Cryptocurrency came into existence because of a very strange set of circumstances. The technology that gave rise to cryptocurrency; public-key cryptography, was created because two very different groups of people in separate eras of history were faced with the same problem.
The problem was sending information securely, covertly, seamlessly, and quickly to large numbers of people. It came about because a new technology greatly increased both the capacity for communications and the danger from information theft.
This dilemma plagued military commanders and intelligence officials during World War II and the Cold War, and members of the anarchistic hacker or Cypherpunk culture that arose during the 1990s. Strangely enough, they arrived at the same solution, and that fix put the two groups on a collision course.
How the Military Industrial Complex laid the Groundwork for Cryptocurrency
Modern cryptography originated during World War II as a response to a new communications technology. The technology was radio which allowed the instant wireless transmission of vast amounts of information from almost any location.
The obvious shortcoming to radio was that anybody else with a receiver could be listening in – including the enemy. The problem first arose during World War I; but became a security nightmare during World War II, when new smaller radio sets made it possible to transmit or receive signals from almost anywhere.
The apparent solution was to encrypt or encode radio transmissions. Encryption of signals became widespread during the 1930s; when devices like the German Enigma machine appeared on the market. When war broke out in 1939 both the United States and the United Kingdom launched massive national encryption and code-breaking programs.
The German Enigma Machine, Image from Wikipedia.
These efforts gave rise to an organized science and technology of cryptography. Cryptography had existed for centuries as a sort of hobby for spies, mathematicians, and diplomats. A few professional cryptographers had emerged from World War I, but they had a hard time finding work. The makers of the Enigma machine ended up selling it to the public; and in 1929 Secretary of State Henry Stimson shut down the U.S. government’s code-breaking operation, because he thought it rude to read others’ mail.
During World War II both the United Kingdom and the United States created massive national encryption and code-breaking efforts. Those efforts helped the war effort greatly by breaking almost every German and Japanese code. After the war, both governments created formal information security and electronic surveillance organizations that continue to this day.
Two cryptographers at one of these organizations, Britain’s Government Communications Headquarters (GCHQ) came up with the basic concept utilized by cryptocurrency in the early 1970s. James Ellis came up with the idea for non-secret, or public key encryption; an encrypted message that contained the key to unlocking the encryption. Clifford Cocks came up with the mathematics that made it work.
James Ellis, image from The Telegraph.
Neither GCHQ nor its American counterpart the National Security Agency (NSA) adopted public key encryption because the technology to enable it was not available. A public computer-controlled communications network (the Internet) was needed to enable public key encryption, but there were no such systems open to the public in the 1970s.
Enter the Cypherpunks
The next group of people to become interested in cryptography were computer scientists and users in the 1980s. Their problem was the same one the military had with radio, how to keep information secret in an open environment – the internet.
As the internet became widely used in the 1990s, a small number of people; mostly hackers, realized it was not secure. They wanted a means of transmitting data secretly and privately on the internet and public-key encryption was the answer.
Small groups of hackers, mathematicians and cryptographers began working to make public-key encryption a reality. The idea had been publicized in the 1970s, and largely picked up by few intellectuals including David Chaum.
David Chaum, Image from Wired.
Chaum began worrying about he called “the dossier society” and “invisible mass surveillance;” in which computers would tell the government and big business everything about everybody. Looking for a means of preserving privacy Chuam turned to cryptography, and proposed a number of solutions far ahead of their time. Chaum’s ideas included untraceable electronic mail, digital signatures, and digital secret identities.
It was Chaum who first proposed cryptocurrency in 1983, in a paper called Numbers Can Be a Better Form of Cash than Paper. Chaum predicted that electronic cryptocurrency might be as anonymous as paper money, but as convenient as a credit card. The technology to create cryptocurrency did not exist in 1983, but the idea stock around.
By the 1990s a movement of “Cypherpunks” had emerged and was hard at work trying to make Chaum’s ideas reality. Various public-key encryption solutions such as Pretty Good Privacy (PGP) were released. The Cypherpunks were an offshoot of the cyberpunk movement; which combined fascination with the internet and computers with a love of 1980s and 1990s counterculture.
The goal of the Cypherpunks was to use the tools of encryption; invented by the military-industrial complex, to protect individual freedom. A major fear of the Cypherpunks was that government would takeover or subvert their playground in cyberspace.
Cryptography would become the shield that would protect their liberty from big government. They laid their basic ideas out in “A Cypherpunks Manifesto” :
Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn’t want the whole world to know, but a secret matter is something one doesn’t want anybody to know. Privacy is the power to selectively reveal oneself to the world.
Many of the Cypherpunks were ideologically opposed to the very idea of government. American Cypherpunks tended to be Libertarians; who view all government as evil. European Cypherpunks were usually Anarchists who viewed both government and big business as evil. The most utopian of the Cypherpunks believed that could use cryptography to create a digital utopia.
This ideology helped fuel the low-intensity warfare between Cypherpunks and the intelligence community that has been waging since the early 1990s. The two groups use the same tools but are at odds because of greatly disparate notions of patriotism and the common good. The warfare heats up every time agencies deploy new surveillance tools, or the Cypherunks unleash new encryption methods.
How the Cypherpunks may have created Bitcoin
By applying cryptography to personal computers and the internet, Cypherpunks launched a widespread movement of open-sourced cryptography research. This research took nearly 20 years but in 2009 it gave rise to the first public cryptocurrency; Bitcoin and introduced the concept of blockchain to a wider audience.
The true identity of the creator of Bitcoin Satoshi Nakamoto, is still unknown but it is obvious that he or she came out of the Cypherpunk movement. That gives rise to all sorts of speculation; including the idea that Nakamoto might be an employee or former employee of GCHQ or the NSA. Either way, Nakamoto’s creation has made the dreams of the Cypherpunks part of the wider culture and society.
Today, we are on the verge of a widespread crypto-revolution that might lead to the fulfillment of the Cypherpunks’ wildest visions; The simple desire to keep information private may just change the world for the better.
An excellent history of public-key cryptography and the Cypherpunk Phenomena appears in The cypherpunk revolution a Christian Science Monitor project from July 2016.
The best history of digital cash is Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order by Michael J. Casey and Paul Vigna. Sadly that book; which appeared in 2015 is already dated, but it is still an eye opener.
There are many excellent books about cryptography and codebreaking in World War II. One of the best is Code Girls by Liza Mundy, which explores the origins of the NSA and American cryptography. Still worth reading is Ronald Lewin’s Ultra Goes to War: The Secret Story; which first publicized the role encryption played in World War II back in 1977.