The WikiLeaks of Money

Is Bitcoin a revolution or a bubble?

For something that few had heard of a month ago, the online currency Bitcoin tends to elicit pretty strong responses. Depending on whom you ask, Bitcoin is the "future of money," a "crypto-geek Ponzi scheme," an "online form of money laundering," or a tool for "libertarian hipsters and criminals."

The publicity has not been kind to Bitcoin, which has faced attacks from law enforcement, hackers, and cybercriminals alike. The currency's value has seen several sharp fluctuations. The currency has been used to spread malware over Twitter. Early supporters appear to have lost confidence, and U.S. lawmakers are starting to ask tough questions. But shutting down Bitcoin may prove more difficult than its critics hope. And whether or not the experiment succeeds, its rise may herald the emergence of a new form of decentralized currency trading.

Bitcoin's origins are appropriately mysterious, in keeping with its cyberpunk image. The idea for the currency was first described in a paper in 2009 by Satoshi Nakamoto, supposedly a Japanese programmer whom no one has ever met or communicated with. The name is almost certainly a pseudonym, and many believe "Nakamoto" may not be only one person.

It's not the first attempt at creating a digital currency. There have been several attempts, including the now defunct eCash, the "Linden dollars" used in the virtual online world Second Life, and, more recently, the Facebook Credits users can use to purchase goods and services through the social network.

What makes Bitcoin unique is its peer-to-peer structure. There's no start-up company or central authority that can go out of business or be shut down by the police. Bitcoins can be purchased through online exchanges by wiring money from your bank account, and there are also sites that will provide users with a few free coins to get started.

"All previous digital currencies required a central trusted authority, which created a single point of failure," says Gavin Andresen, a programmer who develops websites and applications to help users acquire Bitcoins. "And almost all previous private digital currencies turned out to be untrustworthy, because they failed." ECash went out of business, for instance, and the use of Linden dollars remains confined to the still-small world of Second Life users.

The number of coins in circulation, as well as all transactions, is tracked by a distributed server that uses the computing power of Bitcoin users. New coins are "mined" at a rate determined by the computing power of the users involved. Like commodities such as gold or silver, there is a finite number of Bitcoins in the universe -- mining will stop when the total supply reaches 21 million. There are currently about 7.2 million in circulation. The value of these coins grew rapidly throughout this year, hitting a high of nearly $32 dollars per coin in early June.

Economists have been skeptical about the currency's future viability, though, seeing its rapid rise as a sign of irrational exuberance as new users rushed to sign on. University of California-Berkeley economics professor Barry Eichengreen wrote in the Washington Post: "If it is possible to imagine one private electronic currency, then it's possible to imagine several, and there would be no guarantee that other people would accept the particular electronic money you use." George Mason University's Tyler Cowen sees Bitcoin's rapid rise as "a sign of the dependence of the Bitcoin upon expectations, and a sign of its bubbly nature."

But for its advocates, Bitcoin is nothing less than revolutionary: What peer-to-peer file-sharing did for music and movies, and WikiLeaks did for government secrets, they say, Bitcoin will do to the global economy.

"It's the same concept as open-source [software]. It can be trusted because nobody owns it," says Rick Falkvinge, founder of the Swedish Pirate Party and "political evangelist" for the Pirate Party movement, which favors the loosening of intellectual property laws and an end to restrictions on file-sharing. "Because nobody owns it, there's an inherent trust in the network."

Falkvinge has literally put his money where his mouth his. In late May he put his entire savings into Bitcoin. His timing -- at least initially -- appeared impeccable, with his investment quadrupling in just over two weeks.

"I'm seeing this as a future transaction currency both on the Net and in international trade. It obviously has a few hurdles to clear before it can challenge the euro and the U.S. dollar, but I believe those hurdles can be cleared," he says.

Falkvinge has emerged as one of Bitcoin's loudest proponents -- and as he admits, he now has quite an incentive to promote it -- but he's also the first to point out that it faces significant challenges. The main one is that "we need to see more transaction volume with the Bitcoin economy." Nearly every article on the currency points out that it can be used to buy alpaca socks, but Falkvinge still needs to keep a few Swedish krona on hand to buy his groceries. Widespread use won't occur, he says, as long as Bitcoin is seen as a toy for geeks or, more troublingly, a tool for criminals.

That latter problem became particularly evident in early June after Gawker published a widely read story on Silk Road, an online market where anonymous users can purchase illegal drugs including ecstasy, cocaine, and LSD -- using Bitcoin.

The story, probably Bitcoin's biggest mainstream-media mention at that point, actually boosted the currency's value from about $9.90 to $14 as new users -- perhaps in more than one sense of the word -- rushed to sign up. But not all the attention was quite so positive. U.S. Senators Charles Schumer (D-N.Y.) and Joe Manchin (D-W.Va.) wrote to the Justice Department on June 6 demanding that Silk Road be shut down and Bitcoin investigated.

Schumer, a prominent voice on financial regulation, made his views clear. "It's an online form of money laundering used to disguise the source of money and to disguise who's both selling and buying the drug," he told reporters.

