So in a post a few weeks ago about Bitcoin when Mt Gox (the largest USD>BTC exchange) had it’s Dwolla (the intermediary for US bank accounts dollars to reach Mt Gox) account siezed by Homeland Security I abated the fears of anyone reading (and my own) with the logic that this was not the end.  However, as more actions by United States agencies begin to unfold I have adopted more conservative risk management in regards to Bitcoin.  The risk I am specifically trying to avoid is my assets both USD and BTC within the system being locked, frozen, or lost.  Any number of these have been at risk of happening in the “Wild West” economy Bitcoin represents.  I have always held the notion that anything and everything I have in BTC could be gone in an instant (just as a portion of my holdings vanished in a Solid State hard drive crash… yes, I knew you could back up your wallet I was just careless).  I still want to trade it for fun and proof of concept that it is a financial instrument but I have been given pause by current events.

This week I have seen a string of news:

May 28: Justice Department unseals indictment against Liberty Reserve: Liberty Reserve was one of the first ways to get money to Mt Gox.  I remember setting up an account but did find the whole thing a bit shady.  I was much more impressed with Dwolla being US based and used them as my primary funding source instead when they became available.  This indictment was the result of the probe into the Gulf Bank hacking from last December where the criminals involved were using Liberty Reserve to launder the money.  The terminology of the indictment specifically noting the Justice Department’s focus on “digital currency” hits home to Bitcoin.

May 28 – OKPay Suspends Money Services to Mt Gox: I can only assume that OKPay wanted to preserve their other business interests and upon news of the Dwolla seizure made the decision voluntarily.  Notice how the authorities went after the largest funding source on the largest Bitcoin Exchange first… and then the others begin to fall in line.

May 29: The US Justice Department forces Switzerland to change it’s laws on account disclosure: Desperate times call for desperate measures; i.e., our national debt burden is leading the government to go hunting under every crack for some additional tax revenue.  No more is it to be allowed that a US citizen can hide their assets from the IRS in Switzerland.  The Justice Department made it clear to Swiss banks that doing so would put you out of business like Wegelin & Co.  That pressure was enough for another nation to change it’s laws just to serve US.  Notice again; the authorities went for the oldest company.  The point is always to maximize prosecutorial effect.  See also; Martha Stewart.

What this demonstrates to me is that the US government feels entitled to know about every penny it’s citizens posses and exchange to prevent criminal activity and enforce taxation.  Bitcoin, while not yet specifically mentioned, has to be within their crosshairs by now.  There is a very vocal libertarian, crypto-anarchist, black market economist, etc. crowd of people that want to believe they can resist these authorities within Bitcoin but the Lead Developer of Bitcoin was quoted at this year’s Bitcoin conference when asked about government interference:

I think if the U.S. government decided that Bitcoin was a bad thing and told me, “Stop doing what you’re doing,” I’d stop doing what I’m doing, quite frankly. But that wouldn’t be very effective, because there are people all over the world who could pick up and reimplement it, for example in different programming languages; if you browse the Bitcoin forums you’ve seen the enormous chaos and energy there. There’s all sorts of people doing all sorts of things—many of them crazy things that will never succeed, but some of those will be the next big things in Bitcoin.
The first part initially struck me as “wow, what a wuss.”  Then again, one wouldn’t expect passionate martyrdom from a computer programmer.  He admitted that he would cave to even the slightest pressure but knew his departure would not be the functional end of Bitcoin.  Certainly the more anarchistic hackers in the community would take up the project.  His statement doesn’t give me much confidence.  It would be like hearing the COO of a company in which I held stock saying “if I get a letter with harsh words I am going to quit immediately.”

I believe that a parallel can very accurately be drawn between Bitcoin and the history of Peer 2 Peer file sharing.  Bitcoin is based upon a P2P idea and system that fundamentally changes and arguably threatens conventional methods of financial exchange just as P2P file sharing changed the game for intellectual property distribution.  I was amazed the other day to walk into a renovated movie theater to see a server room prominently enclosed in glass in the middle of the lobby.  The manager explained to me that movie production studios provide downloads of digital copies of movies, store them on the servers, and play them digitally through projector across the theater.  There is no need to pay a projectionist’s salary to run the reels nor make and ship several 50 pound metal boxes of expensive chemical film to every theater which can cost up to $5000 each.  File sharing has evolved into real cost savings for the industry that tried to destroy it; just as they tried to destroy VHS in the 80′s.  Governments and financial institutions may one day embrace Bitcoin but not before they exhaust every legal recourse to destroy it for what it represents: change.

So what am I doing?  I am liquidating most of my BTC holdings now on CampBx and transferring them to my USD bank account through Dwolla.  Though I met the owner of CampBx, which is based in Atlanta, there is no guarantee that it will remain immune to being shut down.  In which case any BTC I have on their servers may be lost.  Dwolla may also one day stop any transactions going to Bitcoin exchanges.  In which case I would have to find someone to trade cash in person for BTC.  Either way would represent worst case scenarios and I am limiting such downside risk.  I will still keep a small portion of BTC for novelty in a BACKED UP digital wallet on my own private secured server.  If the climate becomes more hospitable then I’ll jump back in but for now closing out at $130 which is half of the all time high of $266 sounds like a good exit.