Section 1: The Trusted Third Party Problem
Chapter 2: Monetary Theory
by Wendy McElroy
Technology Meets Anarchy. Both Profit (Chapter 2, Part 2)
Bitcoin is the catalyst for peaceful anarchy and freedom. It was built as a reaction against corrupt governments and financial institutions. It was not solely created for the sake of improving financial technology. But some people adulterate this truth. In reality, Bitcoin was meant to function as a monetary weapon, as a cryptocurrency poised to undermine authority. Now it is whitewashed. It is seen as a polite and unassuming technology in order to appease politicians, banksters, and soccer moms. Its purpose is sometimes concealed in order to make the tech palatable to the unwashed masses and power elite. However, no one should forget or deny why the protocol was written.–Sterlin Lujan
Technology Meets Anarchy. Both Profit.
Cryptocurrency was not created to make money; the blockchain was not forged to render banking more efficient. The core developers did not use open source or eschew patents because they were proprietary or wanted to reap a fortune. They wanted privacy and freedom to be available without cost to all. Anyone who believes Bitcoin was designed for financial gain knows nothing about its history or the idealism built into its algorithms. Profiting from cryptocurrency and using blockchains to economic advantage are laudable by-products, but Bitcoin was conceived as a vehicle for creating political and social change by empowering individuals and weakening government. The developers were revolutionaries. Bitcoin was a blast of rebellion.
It came not a moment too soon. The galloping growth of the Internet gave government an incredible weapon against which individuals would have had scant protection without cryptography, the art of secret communication.
The Radical History of Bitcoin
Before Satoshi, there was the engineer and scientist Timothy C. May to whom Bitcoin is sometimes traced. May’s “Crypto Anarchist Manifesto” (1988) first appeared when it was distributed to a few techno-anarchists at the Crypto ’88 conference. The six-paragraph manifesto called for a computer technology based on cryptographic protocols which would “alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation….The technology for this revolution–and it surely will be both a social and economic revolution–has existed in theory for the past decade….But only recently have computer networks and personal computers attained sufficient speed to make the ideas practically realizable.”
The manifesto ended with a cry to arms, “Arise, you have nothing to lose but your barbed wire fences!” The “barbed wire” reference is quintessentially American. It evokes images of land out West being sectioned off by sharp fences that were snipped apart by cowboys who demanded an open landscape.
Even in 1988, May could draw upon crypto-history. In the mid-1970s, cryptography ceased to be the nearly-exclusive domain of military and intelligence agencies who operated in secrecy. The academic research that surged forward was openly shared. One event in particular broke government’s grip on the field. In 1975, computer guru Whitfield Diffie and electrical engineering professor Martin Hellman invented public-key encryption and published their results the next year in the essay “New Directions in Cryptography.” (Arguably, the public key was a re-invention as the British had developed “nonsecret encryption” in 1973 but chose to be silent on the subject, as governments generally do.) In 1977, cryptographers Ron Rivest, Adi Shamir and Leonard Adleman created the RSA encryption algorithm, which was one of the first practical public-key systems.
Public-key encryption hit the computer community like an explosion. It is brilliant in its simplicity. Every user has two keys – a public and a private one – both of which are unique. The public key scrambles the text of a message which can be unscrambled only by the private key. The public key can be thrown to the wind but the private one is closely guarded. The result is close to impenetrable privacy.
Diffie had been inspired by the trusted third party problem. The book “High Noon on the Electronic Frontier: Conceptual Issues in Cyberspace” (1996) quoted him as saying, “You may have protected files, but if a subpoena was served to the system manager, it wouldn’t do you any good. The administrators would sell you out, because they’d have no interest in going to jail.” His solution: a decentralized network with each individual possessing the mathematical key to his own privacy – the right most threatened by a digital society. It obliterated the problem by removing any need for trust. At the same time, public-key encryption also removed the contradiction of sending secure information over insecure channels. It excluded “Eve” – the name cryptographers called unwanted eavesdroppers. And, importantly, public-key encryption was free to all because revolution required participation.
Government was displeased. The National Security Agency (NSA) could no longer eavesdrop at will and its domestic monopoly on encryption was suddenly thrown open to all comers. The journalist Steven Levy commented in a Wired article, “In 1979, Inman [then-head of the NSA] gave an address that came to be known as ‘the sky is falling‘ speech, warning that ‘non- governmental cryptologic activity and publication. . .poses clear risks to the national security’.”
