Tuesday, November 26, 2013

Once You Use Bitcoin You Can’t Go ‘Back’ — And That’s Its Fatal Flaw

Once You Use Bitcoin You Can’t Go ‘Back’ — And That’s Its Fatal Flaw

Banks rely on the reversibility feature every day to stop fraudulent activities. Bitcoin robbery casesaren’t just rising because of interest in the currency — the most recent is a European bitcoin payment processor losing $1M after a DDoS attack — they’re rising because robbing a bank online involves much less friction than doing so in person.

  • To steal a million dollars hidden under mattresses, a thief needs to break into thousands of homes.
  • To steal a million dollars from a typical business’s bank account, thieves need to transfer it to a network of roughly 100 money mules.
  • Each mule must then withdraw less than $10,000 from their account within a short period of time, take the cash to Western Union, and wire the money to the thieves. (This is why those running the mules can claim up to 40-50 percent of the take!)
To steal a million dollars worth of bitcoins stored by a business, however, a thief only needs the private key. Likewise, to steal $1000 worth of bitcoins each from 1000 people, the thief only needs to have his or her bot software running on enough victims with enough bitcoins to automate the process.
This means bitcoins should never be “stored” on an internet-connected device. That includes our computers and our smartphones. (And have you heard the one about the guy who keeps his key on his finger?) Let’s pause for a moment to reflect on that: What sort of online currency requires using offline computers and objects for all storage?
Now, it is theoretically true that stolen coins could be blocked. If a portion of the network blocks stolen bitcoins today, then the same mechanism could block bitcoins that passed through black markets or offshore exchanges (such as BTC-e) that don’t implement anti-money-laundering protections. Yet the bitcoin community strongly resists the idea of blacklists, because it eliminates fungibility — the notion that all bitcoins are identical — which is essential for a currency. If every dollar used in a drug deal couldn’t be used again, would dollars work as currency? Especially if, sometime after acceptance, a dollar becomes void and blacklisted after the fact because of its previous involvement in a crime?

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