Friday Summary: December 20, 2013 year end edition
I have not done a Friday Summary in a couple weeks, which is a blog post we have rarely missed over the last 6 years, so bad on me for being a flake. Sorry about that, but that does not mean I don’t have a few things I to talk about before years end. Noise. Lots of Bitcoin noise in the press, but little substance. Blogs like Forbes are speculating on Bitcoin investment potential, currency manipulation, and hoarding, tying in a celebrity whenever possible. Governments around the globe leverage the Gattaca extension of Godwin’s Law, when they say “YOU ARE EITHER WITH US OR IN FAVOR OF ILLEGAL DRUGS AND CHILD PORNOGRAPHY” – basing their arguments on unreasoning fear. This was the card played by the FBI and DHS this week, when they painted Bitcoin as a haven for money-launderers and child pornographers. But new and disruptive technologies always cause problems – in this case it is fundamentally disruptive for governments and fiat currencies. Governments want to tax it, track it, control exchange rates, and lots of other stuff in their own interest. And unless they can do that they will label it evil. But lost in the noise are the simple questions like “What is Bitcoin?” and “How does it work?” These are very important, and Bitcoin is the first virtual currency with a real shot at being a legitimate platform, so I want to delve into them today. Bitcoin is a virtual currency system, as you probably already knew. The key challenges of digital currency systems are not assigning uniqueness in the digital domain – where we can create an infinite number of digital copies – nor assignment of ownership of digital property, but instead stopping fraud and counterfeiting. This is conceptually no different than traditional currency systems, but the implementation is of course totally different. When I started writing this post a couple weeks ago, I ran across a blog from Michael Nielsen that did a better job of explaining how the Bitcoin system works than my own, so I will just point you there. Michael covers the basic components of any digital currency system, which are simple applications of public-key cryptography and digital signatures/hashes, along with the validation processes that deter fraud and keep the system working. Don’t be scared off by the word ‘cryptography’ – Michael uses understandable prose – so grab yourself a cup of coffee and give yourself a half hour to run through it. It’s worth your time to understand how the system is set up because you may be using it – or a variant of it – at some point in the future. But ultimately what I find most unique about Bitcoin is that the community validates transactions, unlike most other systems which use a central bank or designated escrow authorities to approve money transfers. This avoids a single government or entity taking control. And personally having built a system for virtual currency way back when, before the market was ready for such things, I always root for projects like Bitcoin. Independent and anonymous currency systems are a wonderful thing for the average person; in this day and age where we use virtual environments – think video games and social media – virtual currency systems provide application developers an easy abstraction for money. And that’s a big deal when you’re not ready to tackle money or exchanges or ownership when building an application. When you build a virtual system it should be the game or the social interaction that count. Being able to buy and trade in the context of an application, without having a Visa logo in your face or dealing with someone trying to regulate – or even tax – the hours spent playing, is a genuine consumer benefit. And it allows any arbitrary currency to be created, which can be tuned to the digital experience you are trying to create. More reading if you are interested: Bitcoin, not NFC, is the future of payments, and Mastercoin (Thanks Roy!). Ironically, this Tuesday I wrote an Incite on the idiocy of PoS security and the lack of Point to Point encryption, just before the breach at Target stores which Brian Krebs blogged about. If merchants don’t use P2P encryption, from card swipe to payment clearing, they must rely on ‘endpoint’ security of the Point of Sale terminals. Actually, in a woulda/coulda/shoulda sense, there are many strategies Target could have adopted. For the sake of argument let’s assume a merchant wants to secure their existing PoS and card swipe systems – which is a bit harder than securing desktop computers in an enterprise, and that is already a losing battle. The good news is that both the merchant and the card brands know exactly which cards have been used – this means both that they know the scope of their risk and that they can ratchet up fraud analytics on these specific cards. Or even better, cancel and reissue. But that’s where the bad news comes in: No way will the card brands cancel credit cards during the holiday season – it would be a PR nightmare if holiday shoppers couldn’t buy stuff for friends and families. Besides, the card brands don’t want pissed-off customers because a merchant got hacked – this should be the merchant’s problem, not theirs. I think this is David Rice’s point in Geekonomics: that people won’t act against their own short term best-interests, even if that hurts them in the long run. Of course the attackers know this, which is exactly why they do this during the holiday season: many transactions that don’t fit normal card usage profiles make fraud harder to detect, and their stolen cards are less likely to be canceled en masse. Consumers get collateral poop-spray from the hacked merchant, so it’s prudent for you to look for and dispute any charges you did not make. And, since the card brands have tried to tie debit and credit cards together, there are
