Hopkins researchers are creating an alternative to Bitcoin
Source: cwells
Inside a drab computer lab at the Johns Hopkins University, a team of researchers is trying to build something that has never existed before: a digital currency that changes hands completely in secret. Its name is Zerocoin.
The untraceable currency is designed to compete with other virtual moneys such as Bitcoin, which are drawing attention as alternatives for businesses and individuals ― and drawing criticism from some who believe they enable money laundering and other criminal activity.
Advocates say such digital currencies, made possible by complex computer formulas, will eventually be widely embraced by users who want to exchange money instantly and directly, without a bank as middleman. Bitcoins are already being accepted as payment by a growing number of businesses large and small ― from Overstock.com to the D Casino Hotel in Las Vegas to the Fells Point bar Bad Decisions.
Matthew Green, the Hopkins assistant professor of computer science who is leading the Zerocoin project, says there is a legitimate need for anonymous financial transactions. If virtual currencies are going to exist, he and his team of graduate students say, there should be one that provides the same kind of privacy that people have when exchanging traditional forms of money.
"In our field, the probability that you're going to have an impact on the world is kind of low," Green said. "We want to make something that the world wants and can get use out of."
But some worry about the potential for misuse of unregulated virtual currencies, which are not backed by any government or a commodity like gold, but instead exist entirely as computer code.
Steve Hudak, a spokesman for the Financial Crimes Enforcement Network, a money-laundering-monitoring agency under the U.S. Treasury Department, said his agency is concerned about the risk of criminal use of virtual currencies.
"The anonymous transfer of significant wealth, instantly, any place in the world, is kind of an obvious money-laundering risk," he said, declining to comment specifically on Zerocoin.
Virtual currencies have drawn attention in recent months in large part because of the high-profile bust of Silk Road, a $1.2 billion online marketplace for illegal drugs. The secretive cryptocurrency Bitcoin was used to make purchases on Silk Road, according to federal prosecutors in Maryland and New York who charged the site's alleged founder, Ross William Ulbricht, with drug, money-laundering and computer hacking offenses, in addition to attempting to order the killing of an employee.
At the time of his arrest last year, federal authorities said, Ulbricht had 600,000 Bitcoins worth about $80 million. Ulbricht has pleaded not guilty and is being held pending trial.
This week, federal prosecutors charged Charlie Shrem, the CEO of a Bitcoin exchange site and vice chairman of the Bitcoin Foundation lobbying group, with conspiracy to commit money laundering. They alleged that he and another man had sold $1 million worth of Bitcoins to people attempting to buy and sell drugs on Silk Road. Shrem has denied the charges through his lawyer.
Bitcoin, the first virtual currency, arrived on the scene in 2009 and its inventor is a mystery, known only by the pseudonym Satoshi Nakamoto. Essentially, Bitcoins and other virtual currencies are "mined" when computers compete to solve complex mathematical formulas ― the first to solve a formula is rewarded with 25 Bitcoins. The Bitcoin mine will eventually run out when all 21 million Bitcoins are created and put into circulation.
Bitcoin transactions are recorded in a public ledger. That ledger, which shows the size, time and number of Bitcoins sent, is necessary to prevent duplicate Bitcoins, but is the key reason the cryptocurrency is not truly anonymous.
Green and other cryptography experts say patterns in the ledger can be tracked with data-mining software and ultimately traced back to the user. So he set out to work on an untraceable currency, working with three Hopkins grad students and a group of researchers at the Massachusetts Institute of Technology.
Zerocoin was initially conceived as computer code that would add anonymity to Bitcoin transactions. But it is now being developed as a separate currency after pushback from some Bitcoin advocates who are seeking to defuse the issue of criminality and win over Congress and federal authorities by arguing that Bitcoin transactions are traceable.
Green and his graduate students released a paper in April 2013 outlining how Zerocoin would work, hoping that someone would take the research to the next level and write the software code to support it. When no one did, they began writing the code for an exchange. They believe it will be ready in the spring or early summer.
The researchers struggle to explain to those unfamiliar with cryptography how Zerocoin works, and their 2013 paper contains lines such as, "This optimization involves a time-space trade-off." The simplest explanation they use is that Zerocoins are based on computer code, similar to Bitcoin, and to make the transactions private, they rely on a complicated formula. Users would access Zerocoin using an anonymous web browser.
Inside their third-floor lab in Maryland Hall at the university's Homewood campus, home to several working computers and a jumble of hard drives and other computer parts, Green and the grad students are candid about their excitement about the project, their uncertainty about the legal implications of their research and their skepticism of claims that Zerocoin would be exploited by criminals.
Green, who blogs on privacy issues, found himself in the middle of controversy last year after a Hopkins official ordered him to remove from university servers a blog post that criticized the National Security Agency's surveillance methods. The university later reversed course.