It's a fair bet that most Bitcoin users -- many of whom might be described as cyberanarchists -- are probably not all that concerned about the senators' disapproval.

"All currencies are used by criminals. Bitcoin is no different," Andresen says. "If Bitcoin becomes widely used, crimes like identity theft will be much harder" -- because transactions are tracked by the distributed server -- "while others, like avoiding cross-border capital flow regulations, will become easier."

In any event, Bitcoin's supporters believe the currency's decentralized structure will make it nearly impossible for authorities to crack down.

A bigger scare for the Bitcoiners came on June 10, when the currency's value dropped more than 31 percent in one day on Mt.Gox, the most widely used Bitcoin exchange -- ending weeks of rapid appreciation. Falkvinge was unperturbed, calling the dip "just part of the overall growth pattern."

"The swings are ridiculously large compared to any normal market. It's a gutsy day-trader's wet dream," he said. "This is currency trading on Internet time."

Another possible vulnerability in the system emerged on June 13, when a veteran user reported that his account had been hacked, resulting in the loss of thousands of dollars worth of Bitcoins. The report hasn't been confirmed, but Andresen did concede to the online magazine Ars Technica that such a crime was technically possible.

Then, on June 19, the value of Bitcoin on Mt.Gox dropped from $17 to just a few cents in a matter of minutes. The drop was blamed on a hacked account and the exchange was taken offline. Bitcoin is still trading at around $15 on rival exchanges, and Mt.Gox has promised to restore its value to pre-hack levels when it comes back online, but the attack was certainly another blow to the currency's already compromised credibility.

The day after the crash, the Electronic Frontier Foundation (EFF), a prominent San Francisco-based digital-rights organization, announced that it would no longer accept donations in Bitcoin, as it had for the last several months. "We don't fully understand the complex legal issues involved with creating a new currency system," the group said in a statement. "People were misconstruing our acceptance of Bitcoins as an endorsement of Bitcoin." A number of other organizations that had initially been supportive of Bitcoin, including WikiLeaks and the Free Software Foundation, also seem to be emptying their accounts and disassociating themselves.

While some Bitcoin supporters have blasted the EFF and continue to defend the currency's future viability, it's hard not to see the past few days' developments as the fulfillment of Falkvinge's great fear -- that Bitcoin will have difficulty finding acceptance beyond its hard-core base of geeks and radical libertarians. Although it wouldn't be fair to say the currency has crashed -- Falkvinge is still ahead on his initial investment -- the legal questions, volatility, and insecurity associated with Bitcoin in recent days are sure to scare away potential mainstream adopters.

"I think it will take many years before Bitcoin is mainstream, and it may never become mainstream," Andresen acknowledges. "People are, correctly, suspicious of any new idea or technology." Andresen says the next step in the currency's development would be for a major corporation to begin promoting it or for a "country that was looking for a replacement for their failed national currency" to adopt it, but he doesn't believe this will happen anytime soon.

But even if Bitcoin fails, it would probably be a mistake to discount its 15 minutes of fame as a complete fluke. Just as Napster begat BitTorrent and MediaFire, Bitcoin has demonstrated a model for how a non-state-sanctioned, peer-to-peer electronic currency system could work. It may not be "the one," as its advocates hoped, but other innovators are sure to tinker with the formula, improving security and usability. Whether one emerges as a default option in both the online and offline worlds will demonstrate whether Bitcoin's flaws were technical, or something more fundamental; as Eichengreen fears, there might well be a period of multiple online currencies competing for acceptance and legitimacy, dooming the concept altogether.

The disruptive power of Bitcoin on banks and central governments has surely been overstated, but these institutions might be better served to take its emergence as a warning rather than a reassurance: They may not be the only game in town forever.


Showdown in Tehran

Mahmoud Ahmadinejad is fighting for his political survival. But that doesn't mean his clerical enemies will be the winners.

While much of the Middle East is in the throes of a historic struggle for democracy, Iran's main political fissure pits the clerical establishment against muscular, nationalist upstarts who seek to usurp power. And in this contest between Iran's elite factions, the world should be rooting for the clergy.

The primary players in this battle are President Mahmoud Ahmadinejad and Supreme Leader Ayatollah Ali Khamenei. The two forged an ideological alliance in 2005 and worked closely to crush the "Green Movement" after the disputed 2009 election. They are now engaged in a public spat over the spoils of power and, more importantly, over the proper interpretation of the Shiite fundamentalist ideology that inspired the 1979 Islamic Revolution. The contest spilled dramatically into public view in April over Ahmadinejad's ultimately unsuccessful attempts to dismiss Iran's intelligence minister, and again this week with the forced resignation and arrest of the deputy foreign minister, an ally of the president's chief of staff, Esfandiar Rahim Mashaei.