The Cypherpunk response was captured by a later statement by cryptographer John Gilmore. “Show us. Show the public how your ability to violate the privacy of any citizen has prevented a major disaster. They’re abridging the freedom and privacy of all citizens – to defend us against a bogeyman that they will not explain. The decision to literally trade away our privacy is one that must be made by the whole society, not made unilaterally by a military spy agency.”
The first crypto war erupted with the NSA strenuously trying to curtail the circulation of Diffie’s and Hellman’s ideas. The agency went so far as to inform publishers that the two rebels and whoever published them could face jail time for violating laws restricting the export of military weapons. The Institute of Electrical and Electronics Engineers, one of Hellman’s outlets, received a letter that read, in part, “I have noticed in the past months that various IEEE Groups have been publishing and exporting technical articles on encryption and cryptology—a technical field which is covered by Federal Regulations, viz: ITAR (International Traffic in Arms Regulations, 22 CFR 121-128).” Gag orders were issued. Legislation was proposed. The NSA attempted to control funding to crypto research. Inman gave the agency’s first public interview to Science magazine in order to explain his position. NSA also considered requiring people to “escrow” their private keys with a third party who would be vulnerable to a judge’s order or to the police; of course, this would have returned the trusted third party problem which public key encryption was intended to solve. In response, Electronic Frontier Foundation co-founder John Perry Barlow declared, “You can have my encryption algorithm…when you pry my cold dead fingers from my private key.”
The NSA’s efforts failed. Powerful crypto was now a public good.
In the late 1980s, “Cypherpunks” emerged as something akin to a movement. The deliberately humorous label was coined by hacker Judith Milhon who blended “cipher” with “cyberpunk.” The Cypherpunks wanted to use cryptography to defend against surveillance and censorship by the state. They were also determined to build a counter-economic society that offered an alternative to existing bank and financial systems.
Their vision was inspired by the pioneering work of computer scientist David Chaum, nicknamed the “Houdini of crypto.” Three of his papers were particularly influential.
- “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms” (1981) laid the groundwork for research into and the development of anonymous communications based on public-key cryptography.
- “Blind Signatures for Untraceable Payments” (1983) stated, “Automation of the way we pay for goods and services is already underway….The ultimate structure of the new electronic payments system may have a substantial impact on personal privacy as well as on the nature and extent of criminal use of payments. Ideally a new payments system should address both of these seemingly conflicting sets of concerns.” The essay called for digital cash.
- “Security without Identification: Transaction Systems to Make Big Brother Obsolete” (1985) further described anonymous digital cash and pseudonymous reputation systems.
A typical cypherpunk distrusted and disliked government, especially the federal variety; the NSA’s near-hysteria over unclassified encryption only heightened this response. Most cypherpunks embraced the counterculture with its stress on free speech, sexual liberation and freedom to use drugs. In short, they were civil libertarians. One of the earliest portraits of the coding radicals was Levy’s Wired article, mentioned above, which appeared in the magazine’s second issue (May 1993). Levy called them “techie-cum-civil libertarians.” They were idealists who “hope for a world where an individual’s informational footprints – everything from an opinion on abortion to the medical record of an actual abortion – can be traced only if the individual involved chooses to reveal them; a world where coherent messages shoot around the globe by network and microwave, but intruders and feds trying to pluck them out of the vapor find only gibberish; a world where the tools of prying are transformed into the instruments of privacy.”
Levy understood the stakes. “The outcome of this struggle may determine the amount of freedom our society will grant us in the 21st century.” The spread of personal computers, the rise of the modern Internet and the titillating label of “outlaw” were an irresistible combination.
Then, in 1991, Phil Zimmermann developed PGP, or Pretty Good Privacy, the world’s most popular email encryption software. He viewed it as a human rights tool and believed in it so deeply that he missed five mortgage payments and almost lost his house while designing it. The first version was called “a web of trust” which described the protocol by which the authenticity of the link between a public key and its owner was established. Zimmermann described the protocol in the manual for PGP version 2.0:
“As time goes on, you will accumulate keys from other people that you may want to designate as trusted introducers. Everyone else will each choose their own trusted introducers. And everyone will gradually accumulate and distribute with their key a collection of certifying signatures from other people, with the expectation that anyone receiving it will trust at least one or two of the signatures. This will cause the emergence of a decentralized fault-tolerant web of confidence for all public keys.”
PGP was initially given away by being posted on computer bulletin boards. Zimmermann commented, “[l]ike thousands of dandelion seeds blowing in the wind” PGP spread around the globe. Government noticed. Zimmermann was targeted in a three-year criminal investigation based on the possible violation of US export restrictions for cryptographic software.
