The public perversion of bitcoin

15 April, 2018

When the entity known as Satoshi Nakamoto first slapped the world with a Bitcoin White Paper in October 2008, the decentralization of trust was central to his vision. That vision has been undermined by forces both public and private.

Understanding the public erosion of bitcoin's vision is fundamental to understanding the market attacks that came later.1 "The root problem with conventional currency is all the trust that's required to make it work," Nakamoto wrote in a cryptography mailing list publicizing the white paper. "The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micro-payments impossible."2

The delicate interplay between currency and trust was first explored in the crypto-sphere in 1998 by Nick Szabo - one of many strong contenders for the real identity of Nakamoto. He added further thoughts on the subject in a blog post in 2005, building on earlier work he had done with smart, self-executing contracts.

"Thus, it would be very nice if there were a protocol whereby unforgeably [sic] costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust," Szabo said in his blog Unenumerated. "Bit gold."3

The strong anti-authority beginnings of bitcoin and ties to gold don't end there. Nakamoto chose his birthday on public forums as April 5. On that date in 1933 - a date some view as just as infamous as Dec. 7, 1941 - FDR signed a law confiscating all gold from private citizens for a relatively paltry sum and instituted massive penalties for failing to do so.4 The ostensible reason was to prevent hoarding the midst of the Great Depression. The real reason, some whisper, was to give the Federal Reserve greater power to manipulate the economy out of its sad state.

Thus the "birth" of Nakamoto was directly tied to an example of perceived government overreach in the currency arena.

Nakamoto explored this concept further in his original Bitcoin White Paper.

"What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party," Nakamoto wrote. "Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers."

Silk Road

Severing the link between currency and government-backed entities, like banks, had one important knock-on effect. Transactions could now be conducted privately between two parties without involving the government at all. These transactions were even more secure than cash, as cash still derives its value from government backing and each note is marked with an individual serial number. The implications of this immediately became obvious to the black market.

The government first took a real interest in bitcoin and cryptocurrency in general in its investigation of the notorious Silk Road online marketplace.5

From 2011 to its eventual shutdown in 2013, Silk Road provided a kaleidoscope of illegal merchandise and services, with bitcoin as one of its staple payment methods. bitcoin, at the time, was thought to provide a level of security because it wasn't associated with any established third party. In 2013, the U.S. government arrested Silk Road founder Ross William Ulbricht, a.k.a Dread Pirate Roberts, and confiscated a quantity of bitcoin it would later sell in auctions in 2014 and 2015 for $48 million.

Bitcoin's privacy concerns have since been highlighted and partially addressed. Though the blockchain makes it difficult to link a real person with a listed transaction, it is not impossible. In fact, with the cooperation of a third party, it's downright easy.

Taking Its Share

Once it was generally recognized that cryptocurrency wasn't going anywhere and had legitimate use cases, the government adopted a generally hands-off approach while it consolidated its strategy.

The general explosion of cryptocurrency market cap forced the U.S. government to take a close look at the potential tax revenue it was losing.

Until 2017, cryptocurrencies like bitcoin operated in a shady legal tax zone. The onus, as always, was on individuals to report and pay their capital gains related to bitcoin. But the very thing that made bitcoin such an attractive payment option on the Silk Road made it difficult for the government to find out exactly who owed taxes and how much they owed. Many crypto holders flew the flag of Nakamoto's original vision; transactions that occur on the blockchain are strictly between us, the bitcoin holders. It was a philosophical argument that just happened to save money on the way to the moral high ground.

Bitcoin holders who wished to meet the government halfway on tax obligations clung to the legal loophole of "like-kind" exchanges, a loophole typically reserved for real estate. This held, in basic terms, that exchanging one type of cryptocurrency for another was merely trading one asset for another of equal value and so not subject to capital gains tax. This loophole was closed with the 2018 passage of President Trump's tax reform bill.6

The writing had already been on the wall for several months. In November, a federal court ordered exchange Coinbase to turn over its records to the Internal Revenue Service (IRS).7 The order specifically compelled Coinbase to reveal users who had moved more than $20,000 per year between 2013 and 2015. That amounted to the IRS gaining information on 8.9 million transactions, spread out over more than 14,000 Coinbase users.

The court opinion made it clear that the IRS had finally picked up the scent of alleged bitcoin tax dodgers.

"Coinbase itself admits that the narrowed summons requests information regarding 8.9 million Coinbase transactions and 14,355 Coinbase account holders," the court wrote. "That only 800 to 900 taxpayers reported gains related to bitcoin in each of the relevant years and that more than 14,000 Coinbase users have either bought, sold, sent or received at least $20,000 worth of bitcoin in a given year suggests that many Coinbase users may not be reporting their bitcoin gains."8

What's Next?

Bitcoin was founded on the principle of independent transactions, verified with cryptographic technology, to address some of the wilder abuses of the centralized monetary system. Due to government intervention from both the criminal and civil fronts, that original vision has largely been lost.

It's unclear right now if bitcoin alone can recover its original purpose, especially now that government forces have largely passed the persecution torch to private entities.

"The possibility to be anonymous or pseudonymous relies on you not revealing any identifying information about yourself in connection with the bitcoin [sic] addresses you use," Nakamoto said in a November 2009 forum post. "If you post your bitcoin address on the web, then you're associating that address and any transactions with it with the name you posted under. If you posted under a handle that you haven't associated with your real identity, then you're still pseudonymous."


1) Nakamoto, Satoshi. "Bitcoin: A Peer-to-Peer Electronic Cash System." Oct. 2008.

2) Satoshi Nakamoto Institute.

3) Szabo, Nick. "Unenumerated." Bit Gold, 1 Jan. 1970.

4) "April 5th: Happy 'Birthday' to Satoshi Nakamoto / The Government Can't Confiscate Digital Gold." Crypto Cannibal, 4 Apr. 2018.

5) Greenberg, Andy. "Your Sloppy Bitcoin Drug Deals Will Haunt You for Years." Wired, Conde Nast, 1 Feb. 2018.

6) "New Tax Law Closes Bitcoin Loophole." Fortune.

7) Hatmaker, Taylor. "Coinbase Ordered to Give the IRS Data on Users Trading More than $20,000." TechCrunch, TechCrunch, 7 Dec. 2017.

8) Erb, Kelly Phillips. "Coinbase Notifies Customers That It Will Turn Over Court-Ordered Data." Forbes, Forbes Magazine, 28 Feb. 2018.