I Wasn't Interested in Crypto—Until a Fake Canadian 'Emergency' Showed Me Why We Do

'[A]ny electronic-cash model that necessitates regular human oversight will eventually be captured by the same legal regimes that govern the legacy financial system, because the presence of human actors (who, of course, can be fined, jailed, or forced into plea bargains) represents a vulnerability that government actors can and will exploit to assert control. The one-sentence explanation for bitcoin's success is that it solves this challenge in what appears to be the only way possible: by removing human decision makers entirely from the system.'

I went to my new favorite banking institution a few weeks ago. It's a Toronto corner store with a rusted-out air conditioner over the front door and windows splashed with advertisements for drumstick ice cream cones and lottery tickets. A cryptocurrency ATM can be found at the back door, buried among old cardboard boxes full of obsolete stuff. The majority of readers will understand how this works: You feed it cash, and it rewards you with bitcoin, Ethereum, Dogecoin, or any of the thousands of other cryptocurrencies available.

There are numerous websites, podcasts, and movies available to educate you on cryptocurrency. In fact, I've never met a subject that continually drives its devotees to ceaseless babbling. I recently received some of it myself, when I tweeted a request for advise on how to best use bitcoin as a hedge against certain unsettling political developments in Canada (more on this below). Many of the DMs I received were riddled with nonsensical abbreviations. For example, one self-described "crypto entrepreneur" advised me to "Buy as much Litecoin LTC as possible." It is the most popular ALT, and the number of new addresses is increasing faster than BTC and ETH... The LTC will be halved in 2023."

Finally, I found a guy who consented to walk me through the fundamentals of cryptography in anything resembling plain English. It also helped that he was a fellow Canadian, because he understood how the domestic news cycle had influenced my choices.

Following weeks of anti-vaccine-mandate rallies in downtown Ottawa, Justin Trudeau declared a national emergency on February 15th, moving from complete passivity to ludicrous overreaction. As a result, banks were suddenly given the authority to freeze the personal assets of citizens associated with the protests, civil liberties be damned. At the same time, hackers obtained and publicized identifying information for thousands of people who had donated money to the protest movement. Rather than condemning this obvious criminal data breach, several public figures—including Trudeau's former right-hand man Gerald Butts, who resigned amid scandal in 2019—applauded the doxxing. Before being stung by a public response, some media sites attempted to mine the dox information for sensationalism. While I had not donated to the Freedom Convoy movement, I was so outraged by these developments that I began researching how to donate to a similar cause without government officials and social-media hyenas using these transactions as a justification to attack my assets and reputation.

I discovered that the simplest approach to enter the crypto market is to register an account with an exchange platform like as Coinbase or Wealthsimple. However, while exchange platforms are simple to use, they normally ask clients to provide government-issued ID when they secure their accounts, and transactions are traceable by authorities. My professor advised me that "cold storage" is a superior (albeit more complex) solution for ensuring true anonymity and theft protection. This is a real physical device—in my case, a Ledger—that serves as a personal crypto wallet.

My Ledger, displaying one of the many ominous warning messages that appear upon setup

My Ledger (which resembles a giant USB key drive) stores the information needed to generate the "private keys" (which resemble long passwords but aren't precisely what they are) that allow me to spend my crypto on other people. And that spending is only possible while the gadget is linked to the Internet, after which it can be confined to a drawer or safe (thus the metaphorical concept of "cold storage"). On the other side, even if the Ledger is offline, I can receive money as long as the sender has my public key, which (unlike a private key) is generally safe to share with others (such as, say, a prospective donor to any charitable cause that I might establish).

The fundamentals of Bitcoin were laid forth in 2009 by the much-mythologized pseudonymous author (or collective) known as "Satoshi Nakamoto." Satoshi describes the newly conceived electronic coin in a legendary white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System as consisting of a chain of digital signatures (a blockchain) that build one upon the next through a mathematical mechanism known as a cryptographic hash function—a one-way function whose output does not expose the original private key to reverse-engineering. So, once a bitcoin transaction is recorded and uploaded to the blockchain in confirmed form by everyone—this being the "public distributed ledger" that bitcoin users are a part of—the transaction cannot be erased or undone (with one important theoretical exception, described later on).