The political bickering masks a more fundamental dispute over the direction of the Shiite fundamentalist ideology that Iran's theocracy draws its legitimacy from. Ayatollah Ruhollah Khomeini guided the 1979 revolution through a mix of religious zealotry and leftist revolutionary activism, with the aim of fomenting class war set to an Islamic tune. The Islamic state he envisioned was a dictatorship of the proletariat ruled by the clergy; in homage to Plato's Republic, Khomeini privileged a class distinguished by its education in Islamic law. He advanced the claim that, in the absence of the Shiite messiah, the Hidden Imam, they represent him in the world. And Khomeini assumed the position of the cleric supreme, vali-e faqih, the all-knowing philosopher-king with divine political authority.

The Islamic and the leftist components of Khomeinism came apart after his death in 1989. Exhausted by war and revolution, Iran opted for normalcy. Those interested in the Islamic aspect of the revolution, the so-called conservatives, gathered around Khamenei. They ended revolutionary activism, opened the economy to private-sector activity, and erected an authoritarian theocracy run by the supreme leader.

Meanwhile, the more radical Jacobin faction, which fed on revolutionary activism and favored a socialist economy, was pushed to the margins, only to resurface in the late 1990s in the guise of reformists. So it is that Mir Hossein Mousavi, the leftist prime minister of the 1980s, has emerged as the face of the Green Movement.

Conservatives and reformists-cum-reconstructed-leftists have fought over power for the past two decades. Reformists have placed their hopes in elections and a Vatican II-style transformation of Shiite theology. Conservatives have resisted tampering with both religion and ideology and have used brute force to hold on to power. In the process, Iran's Shiite fundamentalist ideology, shorn of its leftist legacy, turned stolid and unpopular, and the regime turned to repression to survive.

Ahmadinejad arrived on the scene in 2005 promising to breathe new life into the dying revolution by combining religious fundamentalism with Iranian nationalism and economic populism. This formula -- the same one Khomeini had used to dominate the revolution in 1979 -- proved to be a clever political strategy that won him the presidency. But the promise of unending revolution came crashing down in the 2009 election, when reformists mounted a winning election campaign and then brought millions into the streets to protest the fraudulent results.

What Ahmadinejad preached posed a direct threat to the supreme position of clergy in the Islamic Republic. The president and his circle of advisors are of the view that, because of the Islamic Revolution and his defeat of the reformist challenge, Iran is now a genuinely Islamic state, and the state should take over the role of the clergy.

This only confirms the singular importance of the Islamic Revolution to Shiite history and theology. If, as Khomeini claimed, the Islamic Republic is the embodiment of a just and sacred government, Shiites no longer need the clergy as the anchor of their faith. Holiness rests in the state and not the guardians of the state. The idea appeals to the muscular nationalism and Bonapartist ambitions of the Islamic Revolutionary Guard Corps (IRGC), which believes that military might, rather than clerical leadership, sustain Iran against domestic and foreign enemies.

Many Iranians dismiss Ahmadinejad's cultish messianism as no more than boorish superstition and clever political positioning. The clerics see it as a direct threat. Since taking office, Ahmadinejad has charged his cabinet to sign a pledge committing them to serve the Hidden Imam, peppered his speeches with messianic themes, and even claimed that he leads the "Hidden Imam's government." It is a folksy but religiously charged proposition.

Ahmadinejad was ridiculed when a video clip showed him bragging to a senior ayatollah that the Shiite messiah had visited him during his 2005 address before the United Nations. The larger message, which was not lost on skittish ayatollahs, was that the lay president was giving notice that the messiah favored him over the clerics. Mashaei, Ahmadinejad's close advisor, has been blunter, declaring that Shiism can and should do without clerics and that the Islamic Republic no longer needs a supreme leader.

Unsurprisingly, many in Iran have come to see Ahmadinejad as the Shiite Martin Luther, determined to break the clergy. Senior ayatollahs have accordingly criticized the president at every turn and refused to receive him or his representatives in the holy city of Qom.

Ahmadinejad may believe the Hidden Imam is on his side, but for now Khamenei holds most of the cards: He controls the media and can mobilize the parliament, judiciary, and security forces against the president. Still, Ahmadinejad's ouster may not herald the death of his brand of Khomeinism. That will depend on how ambitious military leaders react and whether Ahmadinejad's base among the poor stays by his side. For now, both the IRGC and the base are divided over their allegiance to old Khomeinism and support for Ahmadinejad's new variety.

Around the region, Ahmadinejad has had little impact. The Shiite revival in the Arab world, which started in Iraq in 2003 and spread across the region, looks to the Iraqi Shiite religious center Najaf's quietist brand of the faith for inspiration. In pockets of Bahrain, Iraq, and Lebanon, where Khomeinism commands support, fealty belongs to Khamenei. The supreme leader has even bypassed Ahmadinejad's government and assigned a trusted advisor to oversee relations with Hezbollah.

Yet any victory the clergy could win against this new upstart will only be a Pyrrhic one. Ahmadinejad is a threat to clerical supremacy, but without him, Khomeinism is even more vulnerable to reformist challengers. The alternative would be a right-wing ideological state -- nationalist, fundamentalist, populist, and ruled by militarism, something akin to the Japan of the 1930s. And that cannot last. In this contest between Iran's elite factions, the world should be rooting for the clergy -- their victory will bring about the quickest end to the Islamic Republic.