with the case study of a woman diagnosed with Dissociative Identity Disorder. The main component of the Sybil attack comprise of creating a large number of pseudonymous identities. Once the identities are accepted as peers they try to gain control of the network and subvert the whole network from within. The network’s resilience depends on the main criteria which is how easy it is to create an identity and be accepted as a peer. As there is no 100 percent fail-proof firewall against these types of attacks, the best defense against sybil attacks is to make it as impractical as possible.

    Sockpuppet is a term that implies many online identities for the sole objective of deception in the online communities.

    A sockpuppet is an online identity used for purposes of deception. The term, a reference to the manipulation of a simple hand puppet made from a sock, originally referred to a false identity assumed by a member of an Internet community who spoke to, or about, themselves while pretending to be another person. A significant difference between the use of a pseudonym and the creation of a sockpuppet is that the sockpuppet poses as an independent third-party unaffiliated with the puppeteer.

    What is 51% attack?

    A “51% attack” means a bad guy getting as much computing power as the entire rest of the Bitcoin network combined, plus a little bit more.

    In his white paper Satoshi proposed the Proof of Work. The main purpose of this algorithm is to minimize 51% attacks. However proof of work does not completely eliminate 51% attack. If a bad guy tries to launch an attack, the algorithm makes it harder as it requires a lot of resources to take down the hashing power of 51 percent of the nodes that constitutes the Bitcoin network. I would therefore like to discuss the possibilities of mitigating these risks by proof of reputation.

    Why centralized proof of work increases the risk of 51% attack?

    Let us imagine a case scenario where the proof of work is centralized in a few data centers. As a result whoever controls the data centers can intentionally manipulate the proof of work algorithm of the decentralized network to his own ends. It is also feasible for the hackers to have a total control of the network. It will play out exactly the same way the centralized Bitcoin exchanges are getting hacked nowadays. Thus we can conclude that if we centralize the proof of work it only magnifies the risk of the attack rather than mitigating it.

    Why delegated Proof of Stake is equivalent to centralized Proof of Work?

    Delegated proof of stake magnifies the risk of 51% attack same as centralized proof of work. It is relatively easy to corrupt, say 100 delegates than to corrupt the 51 percent of the stake holders.

    A bank is an example of a hybrid of delegated Proof of Stake and fractional reserve system. When a user deposits 100 pieces of silver coins into a bank, the user delegates his stake of silver to the bank. Then the bank releases a token of 10000 notes based on the user’s 100 pieces of silver coins.

    The issue with banks is that it involves trusting the third parties as it is based on delegated Proof of Stake. If the trust is violated it magnifies the risk out of proportion because of fractional reserve system. Thus Delegated Proof of Stake cannot be classified as a decentralized system because one has to trust a third party to delegate his stake. In the long run more users tend to delegate their stakes because of brand loyalty, user friendliness etc. This leads to more centralization, violation of the trust, dilution and corruption of the whole stake. 

    Proof of Reputation

    The motive behind proof of work is based on the control of processing power while proof of stake is based on the percentage of wealth. It is very easy to corrupt both. On the other hand the motive behind proof of reputation is based on ethics and morality which is very resilient to corruption.

    Let us examine the Proof of Reputation in depth and its implications. Assuming there are 10 anonymous generals who don’t trust each other but are willing to undertake an invasion by providing 1000 soldiers each. In return they are willing to settle with one tenth of the spoils. It is highly probable for a general to either have 2 to 3 sockpuppets, to conspire with another 5 generals or the combination of the two.

    Let us now bring in the proof of reputation in the equation. Say for example each general has a score for Proof of Reputation which is based on how many of the 1000 soldiers like them. It is very difficult to gain good reputation for all the 3 sock puppets even if they tend to have similar reputation as it negates the purpose of the sock puppets. If a general tries to conspire with another 5 generals, it will be very difficult to conspire with all the 5 generals with good reputation. This is because each one will have to risk his reputation.

