The Civil War Inside Bitcoin: Go Anonymous or Go Mainstream?

There’s a civil war going on inside the world of Bitcoin. Its backers are fighting over the future of the Internet currency after one of Bitcoin’s biggest shopping sites was busted this month for selling illegal drugs and other goods.

Some Bitcoin supporters want the currency to hide user identities. Others want to put Bitcoin into the hands of regular consumers.

Bitcoin is Internet cash. It’s different from paper cash in one key way. It has no central bank.

Dan Kaminsky, a Bitcoin security analyst, explains, “Currencies tend to have an issuer. Dollars have the U.S. government.”

There’s a fixed amount of Bitcoin in the world. Bitcoin “miners” compete with each other to solve complex math problems to get rewarded in Bitcoin.

“While it might seem strange, there’s no controller,” Kaminsky said. “There’s software, it’s a program, it’s a protocol between potentially thousands of people.”

The first dabblers in Bitcoin in 2009 were math geeks and hedge-fund guys who loved the idea of a currency free of government control.

Kaminsky tracks activity on the Bitcoin network and, according to his records, there were about 50,000 nodes two years back. Today there are about 2,600 nodes. “It is a shrinking number of participants in the classical Bitcoin architecture.”

As the number of miners sharply decreases, Bitcoin is entering a new era in trading. And there’s infighting over the future of the currency.

Go anonymous?

Matthew Green is a founder of ZeroCoin and a computer scientist at Johns Hopkins University. He wants Bitcoin to improve protections so that users are effectively anonymous.

Green fears surveillance has gotten out of hand, that “we live in a world where we’re losing privacy. We’re losing privacy every day when companies collect our information. And I believe the only way you can truly protect yourself is to use technological means to keep your private information to yourself.”

Green has a thesis on how to make Bitcoin more anonymous.

Every Bitcoin transaction gets recorded on an accounting ledger called a block chain. Green is working on a way to scramble the user IDs listed on the ledgers and then further conceal them with encryption.

“People might still know that somebody transacted three dollars to somebody else. But they won’t be able to trace that back to you,” he said.

The appeal of anonymity turned Bitcoin into a leading form of payment for illegal drugs. And it’s why the U.S. government is worried Bitcoin may just be a tool for money laundering.

This month the FBI took down a site called Silk Road, arresting its alleged operator in a San Francisco public library.

But the currency is continuing to trade in all sorts of legal transactions.

Or go mainstream?

Brian Armstrong is a poster child for the Bitcoin camp that wants to go mainstream.

Armstrong is a founder of Coinbase, a Bitcoin startup in San Francisco that’s raised nearly seven million dollars in seed funding from some prominent investors in Silicon Valley.

Armstrong takes his five employees rock climbing every week at Dogpatch Boulders, a local favorite, to bond with other startup entrepreneurs.

He said, “It’s a good place to talk with people about Bitcoin, maybe poach a few candidates, things like that.”

OKCupid.com, Reddit.com and Khan Academy currently accept the Internet cash. Armstrong’s job now is to get more people and companies to use Bitcoin.

His pitch is that it’s cheaper and easier to use than Western Union, Visa or PayPal.

If you need to send a hundred dollars to someone in Buenos Aires, for example, “it’s way too difficult,” he said. “The technology exists today where those things can be really simple and easy. But they’re not. And Bitcoin is going to bring that technology to the masses.”

Armstrong says it’s time for Bitcoin to grow up and it’s going to take basic government oversight.

He’s glad the feds cracked down on Silk Road.  When he sees a shady merchant trying to sell marijuana seeds or Russian mail order brides on his site, he says he routinely speaks with federal anti-money laundering regulators at FinCEN and files suspicious activity reports.

“These are all things that a legitimate Bitcoin company now and in the future is going to have to do,” he said.

The Bitcoin camp that wants to go mainstream recently hired staff to work Capitol Hill. The anonymous camp is working on code that’s too strong for even the NSA to crack, which experts say it a very tough technical challenge.

In the middle, regulators are scratching their heads, trying to figure out: who’s responsible for regulating Bitcoin anyway?

Listen to Aarti Shahani’s reporting on the struggle over Bitcoin’s future for The California Report earlier today.