Image contained in Bitcoin: A Peer-to-Peer Electronic Cash System, demonstrating the use of public and private keys to verify and sign bitcoin transactions. 

To utilize cryptocurrencies, you don't need to understand how cryptography works. However, it is vital to understand a crucial notion that distinguishes crypto from traditional assets such as money in a bank account. Your bank account number is worthless in and of itself: It's only a convenience for you and your bank to know where your actual money is kept (which is why that account number sits in plain sight on every physical check you sign, assuming you still use checks). In the case of bitcoin, however, a private key is essentially money in the sense that anyone with access to such a key can spend the cash connected with it. As a result, if you misplace your private-key information or it is stolen by a burglar, there is no 1-800 helpline number. It's gone for good.

The advantage of crypto is that it can be utilized anonymously if you know what you're doing. That brings me back to the shady Toronto convenience shop and the ATM that devoured my wad of twentys.

As any expert bitcoiner would tell you, I chose an inconvenient, incompetent, and costly method of obtaining my cryptocurrency (since the machines charge usage fees). It's far more convenient to simply open an online crypto account with one of the aforementioned services and buy bitcoin over the counter like a respectable person. Once you've saved your cryptocurrency in an online account, you may always transfer it to the dark, anonymous jaws of a private wallet (physical or otherwise).

But for my first trial bitcoin run last month, I went the ATM method because I wanted to avoid giving a doxxer or government investigator even the most improbable means of tying me to any upstream transactions. (However, even this shady cash-to-crypto technique wouldn't be completely anonymous without a burner pay-as-you-go cell phone, because Canadian bitcoin ATMs won't accept cash unless you supply a code that's texted to a number you specify.)

Technically, my operation was a success: I loaded the bitcoin into my Ledger and can now transmit it to anybody I want without blowing my cover. On the other hand, the fundamental demand isn't as pressing as formerly thought: As I was walking home from the corner store, word surfaced that Trudeau had abruptly reversed his application of the Emergencies Act, after it became evident that his (usually quiet) Senate was about to call him out on his phony emergency.

It's comforting to know that I'm prepared for the next time a Canadian government suspends civil liberties. But, for the time being, I don't see myself spending much cryptocurrency. The internet may be teeming with crypto geeks. But, in the real world, mortgages, school tuition, restaurant meals, tax payments, energy payments, and Amazon sales were all still priced in dollars the last time I checked.

And there’s no denying that the plain-brown-envelope atmospherics of that store captured the way a lot of people still think of crypto. One sobering detail was the sticker placed at eye level on the bitcoin ATM, warning me that the CRA and RCMP (Canada’s tax-collection and national police agencies, respectively) “do not demand payment through Bitcoin. You are a target of fraud.” The obvious back story here is that a substantial number of people using these machines are acting at the direction of fraud artists, who’ve convinced their marks that they’ll be hauled off to jail unless they pay some bogus fine or penalty charge with crypto.

The crypto-fraud connection isn't limited to naïve Toronto seniors. The popular Steam videogame distribution service stopped accepting bitcoin payments some years ago because up to 50% of crypto transactions were supposedly related with people who engaged in some form of fraud. Needless to add, utilizing cryptocurrency is not necessarily nefarious. But, given that this is a technology that allows for anonymous transactions, it's not surprising that it's favored by people who want to avoid detection or accountability. To be fair, that's why I wanted bitcoin in the first place—if not to steal, then to hide.

The irony is that bitcoin's creators envisioned it as a way to remove fraud and ambiguity in commerce—as opposed to the existing system, in which trusted third parties (banks and other financial institutions) function as arbiters of which payments are legal and which should be reversed:

While the [traditional] system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. And there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable.

And here we come to a significant underlying reason why the supposedly apolitical subject of cryptocurrency often appears politicized: the very structure of bitcoin embeds a fundamental moral judgment about which types of fraud and dishonesty in society should be addressed, and which should be accepted.