    In a decentralized peer to peer network it is next to impossible to corrupt 51% Proof of Work, 51% Proof of Stake and 51% Proof of Reputation of the whole network. 

    Implementation of Proof of Reputation

    Proof of Reputation can be implemented as an assurance contract which is explained as follows:

    In a binding way, members of a group pledge to contribute to action A if a total contribution level is reached. If the threshold level is met, the action is taken, and the public good is provided; otherwise, the parties are not bound to carry through the action and any monetary contributions are refunded.

    The problem with assurance contract is that it enables free riders. Free riders are those who do not contribute to the public good but reap the benefits of the public good at the cost of other contributers. In order to eliminate the problem of free riders, Alex Tabarrok proposed Dominant Assurance Contract by publishing a white paper. Dominant Assurance Contract not only defines the monetary incentive, expiry date as in Assurance contract but also adds another parameter known as minimum number of contributers required for the contract to come into effect.

    Therefore Proof of Reputation has to be implemented as a dominant assurance contract to discourage free riders. One method of implementation is based on semi-trusted oracles. Gavin Andresen explains the implementation as follows.

    So I’ll start there, and imagine that there are semi-trusted ‘oracles’ that compete to be the most reliable and trustworthy verifiers of contracts. People involved in contracts choose N of them, and then require that contract conditions be validated by one or more of them before the contract pays out. Pick more than one so no single oracle can steal the contract’s funds, but less than N in case some of them go out of business or just aren’t around to validate contracts when it is time for the contract to pay out.

    These oracles need an agreed-upon, machine-readable contract language, but that shouldn’t be hard. There are lots of interesting design decisions on what information contract scripts have access to (and lots of not-so-interesting-to-me design decisions on the language itself; is it stack-based, register-based, high-level, low-level bytecode, etc etc etc).

    Another method of implementation is by awarding tokens to miners based on honesty and integrity. Tokens are basically an implementation of the assurance contract to make sure that the motives of the miners and end users are aligned for the common good. For example, if the mining pool operators will tweak their mining rigs between 10-20 percent for a period of time then the operators will have an incentive to be honest and earn reputation as tokens in addition to mining incentives. If a miner is using a mining pool, he can pledge may be 5% of his total Bitcoin mining towards the dominant assurance contract so that the mining pool will receive a reputation token which can be pegged to the market value of Bitcoin.

    Tokens can also be crowd funded as a pledge by the stake holders in the decentralized network to ensure the miners and pool operators have an incentive to be honest, hence earn reputation. The tokens can be earned or burned depending on the nature of the coin which is either inflationary or deflationary. If it has to be burnt it can be released as a token and claimed by charities.

    The tokens can be issued either as 1 to n, n to n or n to 1, depending on individual requirements based on Counterparty protocol, Colored coin protocol for Bitcoins or Dogeparty protocol for Dogecoins.

    Another method of implementation is using the Lighthouse platform. Lighthouse has a lightweight encrypted HD wallet. It uses payment verification by directly synchronizing with the block chain. It also enables dominant assurance contracts for people to pledge for the projects directly using Bitcoins. If they want their money back before the contract reaches its target amount, they can revoke the pledges they have already made. As the contract is entirely based on the block chain, pledges cannot be claimed individually. They can only be claimed when the combined pledges together reaches the targeted amount.


    In LTB network, Proof of Reputation is being implemented to defend against sockpuppets which is based on token controlled access. Each piece of content is mapped to certain tokens and quantities. If the quantity is zero, the content is accessible to users. If the quantity required is more than zero, the content is then blocked.

    Token-Controlled Access (TCA) is a simple idea. In a given system, different levels of access to that system are granted according to the combination of tokens in a particular user’s wallet. 
    Token Controlled Viewpoint (TCV) is an application of TCA to information content (forums, posts, comments, bonus content, bloopers, walkthroughs, tips, tweets, supplemental blogs, RSS feeds or other data) on basic web pages. 


    This article is meant for informational purposes and is not an endorsement. Articles published on the LTB network are the author’s personal opinion and do not necessarily represent the opinions of the LTB network.

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