Pennies from Heaven

Pennies from Heaven

Thursday, 9 May 2013

Is bitcoin the future of online gaming?

In 2004 two online casinos, SatoshiDice and bitZino, posted May to December profits of $596,213 and $495,000, respectively. Not bad for a couple of start-ups in a saturated market, except these companies conduct business not in pounds or dollars or euros, but exclusively in bitcoin, the world’s first decentralised online currency, a concept which may or may not change the world.

You what?

Bitcoin is a digital “crypto-currency” that operates outside the central banking system, traded via encrypted peer-to-peer networks. That means goods can be bought and sold outside the watchful eye of financial regulators, also, in theory, enabling citizens of countries which prohibit online gambling to gamble, as they bypass the financial institutions that are barred from authorising gambling transactions.

The money supply is automated and given to servers, called “bitcoin miners”, who work together in pools to confirm bitcoin trades and add them to an archived transaction log every ten minutes. That’s the complex side of the bitcoin, though. For most newcomers to the currency, bitcoins can be bought via your computer or smartphone at an exchange service such as Bitinstant, which are then stored in an e-wallet, Instawallet. Because they are cryptographically protected and traded on P2P networks, tying bitcoin transactions to individuals is virtually impossible.

Bitcoins are traded at a variable price against the value the currency in which they are purchased. In April this year one bitcoin was worth anything from $40 to $150, which gives it, on paper, a global circulation worth more than $1.4 billion. As global markets stagnate, the bitcoin’s rise has been meteoric, spurred by a burgeoning demand for a currency people see as impervious to the worldwide financial stagnation. Just two years ago one bitcoin was valued at under $1, and trading has been frantic and lucrative, with a report by Reuters recently indicating that big-hitters such as Goldman Sachs and Morgan Stanley are keeping a keen interest in the bitcoin market.

Shadowy figures

The thing we love most about bitcoin is that it was created by a shadowy figure called Satoshi Nakamoto. Like all good shadowy figures, there is no record of Nakamoto’s existence prior to the creation of the bitcoin software, which was launched in 2009. While he was active in developing and modifying the software and posting in bitcoin forums beyond that, his presence began to fade midway through 2010 and no one has heard of him since. He claimed to be a 37-year-old Japanese male, but his command of English and use of British formatting implies he may, in fact, be British, although that could also be a smokescreen. It’s often speculated that Nakamoto was, in fact, a group of radical programmers with political motivations. Certainly, the few quotes out there that are attributed to Nakamoto reveal a subversive and radical inclination.

“We can win a major battle in the arms race and gain a new territory of freedom for several years. Governments are good at cutting off the heads of a centrally-controlled networks (sic) like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.
"[Bitcoin is] very attractive to the libertarian viewpoint, if we can explain it properly. I'm better with code than with words, though.”
You sure are, you shadowy figure, you.

The Dark Side

Much of the criticism of bitcoin stems from its exclusive use on sites such as Silk Road, an online black marketplace where users can anonymously buy anything from drugs to counterfeit money and forged documents. It operates on the Tor network, which directs internet traffic through a global network of servers that hide a user’s location and usage. The Tor network represents the very best and the very worst of human freedom and anonymity: on one hand, its development was originally funded by the US government to help dissidents living under dictatorships to communicate with the outside world and spread sedition under the radar; on the other, it has become a breeding ground for criminal transactions. Some bitcoin users balk at the criminal association, while others see it as a necessary bi-product of political liberation.

Silk Road is run by another shadowy figure, “Dread Pirate Roberts”, who sees himself as a crypto-anarchist on an ideological mission. In response to recent articles in the media and concern expressed from senior US politicians, however, Roberts has banned the sale of guns on the site as well as the advertising of contract killing and the posting of child pornography. However, Silk Road still points users to a sister site called Black Market Reloaded with no such moral hang-ups.

Is it legal?

Which brings us to the legality of bitcoins themselves; a complex issue, certainly. It’s not illegal to trade or own bitcoins, but it’s certainly illegal to print your own money, although whether that is actually what’s occurring through the production of bitcoins is debatable. Were the US government to crack down, presumably it would go after the “bitcoin miners” first, although this would be an extremely difficult task due to the anonymity of the networks, and certainly, while governments are making greater efforts to police the Tor network, in particular the trade in guns and child pornography, there are no plans to close it down anytime soon.

The simple truth may be that the US government is unconcerned about bitcoin because ultimately it doesn’t see it as a real currency. In fact, it may be it sees it as little more than a fad, an internet meme. That global circulation figure of $1.4 billion may sound like a lot, but in terms of the estimated 1.18 trillion USD in circulation, it’s nothing. Plus, because the exchanges are made through third-party services, it’s not like you’re minting your own notes to do your weekly shop; it’s more akin swapping baseball cards with your mates.

However, should the current trend in online gambling companies taking bitcoins continue to expand, the DoJ may begin to watch with interest. As with a lot of internet related regulation, it’s a question of playing catch-up. It’s a completely new legal challenge and developing policies and strategies for regulation take time, especially with a phenomenon as technically complex as this one.

Michael Hajduk, CEO of Infiniti Poker, a soon-to-be-launched site that will accept only bitcoins from US players, however, is optimistic. “Because we’re using Bitcoin, we’re not using US banks,” he said recently. “It’s all peer-to-peer. I don’t believe we’ll be doing anything wrong… At the end of the day, they cannot freeze your account because they cannot kick down the door to bitcoin.”

And, according to bitZino CEO, Larry Taad, bitcoin offers gamblers flexibility: “Users don't have to trust us with their funds any longer than necessary. If you compare this to traditional online casinos, which can take weeks to send you your winnings, the benefit is obvious ... Frictionless, non-reversible, zero-fraud payments; you can't ask for a more perfect payment system,” he said.

However, while they may be attractive to those who want to play poker online within the US, bitcoin is certainly not invulnerable. In April, Instawallet was hacked, resulting in a sharp fall in price and reminding us that the currency is vulnerable to market shock like any other economy. Bitcoin’s massive growth was down to huge demand; perhaps from budding traders looking for a get-rich-quick scheme, and should that demand wane, then so will the market.

It remains to be seen, then, whether, bitcoin is a subversive force that has the power to undercut the modern financial system and liberate humanity from the economic clutches of governments or simply a cyber bubble ready to burst.

Bits n’ pieces

• EVR, a new midtown Manhattan bar, announced last month that it would be accepting bitcoin. Customers will be given a tablet with the BitPay app, which will deduct the drinks cost from their bitcoin accounts.

• A player at mobile poker operator Switch Poker has become a millionaire after transferring winnings into bitcoins and leaving them lying in his account. The player converted almost €150,000 into bitcoins last year, only to discover they are now worth over €1m.

• A company has announced its intention to create the first bitcoin ATM and is hoping to launch its first machine in Cyprus. Following the recent banking crisis in the country, the European Union authorities imposed unprecedented financial restrictions on Cyprus, which many believe fuelled a rise in the value of the bitcoin currency.

Tags: Bitcoin, features