Many individuals regard the fact that banks block or reverse particular types of transactions, participate in boycotts against rogue countries, and perform the bidding of politicians wanting to punish criticized local actors as a feature, not a defect. That is, most citizens are willing to accept some degree of unpredictability in terms of which individual transactions are permitted, as long as the system as a whole is subject to a benign form of top-down regulation. But, according to Satoshi, the place to maintain discipline is at the micro level, on a transaction-by-transaction basis, rather than at the policy or political levels. Bitcoin is dedicated to ensuring that a properly constructed transaction is always irreversible, even if the human purpose underpinning the transaction is later proven to be illegal or antisocial, by replacing human trust with cryptographic proof.

In simply arithmetic terms, the volume of everyday crypto usage constitutes a minuscule proportion of global business. However, this is largely irrelevant, because an individual's ability to transfer even little amounts is frequently sufficient to weaken a government's ability to leverage its exclusive control of the financial system. A good example is Canada's Freedom Convoy: Despite the government's ridiculous claims that these trucks posed an existential threat to the country, an early assessment put their fundraising efforts at less than $10 million. And you can bet that the next time Canadians organize a similar protest, they will not use GoFundMe, which retroactively declared the protestors in violation of its terms of service. If they're wise, they'll do it with cryptocurrency.

As I have stated, there is at least one situation in which the bitcoin system can be manipulated by a dishonest player attempting to double-spend the same bitcoin. This instance, which is covered in the final few pages of Bitcoin: A Peer-to-Peer Electronic Cash System would entail a dedicated criminal team using an older generation of the blockchain to establish a sort of parallel reality that is acknowledged as authoritative by other bitcoin nodes. However, as Satoshi demonstrates using a mathematical process known as a Binomial Random Walk, such schemes are unlikely to yield fruit unless the fraudsters are able to commandeer a genuinely enormous amount of computing power, so as to drown the bitcoin mining being undertaken by the entire system.

This is because, when confronted with two competing versions of the blockchain, each of the bitcoin network's millions of nodes will favor the one with more blocks—that is, the one with more validated transactions. Furthermore, as discussed in the "proof of work" segment of this video, the addition of each block necessitates an investment of computer power, making it difficult for a dishonest actor to "catch up" when starting from his shorter, fake version of the blockchain.

The lottery-like aspect of the proof-of-work computation that goes into proclaiming new blocks complicates the arithmetic here, which is why Satoshi's calculations are statistical rather than entirely analytic. But, even if the bitcoin blockchain system is potentially at risk of rewarding a fraudulent payment move, the correction mechanism consists of a fully amoral, pre-programmed algorithm that requires (and, therefore, tolerates) no human interaction. As a result, the usual description of bitcoin and comparable goods as "decentralized" currencies with no centralized administration understates the remarkable nature of these projects: Hundreds of billions of dollars in electronic coinage circulate within a system whose essential functionality has been stripped of all forms of human agency. I think it useful to have this type of financial tool at my disposal for my own objectives. But it's easy to see why governments could be concerned: You cannot sue or obtain an injunction against a hash function or a blockchain.

Was it necessary for our (still ongoing) social experiment with digital currency to be so radical? Was there ever a pre-blockchain electronic-coin option that blended aspects of historically regulated currencies with the convenience and anonymity associated with bitcoin and its forerunners? The explanation is that such hybrid options existed. However, such experiments did not end well, nor did they inspire much faith in their long-term viability.

I'm primarily thinking of e-gold, which had a fairly successful run between 1996 and 2009, when it was effectively (though not literally, as we'll see) shut down by US investigators and prosecutors. E-gold was ahead of its time by providing a sort of proto-PayPal and micropayment platform. However, it was old-fashioned in other ways, being run out of a business, with the value of digital assets guaranteed in part by nearly four metric tons of (real) gold. The Florida-based workers were holding "sovereign coins and ingots in safety deposit boxes in banks throughout town," according to a Wired piece on e-ultimate gold's death. When this proved impossible, creator Douglas Jackson literally placed precious metal "around the workplace."

E-gold, unlike bitcoin, was not a peer-to-peer technology, and its centralized servers attracted spammers, fraudsters, and Ponzi schemers. The US government initiated an investigation into it in 2004 for failing to conduct background checks on users or follow up on evidence of fraud. The offices of E-gold were raided, and Jackson spent the next few years desperately trying to preserve his company by assisting the government in tracking down the crooks who'd been exploiting his invention. However, e-gold failed, and Jackson (a former oncologist) was sentenced to three years of supervised release after pleading guilty to financial offences.

