From Auction to Extortion and Everything in ‘Bit’ween

Cryptocurrency taking major steps towards ‘mainstream’

MC 1Bitcoin, the cryptocurrency that never shy from the lime light is now in news in connection to auction, extortion and the Mastercard patent.

Following Friday, June 27th auction of nearly 30,000 Bitcoins amounting to about $19 million at the current exchange rate by the United States Marshals Service, investors and Bitcoin enthusiasts have been eagerly awaiting the outcome. As the agency began notifying winners and losers late on Monday afternoon, many in the Bitcoin sphere were still trying to figure out who made the winning bid and what price these Bitcoins fetched.

The United States Marshals Services, with help from the F.B.I. and federal prosecutors in Manhattan, have arranged the online auction for 29,656 Bitcoins seized from the now-defunct dark net site Silk Road. Silk Road which has been accused of aiding the sales of illegal goods and services has been taken down from the virtual realm of the internet since October 2013.

Bidders had a 12-hour window last Friday to submit one sealed bid for these cryto-coins, which had been broken up into lots of 3,000s.

The Marshals Service stated on Monday, June 30th, that they had 45 registered bidders for the event, and that the agency received 63 bids over the course of the auction. Beyond that, the agency declared from the very start of the auction that no confidential information will shared that will include names of winning bidders or the amount of the winning bids.

Nonetheless, a few bidders names have been leaked out (this is the age of information after all, where privacy is well not really what it seems). So far, there has been confirmation that some of these bidders including names like Coinbase, a Bitcoin payment processor; Rangeley Capital, a value investment fund; and Alex Waters, the chief executive and co-founder of CoinApex, a Bitcoin-focused start-up.

Even as bidders’ names became public, these participants remained largely chose to be tight-lipped about their bids.

Why it Matters?

This is an important question for a number of reasons. The Marshals Service is auctioning off 29,000 plus (held in Silk Road server) bitcoins, however, the federal law enforcement body still holds around 110,000 coins that were seized from the bust and discovered on Ross Ulbricht’s computer). Auctioning just a fraction of the total Bitcoins seized, indicates that the agency might be evaluating the legitimate interest for the auction.

But more importantly, there is a school of thought that the auctioning could be a way for the feds to implicitly acknowledge Bitcoin’s growing value in the currency realm. The alternative for them would have been to simply delete the account.

The Aftermath

Bitcoin prices have been on a rise since the auction begun, and it is now up by 8.90% since last Friday at the time auction ended. Now the price those Bitcoins was sold could create yet another bullish rally. Considering the alternative had the feds just dumped their holdings on the market this would have certainly driven Bitcoin prices down. Hence, the option to have sealed bids has created a different dynamic. With bitcoin trading strongly, it appears the market is leaning towards the winning bids to be above market prices.

Source: Bloomberg
Source: Bloomberg

But this is only speculation at this stage as the US Marshal Service has not released any information pertaining to the winning bid. The bullish reaction, nevertheless, was inflated by vested interests which proclaimed that their bids had gone unfilled. This was immediately interpreted by the community as an indication of growing demand, which means that at least USD$20MM of bitcoin buying demand went unsatisfied during the auction, and it would now be used to purchase bitcoins elsewhere, i.e. through the market

Regardless, the silence from legitimate winners, i.e. those who can actually prove they had winning bids, has been deafening.

This of course is the key point. The nature of the auction (sealed, multiple-bid English) means it is all down to speculations and theory games from now on, unless, of course, the US Marshal Service does the unexpected and surprises everyone with a public release, or a major leak (the virtual world is always full of surprises).

MasterCard files patent

What is more on the cryptocurrency news dashboard, Global financial services giant MasterCard Inc. (NYSE:MA) filed a patent in March 2013, entitled “Payment Interchange for Use With Global Shopping Cart” details of which were published on June 19, 2014.  It has not yet been approved by the Patent Office, but the concept itself is interesting and it is certainly not limited to Bitcoin. The pending patent recognizes that there are other ways to pay for goods and services beyond sovereign currencies, and that a buyer may have very good reasons to use them.

The patent application is part of a series of filings related to MasterCard’s effort to build a global online shopping cart catering to online shoppers.

MasterCard is aiming to create a global payment Interchange that accommodates multiple forms of non-traditional payments including digital wallets, barter, social media credits, coupons, and crypto currencies.  As long as the payment type is accessible through an API (Application Programming Interface) and can have an agreed-upon value, it can pass through this new interchange.

Putting Bitcoin through a MasterCard exchange seems absurd as they both follow fundamentally different rules.  Bitcoin transfers are both anonymous and irrevocable.  MasterCard transactions, on the other hand, are subject to chargebacks and definitely not anonymous.

Bitcoin’s patent battles

With the news of the MasterCard filing, the credit card issuer adds its name to a list of other traditional financial companies that have sought to claim patent protection for various digital currency uses, including Gemalto, Visa (NYSE:V) and Western Union (NYSE:WU).

However, while potentially worrying to observers in the bitcoin community, there remains doubts regarding just what kind of threat, if any, digital currency companies would face from the patent filings.

Show me the Bitcoins!

When Virgin Galactic to Dish Networks (NASDAQ:DISH) to Overstock (NASDAQ:OSTK) stated they would begin accepting Bitcoin for payment, supporters of the currency were thrilled. They cheered that ‘bitcoin is going mainstream!’

Things, however, took a different turn when an extortionist targeted local businesses threatening them with negative reviews on local sites such as Yelp (NYSE:YELP) if they do not pay one Bitcoin each. If they do not abide to blackmailer’s request by the initial deadline the price goes up to three bitcoins each – a few thousand dollars – and then the badgering begins. This includes denial of service (ddos) attacks and vandalism.

Recent extortions have included Domino’s in France which refused to pay $40,000 to prevent the release of 650,000 pieces of private customer information. Considering these pizzerias have very little in the way of value – except their cash – this is more of a low yield, short-term scam. Here is hope these ‘villains’ get caught and that the community helps bring them down. After all, extortion is a bad publicity if bitcoin is to be introduced to small businesses.

Bitcoin has now attracted national retailers and service providers, regulators, consumer complaints and now has boarded the scam wagon like many other breakthrough concepts in the past. This sort of welcomes Bitcoin to a legitimate consumer trend.

Crypto-currencies like Bitcoin are gaining interest from real investors and businesses alike. Now that the rules of engagement have been clarified, and the US government has deemed that the virtual currency is valuable enough to be auctioned in large blocks, speculators will continue show interest. It would be fascinating to see these currencies absorbed into MasterCard’s switches and PayPal’s system.

Capitalism is nothing if not resilient; it would be interesting to observe how it absorbs the anarchy of the cryptocurrency into mainline business processes. We are in a time of revolution after all…

Perhaps we should hedge our bets too…

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