Bitcoin & The Man in the Middle

The Washington Post today writes about honor among thieves – or at least Bitcoin traders:

Once Bob has Bitcoins, and decides to purchase the item from Sarah, instead of paying Sarah directly, Bob places the corresponding amount in escrow with Silk Road. … The escrow mechanism allows the market operator to accurately compute their commission fees, and to resolve disputes between sellers and buyers. Silk Road mandates all sellers and buyers use the escrow system. Failure to do so is punishable by expulsion from the marketplace.

This isn’t a new problem – figuring out how to do deals in an anarchic environment is a tough problem. The trick is that the whole system ultimately depends on an unimpeachable middleman.  Silk Road tried to be that unimpeachable middleman, but it’s hard to project that image of quiet dependable confidence when the Feds are breathing down your neck.  And of course now that the Feds have set the precedent of taking down Silk Road, it’s clear that anyone big enough to be dependable is big enough to be a serious target.

The clear next step is a serious one – move to where the Feds can’t get to you.  Run your Bitcoin merchant exchange someplace with secretive banking laws and few extradition treaties – Switzerland or Singapore seem like fairly obvious choices.  However, this does raise the stakes because the US government tends not to sit idle when its authority is flouted.  They have a long reach, and a decent argument that anyone running a Bitcoin exchange is likely complicit in many and varied felonies.

The result is that a truly free market using Bitcoin, with untraceable transactions in whatever-you-fancy, is more or less doomed to be a marginal and transitory phenomenon.  Your operation simply can’t be trusted as the market-maker without a name, a face, and ultimately some form of recourse for funds held in escrow.  And there are many governments determined to never let that happen.

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