District Court Judge Rosemary Collyer wrote in her 2008 sentencing memorandum that Jackson's business had not been registered with the federal government or any state, and that "the private nature of transactions in e-gold attracted expanding numbers engaged in scams and other Internet-related criminal activity." However, the court ruled that Jackson had not intended to break the law, that he had taken precautions to prevent criminals from using e-gold, and that he had been duped by inadequate legal advice, which is why he was not sentenced to jail time.

Jackson is still alive and well more than a decade later, closely (and ruefully) monitoring the blockchain-powered digital-currency revolution that arose from the ashes of e-gold. When I spoke with him recently, he stressed something that even many digital-currency experts who have closely followed his situation do not understand: Even as he sentenced Jackson, Judge Collyer admitted that e-gold "conceptually is not illegal." The same may be said for prosecutor Laurel Loomis Rimon, who told the court, "Your Honor, we aren't actively requesting that e-gold be shut down." We understand how crucial it is to the defendants that there be a prospect and a possibility for e-gold to survive."

Jackson's idea regarding how and why e-gold was pursued into extinction is complicated, and much beyond my capacity to summarize (though some specifics may be found at Wired, and Jackson isn't shy about discussing it with new acquaintances). But it's important noting that Jackson does not believe e-collapse gold's is unavoidable. As a result, he rejects the concept that, as Peter Thiel put it a few months ago, "Bitcoin was the answer to e-gold, and Satoshi understood that you had to be anonymous and not have a firm... Even a business structure was too closely linked to the government."

Thiel's remarks echo a decade-old Forbes article by Jon Matonis (who would go on to become the founding director of an advocacy group known as the Bitcoin Foundation), who argued that bitcoin would help free people from "monetary tyranny," and that "we can see from the case against digital money provider e-gold that an efficient challenger to the provision of a stable monetary unit will not be permitted."

Jackson, who one might think to be irritated by the treatment he experienced from the US government, does not believe in tyranny. He describes the e-gold requirements as "not onerous." "On the contrary, they were consistent with acceptable business practices that would improve customer account/transaction security and aid in the prevention of reputation-damaging abuses... The government did not shut down e-gold, and concerns about dollar competition had nothing to do with the court action." Rather, Jackson claims, "these self-serving fictions were developed to generate some reasonable explanation for bitcoin—a payment mechanism that takes almost three thousand times longer to process a transfer with finality than e-gold did a decade ago... ... with ten-thousand-fold higher infrastructure/overhead expenditures."

I have no way of verifying those figures, but they are plausible: The entire "proof-of-work" fraud-prevention process built into bitcoin is intended to be a computational equivalent of a needle-in-a-haystack quest. According to one calculation, the electricity required to power the computers involved in bitcoin mining is more than 1,000 kilowatt-hours each transaction. So, regardless of what you think about the legal, political, and ethical issues surrounding cryptocurrencies, there's no denying that bitcoin isn't a resource-efficient money model. And in a more perfect world, when we could all trust politicians, banking regulators, and law-enforcement authorities to always behave rationally and in good faith, e-gold might replace bitcoin in my Ledger. However, it is not the world we live in, as proven by what occurred in Canada last month.

The handling of Jackson by American authorities was controversial. But, at the very least, these federal officials were justifiably concerned about how real criminals were utilizing e-gold to promote their scams. What Trudeau did to protest donors, on the other hand, is far more distressing, because the wrongdoings he claimed to be targeting were either non-existent or politically fabricated.

Both examples suggest that any electronic-cash model that requires regular human oversight will eventually be captured by the same legal regimes that govern the legacy financial system—because the presence of human actors (who, of course, can be fined, jailed, or forced into plea bargains) represents a vulnerability that government actors can and will exploit to assert control. The one-sentence explanation for bitcoin's success is that it solves this problem in what appears to be the only way possible: by removing human decision makers entirely from the system.

** Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of USA GAG nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

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