Authorities in Germany confirmed last week that they had seized 1,700 bitcoin, currently valued at over $79 million, from a nefarious hacker. There’s only one problem: he won’t hand over the password required to access it.
The debacle raises some serious questions: How does Bitcoin encryption work? What can the police do to regulate cryptocurrency? And to what extent does digital cash render traditional governmental authority irrelevant?
Where’s the password?
After serving a two year sentence for secretly installing malware and using other people’s computers to “mine” bitcoin, the Bavarian cybercriminal is refusing to share his password with local authorities. Multiple attempts by police to crack the code have proven futile.
Bitcoin is stored in digital wallets, which are encrypted and entirely secure. Without a password, it is impossible to access contents, and repeated failed attempts can result in a wallet becoming irreversibly locked. “We asked him, but he didn’t say. Perhaps he doesn’t know,” Prosecutor Sebastian Murer told Reuters on Friday.
With Bitcoin’s price at record highs, the wallet’s value has skyrocketed since the original arrest, only fueling the urgency of the search for its password and further demonstrating the strength of Bitcoin’s security. It also indicates the lack of power police and local authorities hold over cryptocurrency accounts.
Complete security comes with great risks
It’s not just Bavarian police who have been running into difficulties accessing digital cash. While Bitcoin’s encryption facilitates completely private and secure ownership, it can pose an enormous risk, even to its biggest holders.
Last month, Stefan Thomas, a German programmer living in San Francisco, made headlines as he closed in on the possibility of losing 7,002 bitcoin, valued at $327 million. Thomas’s wallet is locked by password, and he misplaced the paper he wrote it down on.
After eight failed attempts to log in, he only has two tries left. At ten attempts, the wallet will be inaccessible, forever. “I would just lay in bed and think about it,” Thomas told the New York Times, “Then I would go to the computer with some new strategy, and it wouldn’t work, and I would be desperate again.”
Meanwhile in Wales, an IT engineer is in a dispute with local officials in an attempt to recover a hard drive containing over $350 million worth of bitcoin. While cleaning his home in 2013, James Howells accidentally threw the hard drive, which has since skyrocketed in value, into the trash.
Bitcoin’s secure storage makes accessing a hard drive’s contents possible only with the physical drive in hand. Howells has been able to determine which garbage dump likely contains his hard drive, but he needs permission from the local council to excavate it. His multiple requests to the Newport City Council have all been rejected, citing environmental and funding concerns.
Howells has gone to extraordinary lengths to overturn the decision. He has secured his own funding for the excavation, with backing from a hedge fund, and is even offering to donate 25% of the hard drive’s contents to a Covid Relief Fund for his home city, but all to no avail.
According to the New York Times, 20 percent of the world’s bitcoin is lost on drives or locked in wallets with lost passwords. Most appear to have been misplaced years ago when the value of Bitcoin was a fraction of what it is today. Although the stakes for recovering lost bitcoin are enormous, nothing can be done by police or Bitcoin users alike.
While Bitcoin’s privacy and security is appealing to many, Stephan Thomas warned of the risk that total encryption poses: “This whole idea of being your own bank — let me put it this way: Do you make your own shoes? The reason we have banks is that we don’t want to deal with all those things that banks do.”
The dangers of cryptocurrency
From its inception, Bitcoin was intended to curtail governmental oversight of private transactions by giving users complete control of their assets. No identity check is required to obtain the currency which is regulated by a decentralized network of computers rather than government power.
Anonymity, security, and decentralization have made Bitcoin popular with criminals. A 2019 study revealed that 28 million Bitcoin users, or about 25 percent, are primarily involved in illegal activity. It also found that about half of all Bitcoin transactions are criminal in nature. This has raised concerns among investors and policymakers alike.
In her January confirmation hearing, Secretary of Treasury Janet Yellen dubbed blockchain-based financial networks “a particular threat,” and pledged to “examine ways in which we can curtail their use and make sure that [money laundering] does not occur through those channels.”
The nontraditional structure of cryptocurrency also makes it potentially dangerous to investors. Both the European Central Bank and Goldman Sachs say Bitcoin is too volatile to be a medium of exchange. And, because it is not backed by any banks, they warn that investors should be prepared for the possibility of losing everything.
Despite warnings from the financial establishment, bitcoin’s price had surged to a record $47,000 by early February. Part of that surge could be attributed to Tesla, which purchased $1.5 billion in bitcoin “to further diversify and maximize returns on [their] cash.” The company also announced its intention to accept Bitcoin as a payment method, further bolstering confidence in the currency’s legitimacy.
Public endorsements by celebrity figures from Gene Simmons to Snoop Dogg have also helped send the price soaring. Similarly, Elon Musk’s recent tweets endorsing another cryptocurrency called Dogecoin prompted the coin to rally 37% in just 24 hours. As a result, disruptive cryptocurrencies are becoming more and more mainstream.
Musk touted Dogecoin as “the people’s crypto,” reflecting its ability to provide financial access to any individual. Gabriel Abed, an entrepreneur from Barbados echoes this sentiment. Though he found himself in a similar situation to Stephan Thomas when he lost 800 bitcoin in 2011, he is still an outspoken champion of cryptocurrency.
Before Bitcoin, most citizens of Barbados were unable to access even the most basic financial resources, such as bank accounts or credit cards. Cryptocurrency afforded locals the power to take control of their financial destiny — and even enabled Abed to buy a $25 million property on his home island.
Abed refuted Thomas’ warnings about cryptocurrencies, telling The New York Times, “The risk of being my own bank comes with the reward of being able to freely access my money and be a citizen of the world — that is worth it.”
Some cryptocurrency figureheads have even sought to create a sovereign state on the foundation of a free market and libertarian ideals. The Free Society Foundation, founded by Olivier Janssens, is in the process of “purchasing sovereignty from a government to create the world’s first free society.”
But there are more tangible examples of how cryptocurrencies are already promoting civil liberties. For instance, Bitcoin has the power to financially liberate individuals living under authoritarian governments such as Venezuela and China, both of which wield the authority to seize assets held by citizens in traditional bank accounts.
Situations like the one in Bavaria serve as a reminder of Bitcoin’s power to disrupt traditional governmental authority. While cryptocurrencies may represent a volatile risk to investors today, they have the power to disrupt the very foundation of traditional finance. They may also hold the key to individual financial liberation, a true free market, and realization of the libertarian ideal.
The views expressed in this piece are the author’s own and do not necessarily represent those of The Daily Wire.