Cryptocurrency is cow poo – critic Nicholas Weaver

LONDON — Cryptocurrency and blockchain is a bit like marmite. People are either utter crypto believers advocating how it is free from government interference or are fiercely against it, calling it a glorified Ponzi scheme used by criminals. It was founded a decade ago by a mysterious Satoshi Nakamoto who published a white paper describing an electronic cash system, free from government interference and shared instantly online. That it has shaken up the banking system, was acknowledged by International Monetary Fund Managing Director, Christine Lagarde who cautioned that digital currencies should be monitored to maintain stability. China announced that it wants to ban cryptocurrencies adding another blow to the technology, which has been tumbling in value. One of the fiercest critics of both cryptocurrency mining and blockchain is Dr. Nicholas Weaver, a Berkeley computer scientist who has been studying the technology and believes that the entire space ought to be burnt down in a fire. He told Bloomberg’s Joe Weisenthal and Tracy Alloway the entire ecology is rife with fraud, criminalities and he is surprised that government authorities have not acted against it. – Linda van Tilburg

The big fatal flaws is, it does not actually work as currency. If you can’t use it as a competitor to all the other actual digital currency systems that we have like, PayPal and Poses, LA, ESA. All of these payment systems are vastly more efficient then the cryptocurrencies unless your interest is in criminal activity. So, let’s start with the three things you need to be able to do with the currency. Need to be able to acquire it . You need to be able to hold onto it and you need to be able to spend it. Now actually acquiring cryptocurrency is a hard problem because cryptocurrencies,  the one property it has that the other payment systems don’t, is it’s designed to be irreversible. There is no go back or undo button. Which means in order to buy Crypto currency, you have to do one of three things. You either have to bring cash so the big coin ATM’s don’t take your ATM card, they take cash.

Or you have to be given credit by the seller of the cryptocurrency, so you transfer your money electronically and are given credit or you have to wait. So, you transfer your money to the Exchange who then sits on it for several days. Anyone who does not follow these three rules when selling your cryptocurrency is liable to be defrauded because the rest of the Financial System is all designed with an undo button to mitigate fraud. And so, for example, one of the early Bitcoin Exchanges used a PayPal quo that promise no charge backs and then there were chargebacks and then they went out of business. Likewise, Steve Wozniak sold $75,000 worth of Bitcoin to somebody who paid with PayPal, only to find out it was a fraudulent transaction. The PayPal was reversed since he was out the Bitcoin.  

Fortunately, I think Steve Wozniak could afford the loss. So, they are hard to buy. They harder to hold on to. So, if you store your cryptocurrency on a third-party exchange. You are on the hook if they are hacked and that has been billions of dollars of value lost over the years as the exchanges are hacked. Apparently North Korea is now one of the big hackers on them. So, you store your cryptocurrency in your own computer. Well you can’t do that either because if your computer is hacked, your cryptocurrency gets stolen and in fact we used this one time to detect a break-inn when the thief stole the monitor Bitcoin from a wallet that had a copy on a graduate students account. So, you use a dedicated device – say like iPhone is a very strong device.

An iPhone however you are dependent on the cryptocurrency software and that cryptocurrency software may be dependent on an open source modules on Bit Hub that can be bought by somebody else, taken over and this includes stealing codes. So, if you don’t believe in it, they don’t work for payments and if you do believe it, they don’t work for payments.

But something that strikes me listening to you and watching your presentations and also talking to Bitcoin believers, is there is a point of convergence. So they would say yeah Bitcoin is not for coffee. Bitcoin is for mostly for holding on to. I would never spend my Bitcoins. The point of convergence which you say in your own presentation that Traci referenced is this idea of okay there is one thing that Bitcoin is good for, that is censorship free transactions, that for a certain class of transactions, that cost might still be worth.

Yes. The one thing that Cryptocurrencies do that all the other payment systems don’t is by having no supposed Central Authority; will get to why that’s false, but they are designed to be censorship resistant. There is nobody as a third party who is willing to say no you can’t do forbidden activities.  The problem is, and this is why I’ve gotten much sourer over the past 5 years is I’d come to the conclusion that that is actually a bad fit. Bitcoin actually has committed a crime against me. It has made me believe in the need for rigorous enforcement of money laundering laws and I’m a Silicon Valley quasi libertarian and I believe in the jackboot of justice on money laundering. So, what has happened with the Crypto currency. Well they get used for drug deals but more importantly they get used for extortion. So, give us cryptocurrency or your data gets it. Give us cryptocurrency or we are going to keep sending bomb threats. How long before an airport is blackmailed with, give us cryptocurrency or you going to get drones flying over you? But those markets are so blatantly manipulated and fraudulent. So, I consider every ICO that was open to non-accredited investors… It is security fraud.

So, Nick to go back to something you were saying earlier about the regulatory response. If regulators are sort of missing a trick because they are going to get a bunch of burned investors either via Crypto Investments or ICO’s. You would think there would be some sort of regulatory response.

I would have hoped so but I think when it comes down to is… regulators these days are afraid of being claimed to stifle innovation and what I think has happened is, now that things are collapsing, the regulators are finally starting to pay attention and so the regulators are reactive not proactive. And so, as a consequence they sat back during the boom, did nothing and now that it’s a bust they are going to go and probably drop a lot of lawsuits and probably indict some people because now that the tide is rushing out…they’re actually doing something.

So how much is this really like a technical fight versus essentially a values fight?

