| IS CRYPTOCURRENCY ‘CRYPTO’? First, let’s define the terms. “Crypto” means ‘secret’ or ‘hidden’. Most people think that cryptocurrency is secret money and that the details of transactions in cryptocurrency like Bitcoin are known only to the parties involved and that governments have no way of finding out. I have always suspected that the IRS and the FBI know who is getting large amounts of money with crypto but that they are keeping that under their hats. About a decade ago, I rented an apartment to a group of 5 U.C. Berkeley grad students, all of them working on PhDs in computer science. When they were here, I asked each of them this question: “How secret are cryptocurrency transactions? Is it possible to know who is buying and selling stuff with Bitcoin?” The initial reaction of all of them was: “No. That’s not possible.” Then I asked my second question: “OK. I accept that neither you nor I could figure that out, but what about governments? Suppose a government like the United States or Russia put their state resources into figuring out who is getting and who is receiving large amounts of money in cryptocurrency, could they do it?” All of these guys reacted the same way. First, they went silent while they thought over my question. Then some of them answered: “Yes. I think they could do it.” Others said: “I don’t know”, however, none of them said that the algorithm Bitcoin uses is unbreakable and that even with state resources, it is impossible to figure out who is sending and who is receiving cryptocurrency. (By the way, the Berkeley computer science graduate program is regularly ranked #1 in the nation. It was ranked #1 again in 2024 by U.S. News & World Report.) The evidence now backs up my initial suspicion. On several occasions, big companies in the United States have been hit by ransomware attacks in which the companies made a huge ransom payment with Bitcoin. Some of these ransomware attacks made headlines. In 2021, a ransomware attack on Colonial Pipeline shut down shipments of gasoline from Texas to the East Coast, creating a nationwide shortage. Many gas stations, mainly in the southeast, had to shut down for lack of fuel to sell. President Biden declared a national emergency. The hackers demanded and were paid $4.4 million in Bitcoin. Upon receipt of the Bitcoin by the hackers, an IT tool was sent to the Colonial Pipeline Company to restore their system. It took several days for the pipeline company to get everything back up and running again. This allowed the hackers time to distribute their loot. Nevertheless, a month later, the Department of Justice announced that they had recovered 85% of the ransom. There have been many other stories in the press like this one – a company paid ransom in Bitcoin, and later the U.S. got most or all of the money back. If Bitcoin is truly anonymous, then how did the government get the money back? Predictably, they won’t say. The University of Maastricht. Here’s my favorite ransomware story. In 2020, the University of Maastricht in the Netherlands was hit by a ransomware attack. The hackers demanded and got 30 Bitcoins from the university, then worth about $250,000. In 2022, the university announced that they had recovered the 30 Bitcoins, but by then, the price of Bitcoin had doubled, so when the university sold the Bitcoins, they got $500,000. In other words, the university doubled its money in 2 years from a ransomware attack! While this story is funny, it is additional evidence that cryptocurrency transactions are not really as ‘crypto’ as people think it is. The History of Unbreakable Codes. A lot of individuals and governments have tried to develop unbreakable codes and coding machines over the centuries, but more often than not, it proved to be a disaster. During World War 2, the Germans had a machine that produced coded messages that they believed were unbreakable. The British government put big resources into breaking this coding machine’s messages, and within a short while, they did. By 1942, Winston Churchill had decoded copies of Hitler’s most secret messages to his generals on his desk before the general to whom the order was addressed got his decoded copy. This had a huge impact on the war. Most historians say that without the British code breaking operation, Hitler would have won the Battle of Britain. The Germans continued using the same coding machine right until the end of the war. The Japanese foreign office also had a coding machine that they believed produced unbreakable messages, but even before Japan attacked Pearl Harbor, the U.S. Navy was decoding their messages. Later, the U.S. Navy also broke the Japanese naval code, which proved decisive in the U.S. defeating the Japanese in the Battle of Midway. IS CRYPTOCURRENCY ‘CURRENCY’? “Currency” means money, something people use as a medium of exchange, something to buy and sell things with. Although many people think of cryptocurrency as money and use it like money, it is not legal tender in the United States or any other industrialized country in the world. There is a big difference between money and legal tender. Legal tender is a form of money that governments and their courts recognize for payment of debts. In the United States, only coins and currency issued by the U.S. government or the Federal Reserve are recognized as legal tender. For example, if you are renting an apartment in New York City for $5,000 a month, you have to pay your rent in the legal tender of the United States because New York City is in the United States. You cannot pay the rent on that apartment in Hong Kong dollars unless your lease says you can, and none of them do. Yes, a Hong Kong dollar is money. It is a stable and internationally recognized currency. Although it is money, a Hong Kong dollar is not legal tender in the United States. When the Soviet Union was falling apart and their money was becoming worthless, I knew a businessman who regularly went to Moscow on business. He took a suitcase full of Marlboro cigarettes with him which he used as money. He paid for everything with cigarettes. American cigarettes became money in Russia, but they were never legal tender. In some countries, the courts recognize cryptocurrency as money, but no court and no government in any industrialized nation on Earth recognizes cryptocurrency as legal tender. Why is that? If a government were to accept cryptocurrency as legal tender, then people could pay their taxes with something that they could create themselves, and then those governments would collapse. If, for example, the U.S. government allowed people to pay their taxes in cryptocurrency, then how would the government pay the interest on the national debt? Debt service is now almost equal to the U.S. military budget, and interest payment must be paid in U.S. dollars. Congress may recognize cryptocurrency as money, but they will never make cryptocurrency legal tender. So, if you are using Bitcoin as a way to commit a crime without getting discovered, like income tax evasion, you may not be fooling the IRS. You may just be fooling yourself. |
CYRPTOCURRENCY
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