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Setbacks For Bitcoin, The Anonymized, Digital Cash

BY Nick Judd | Tuesday, June 21 2011

Bitcoin, the anonymized, peer-to-peer system for digital cash transactions, just reached a low point: After mentions in the mainstream press, then reports of trojans and exploits targeting Bitcoin users, followed by a catastrophic vulnerability at one of the largest Bitcoin exchanges, Mt. Gox, the Electronic Frontier Foundation yesterday announced that it felt the currency was too new and too legally unproven to continue using.

Bitcoin's advocates are quick to say that there have yet to be any proven technical flaws in the system itself — just in the systems of other people using it. But it may be that its legal obstacles and uncertainties are enough to set the project backward.

The EFF, one of the most respected advocates for privacy, anonymity and personal security online, was cautiously optimistic about Bitcoin earlier this year. Because of its combination of openness and anonymity — the database of Bitcoin transactions is public, the identities of each buyer and seller don't have to be — and its separation from any state actors, the foundation saw great potential in the project.

"Bitcoin is particularly interesting in the wake of recent events that demonstrated how financial institutions can make political decisions in whom they service, showcased by the decisions of PayPal, Visa, Mastercard and Bank of America to cut off services to Wikileaks," their Rainey Reitman wrote in a blog post exactly six months ago. "Bitcoin, if it were to live up to the dreams of its creators, might offer the kind of anonymity and freedom in the digital environment we associate with cash used in the offline world."

But there has been no shortage of skepticism about Bitcoin, either. Seatgeek's Adam Cohen has already predicted its demise; earlier this year, he criticized the currency on Quora as "such an obviously flawed system that it will probably never grow to a point where it causes any ill-effects,or even impact, to world economies," for many of the reasons that caused the crash after the Mt. Gox attack.

For the EFF, this all seems to be a bit too much to deal with. In a blog post, their legal counsel, Cindy Cohn, said the foundation did not want to be using Bitcoin on the off chance that it turns out to be, well, illegal.

"However, we’ve recently removed the Bitcoin donation option from the Other Ways to Help page on the EFF website, and we have decided to not accept Bitcoins. We decided on this course of action for a few reasons," Cohn wrote.

Chief among those reasons, she wrote, was that "we don't fully understand the complex legal issues involved with creating a new currency system."

The market for Bitcoins doesn't look to be catastrophically affected. According to the Bitcoin currency tracking site Bitcoin Charts, Bitcoins will trade at $17.51 at Mt. Gox when it's back online and opened at €12 on another high-volume exchange, Bitmarket.