If you need censorship resistance, you always still have cash. It’s just that cash has both the need for physical proximity and significant mass. So, scaling past moving $1,000 is easy. Moving a $Million bucks is hard. So Cryto currencies want to enable that moving large quantities and the other thing is, I have just seen the damage that it’s done. So, people point to cryptocurrency being used in two good situations to get around censorship. The first was payments to WikiLeaks. So WikiLeaks was cut off from the banking system back around when Assange first fled to the embassy to avoid the sex assault charges. So, when that happened you could use cryptocurrency if you wanted to support WikiLeaks and that’s all fine and good. But WikiLeaks decided that it’s actually better just to arrange with a US non-profit to access an intermediary and basically won contributions and then we had Back Page.

Backpage was a Craigslist clone that did a lot of support for sex workers. I actually think yeah that probably was good overall or at least been less damaging than the alternatives but they were cut off from the Banking System and so to pay with them, you’d either have to pay with cryptocurrency or you send them a cheque in the mail and I suspect most of their payments became cheques in the mail. Now the problem is, let’s face it. Backpage turns out to be a criminal conspiracy and so we’re left with very few non-criminal uses because it is so expensive. So, it’s actually a lot more expensive than the other anonymous electronic payment you want. So, if you want to buy your porn anonymously you go into Target, pay $104 for a Visa gift card and now you can use that Visa gift card to buy your porn.

So, the cost of privacy on electronic transactions is actually a lot less than the Cryptocurrencies offer because you have this huge problem that you can’t hold onto the Cryptocurrencies, yet you can hold onto a Visa gift card.

What ultimately is going to be the thing that destroys cryptocurrencies as you put it in your presentation, it ends up burning them with fire in some way.?

There are two things that can really burn the system with fire. The first is the Federal Government getting their act together and going after this cryptocurrency called Tether. Tether is effectively a Digital Bank note. It is supposedly tied one to one with the dollar, but it’s not. Basically, it’s re-inventing 18th century banking combined with Liberty Reserve, which was a criminal enterprise that shut down a few years back. And so, it’s a right target for disruption. But if the Tether is removed, that actually destroys almost the entire Bitcoin Exchange Ecology. So, 80-90% of the cryptocurrency volume on the exchanges are exchanges that are already cut off from the banking system because they are viewed by the banks as basically too high-risk fraudulent enterprises with a huge amount of washed trading and painting the tape and Such blatant manipulation that the price graphs look like Bart Simpsons’ haircut.

So, if you removed Tether, basically you removed the entire Exchange Ecology except Ethereum, and so that alone would have a huge negative impact and Tether is such blatantly a crime under money laundering laws that it’s surprising they have not been prosecuted yet. So that’s one. Number 2: is all these proof of work coins. So, the idea behind the proof of work which is what predicts Bitcoins, Ethereum and all of the other major cryptocurrencies is basically better described as burning money. So, the system burns X thousands of dollars an hour, under the assumption that an attacker to attack the system would have to burn more than that. The problem is, is in order to dispense the system, you have to be burning X dollars an hour continuously, but an attacker might only have to burn X dollars for a limited period of time.

And so, what has happened is the cryptocurrency system that only cost $5,000 an hour to run, the so-called Alt coins. There are less polite terms for them as well. Those have actually become regularly attacked by people who burn $6,000 for an hour and use it to conduct fraudulent transactions targeting cryptocurrency exchanges. So, if you are efficient, you’re vulnerable, but if you burning Bitcoin level of money, thousands of Dollars or so like Bitcoin is about $5m a day right now. If you are burning $5m a day, yes you are secure against an attacker but you are so dependent on the price that you need $5m a day of new money coming in just to keep the lights on.

So, if the cryptocurrency drops in price, it actually creates a death spiral situation where you have got a lot of mining equipment that will get turned off because it is not profitable to protect the network, but it may be profitable to turn on for an hour or two to attack the Network. And so as long as the price stays high and growing, the system is secure but in order for that to happen, they keep needing $5m a day plus of new suckers coming in wanting to buy the cryptocurrency and that is net in new money  and if that ever stops the price starts to drop and then we get into these death spirals where they lose all their securities.

China plans to ban cryptocurrency mining in renewed clampdown

By Edwin Chan

(Bloomberg) – China signaled its intent to ban cryptocurrency mining, dealing a fresh blow to an industry buffeted by tumbling virtual currency prices, stiff competition and waning investor interest.

The National Development Reform Commission, the country’s powerful economic planner, this week listed crypto-mining among a plethora of industries it intends to eliminate because they “seriously wasted resources” or polluted the environment. The agency is seeking public feedback on the guidelines and indicated that the crypto-mining ban could take effect as soon as they’re formally issued. The consultation period ends on May 7.

While China was once home to about 70% of Bitcoin mining and 90% of trades, authorities have waged a nearly two-year campaign to shrink the crypto industry amid concerns over speculative bubbles, fraud and wasteful energy consumption.

After banning initial coin offerings and calling on local exchanges to halt virtual currency trading in 2017, Chinese officials outlined proposals in 2018 to discourage crypto mining – the computing process that makes transactions with virtual currencies possible but consumes vast amounts of power. Beijing was said to have asked local agencies at the time to try and push miners out of business. The NDRC’s guidelines are likely to accelerate that process.

The industry, which was initially drawn to China’s inexpensive electricity, local chipmaking factories and cheap labor, has already begun shifting overseas. Market leader Bitmain Technologies Ltd. – which in March allowed its application for a Hong Kong initial public offering to lapse – has established mining operations in the U.S. and Canada. BTC.Top, the third-biggest mining pool, said last year it was opening a facility in Canada.

Taiwan Semiconductor Manufacturing Co. and Nvidia Corp. are among listed chipmakers that supply crypto miners in China and around the world.

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