Ever since BitCoin appeared, I've been waiting for two security experts to venture detailed opinions on it: Dan Kaminsky and Ben Laurie. Dan has now weighed in, with a long, thoughtful piece on the merits and demerits of BitCoin as a currency and as a phenomenon.
Bitcoin's fundamental principle of fraud management is one of denial. If we drop our wallet on the street, the U.S. government is not going to compensate us for our lost cash. Bitcoin attempts to make the same deal, to the point where it calls its stores of keys, "wallets." If we drop our wallet on the street — heck, if someone picks it out of our pockets — the money's gone.
There have been bitcoin thefts. A few years ago, I tried to break Bitcoin, and failed quite gloriously. The system and framework itself is preternaturally sound. But it too is built on the foundation of buggy technologies we call the internet, and so Bitcoin must experience failures from the code around it. Hackers don't care whose code they broke on their way to bitcoin, any more than pickpockets care that they're exploiting the manufacturer of one's jeans or leather wallet. So they break the server below the money, or the web interface above it. They still win.
At least, that's the theory. Reality is more complicated. Of all the millions of dollars of purloined bitcoin that's floating around out there, not one Satoshi of it has been spent. That's because while most other stolen property becomes relatively indistinguishable from its legitimate brethren, everybody knows the identity of this particular stolen wealth, and can track it until the end of time.