Privacy is "really important" and virtual currency users need it for various reasons, he said. "Imagine everyone knows you won the lottery and are worth $50 million, and they kidnap you, which doesn't really happen in the U.S. but is an issue in other countries," he said.
Green also envisions Zerocoin being used for everyday purchases or costs such as visiting a psychiatrist.
To Green and his team, fears of Zerocoin being used for widespread money laundering are overblown. They say they can incorporate a method of allowing law enforcement to identify users suspected of criminal activity while keeping the system anonymous for everyone else.
Besides, said Ian Miers, one of the grad students, "Money laundering isn't about anonymity, it's about making it look legitimate."
Still, authorities and some experts on the issue of virtual currency remain leery ― while acknowledging that it will be difficult to stem the tide of virtual, secretive currencies.
"If I'm a drug cartel and I want to deal in cash, it's very difficult for me to move large multimillion-dollar suitcases from point A to point B and to pay many people in my network without being caught," said E.J. Fagan, a spokesman for Global Financial Integrity, a Washington-based anti-money-laundering organization. Zerocoin would make such transactions easier, he said, while handcuffing authorities.
"Any efforts to make these things more anonymous are extremely dangerous," Fagan said.
Dennis Lormel, a consultant on financial crimes and the former director of a division within the FBI that monitors terrorist financing, agrees. "If you're a terrorist or a criminal trying to move money, if you have the ability to do it anonymously, it certainly works to your comfort level," he said.
Other cryptographers say the relatively complicated nature of using cryptocurrencies versus cash or a bank account would limit any criminal use. Nicholas Weaver, a professor in the International Computer Science Institute at the University of California, Berkeley, said accusations that Zerocoin would aid widespread money laundering are "downright silly."
"This anonymity is still imperfect," said Weaver. "It works if there is a large crowd of users, but if there is not, or if there are one or two big users, the anonymity it affords is limited. Any criminal who wants to launder money with Zerocoin will still face the same problem: They need to turn the substantial amount into dollars, and that's a difficult and traceable step."
The U.S. government, like other nations, is still evaluating its response to virtual currencies. Last month, Treasury Secretary Jack Lew called Bitcoin a "phenomenon" but said the federal government should ensure that it does not become a financial haven for criminals and terrorists. Meanwhile, various federal agencies are working out regulations for virtual currencies. The IRS, for example, is developing its own rules, but has not determined yet whether a virtual currency should be taxed as a commodity, asset or currency.
Hudak, of the Financial Crimes Enforcement Network, said his agency issued guidance last year for companies changing Bitcoins or other such currencies into cash ― they must register with the government as a money services business and put anti-money-laundering controls in place. About 40 firms have done so, he said.
"There's some tension now between groups that think regulation is good for Bitcoin, that coming under regulation would improve its chances of being a legitimate business activity and lead to greater acceptance throughout the economy," Hudak said. "But there are still other players in the Bitcoin community who take a more libertarian view and think government should stay out of any involvement in Bitcoin's growth."
Zerocoin and Bitcoin have competitors that federal authorities are also watching. There are Anoncoin, Litecoin and a few other currencies that Green's team said were developed as a joke but get some real use: "Dogecoin," as in dog, and "Coinye," a play on recording artist Kanye West's name.
Speculators have driven up the value of one Bitcoin from $250 last April to nearly $1,000 at one point in January, leading some to believe that value is a bubble. Investors include Cameron and Tyler Winklevoss, the twins who engaged in a legal battle with Mark Zuckerberg, arguing that he stole the idea for Facebook from them in a case that netted them a $65 million settlement.
Zerocoin has also attracted attention from other cryptography researchers and from Bitcoin enthusiasts. On the online forum Reddit, those familiar with the money being speculated in Bitcoin ask: "Can we start mining ZeroCoin?" Green said some people have offered the researchers money to complete the project, but they have turned it down.
"This logic is why everyone is hounding us about Zerocoin," said Miers. "They want to get in on it early. If you get in for cheap, it's worth the risk."
Green and Miers say they are not creating Zerocoin as a get-rich-quick scheme. Instead, they warn that once the exchange is live, users should be cautious about putting their money into it. They want to place warning labels on the website, and Green said they plan to eventually "walk away" from it.
"We're cryptographers," Green said. "We're not going to invest our own money in it."
The researchers harbor some worries about practical issues. For example, Zerocoins, which would exist virtually on a user's computer or hard drive, can be stolen, and there would be absolutely no way to get them back or even to know who took them.
Green and his team say they cannot foresee how Zerocoin's popularity will compare with that of other virtual currencies. They hope to release it to the world, step back and watch what happens.
"If people start playing with it, that's all I want," Green said.
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