Fast forward to 1992. May, Milhon, Gilmore and Eric Hughes formed a small group of coding zealots who met every Saturday in a small office in San Francisco. A Christian Science Monitor article described the group as “all united by that unique Bay Area blend: passionate about technology, steeped in counterculture, and unswervingly libertarian.”
The group’s size grew rapidly. The List, an electronic posting forum, became the most active aspect with the “people’s algorithms” drawing staunch support from the likes of Julian Assange and Zimmermann. The Christian Science Monitor article commented, “Radical libertarians dominated the list, along with ‘some anarcho-capitalists and even a few socialists’. Many had a technical background from working with computers; some were political scientists, classical scholars, or lawyers.” Eric Hughes contributed another manifesto: “A Cypherpunk’s Manifesto” that opened, “Privacy is necessary for an open society in the electronic age.” But , it continued, “[f]or privacy to be widespread it must be part of a social contract. People must come and together deploy these systems for the common good. Privacy only extends so far as the cooperation of one’s fellows in society.”
The group quickly encountered an objection that later became a dominant thrust of government’s attack on private encryption: “bad actors” would use anonymity to get away with crimes. During a 1992 interview, a skeptic confronted May. “Seems like the perfect thing for ransom notes, extortion threats, bribes, blackmail, insider trading and terrorism,” he challenged. May calmly replied, “Well, what about selling information that isn’t viewed as legal, say about pot-growing, do-it-yourself abortion? What about the anonymity wanted for whistleblowers, confessionals, and dating personals?”
Cypherpunks believed public-key encryption made society less dangerous because it removed the two major sources of violence. First, anonymity neutralized governments, which consisted of “men with guns.” Shutting governments out removed those guns from exchanges. If financial exchanges were invisible, for example, the violence of taxation would be impossible. Second, public-key encryption reduced the risks associated with victim-less crimes, such as drug use. Ordering drugs online, for example, was safer than buying them in a back alley of a shoddy neighborhood. Admittedly, public-key encryption could shield activities that violated rights. A common Cypherpunk response was to view the prospect as irrelevant. Encryption was a reality and it would spread in spite of unpleasant side effects. Perhaps cypherpunks believed a technological or community solution to real online crimes would evolve.
The Crypto Wars Continue
One incident captures the core of crypto wars between the Cypherpunks and government, especially the NSA. Gilmore was determined to rescue the information from documents that the NSA was attempting to suppress. His first major victory was to distribute a paper by a cryptographer employed by Xerox, which the NSA had persuaded Xerox to suppress. Gilmore posted it on the Internet and it went viral.
Then, in 1992, Gilmore further enraged the NSA. He filed a Freedom of Information Act (FOIA) request to acquire the declassified parts of a four-volume work by William Friedman who is often called the father of American cryptography; the manuals were decades old. Gilmore also requested the declassification of Friedman’s other books.
While the NSA dragged out its response before refusing Gilmore, he heard from a Cypherpunk friend. Friedman’s personal papers had been donated to a library after his death, and they included the annotated manuscript of one still-classified book Gilmore sought. The friend simply took it off the shelf and Xeroxed it. Then, another of Friedman’s still-classified books was found on microfilm at Boston University; a copy of it was also turned over to Gilmore. He notified the judge, who was hearing what had turned into a FOIA appeal, that the “classified” documents were publicly available in libraries. Before he did so, however, Gilmore made several copies and hid them in obscure places, including an abandoned building.
The NSA reacted with extreme prejudice. They raided libraries and reclassified documents that used to be publicly available. The Justice Department called Gilmore’s lawyer to say that his client was close to violating the Espionage Act, which could bring a prison term of ten years. The violation: he showed people a library book. Gilmore informed the judge of the latest development, but he also contacted technology reporters in the press.
NSA feared publicity, and the Cypherpunks knew it. Articles began to flow, including one in the San Francisco Examiner. Two days later, the New York Times stated, “The National Security Agency, the nation’s secretive electronic spy agency, has abruptly retreated from a confrontation with an independent researcher over secret technical manuals he found in a public library several weeks ago….[I]t said that the manuals were no longer secret and that the researcher could keep them.” The Aegean Park Press, a California publisher, quickly printed the books in question.
The early Cypherpunks were prototypes who set the attitude, technology and political context in which the next generation of cryptocurrency zealots operated. The goals were disobedience, disruption of the system through cryptography, personal freedom, and counter-economics. They set and lit the stage for Satoshi Nakamoto.