Follow up:

egold plead guilty to "operation of an unlicensed money transmitting business". While I'm not familiar enough to say definitively if bitcoin could avoid this same statute in the US, I'd guess not.

Even more so than Napster, E-Gold was very centralized, and thus an easy target. Bitcoins are an entirely decentralized network like Bittorrent or Gnutella, which have not been declared illegal.

But even if trading was made clearly illegal in the U.S. all that we need is a company abroad under benign legislation that allows you to buy/sell bitcoins and that accepts credit cards.

You're right that you obviously can't make it illegal to perform mathematical calculations over big numbers. Also, you can't make it illegal to interpret the result of the calculations or giving them a context.

But I think you can't make it illegal to trade bitcoins either: if everything else fails we can always have bitcoin trading parties where the participants can exchange bitcoins to money and money to bitcoins with no third party in the middle.

Look at E-Gold's fall: http://www.wired.com/threatlevel/2009/06/e-gold/

E-Gold was a private organization that allowed people to open anonymous accounts backed by gold. I can see how this could be construed as a bank.

Bitcoins are not backed by anything, and are not managed or owned by any organization. I don't think you could classify the Bitcoin network as a "bank", any more than you could classify any random crowd of people as a bank.

E-Gold was a commercial enterprise with only 20 employees and no legal team. Very easy to take down. It will be hard for the feds to take down a P2P network, although very easy for them to police e-commerce sites that accept it.

While "best practice" is to generate a new btc address for each transaction, there are still ways to attempt to profile users even if they use that rule. For instance, if someone knows you like an esoteric thing, and they know you have a lot of bitcoin, they can look at people buying things from public addresses (most shops or established bodies have permanent addresses for receiving) that are associated with esoteric thing, and say it's likely that you were purchasing at least some of that. They can do other filtration and process-of-elimination things to find out who is using what, or where something comes from.

Additionally, if the wallet of one who you've traded with in the past is compromised, even if they were using single-transaction addresses, the attacker may be able to fill in some missing links in the chain, especially if the wallet's owner has recorded anywhere a translation from btc address to useful memo/accounting data. Imagine if UBL used btc and the Feds got his wallet; everyone downstream would be hunted with some serious prejudice.

I should clarify that in bitcoin, the entire transaction chain from the time the block is generated until the last time it is used is recorded forever. Once you send from an address to another address, that transaction is ingrained in btc for the remainder of its existence, and every coin you receive has a long history that shows all of that. While the names are long hashes and not things like "TERRORIST KINGPIN -> INNOCENT BUT NOW SUSPECT GUY", there are some ways to put something like that together, and they're not all obvious.

One argument would be that bitcoin is an illegal pyramid scheme.

Another would be that bitcoin is means circumvent the tax system (all barter and local currency systems, for example, have to pay taxes).

I'm sure many other arguments could be found.

Like, "Bitcoin is anti-American" or "Bitcoin will be used by heroin dealers who will sell your daughters into prostitution"

If bitcoin is a means to circumvent the tax system, then we'd have to apply whatever tax regulation that results to all other forms of currency. Social Security is an illegal pyramid scheme because it wasn't sold to the American public that way.

Let's start applying the law equitably before we stomp on innovation.

That is, any "money" is both a medium of exchange and a store of value. It's OK to compete with the dollar as a medium of exchange but if you compete as a store of value, then you've wandered into some heavily guarded turf...

Bitcoins are probably most at risk from being classified as a type of security, which would put them under the scope of a large number of financial regulations. It wouldn't make them illegal, but it would make them more difficult to trade.

However, in general I'm optimistic about Bitcoin's chances. I certainly don't believe it is inevitable that they will be regulated out of existence.

Regulation does not necessarily mean "make it completely illegal". Food is regulated, but that doesn't mean the government has made it illegal (or even difficult) to eat.

The government hates it because it's difficult to track the money; they'll claim it's used for terrorism, money laundering, and other forms of illegal funding, and as you know, once such a claim is solidified in the public psyche it doesn't really matter what statute the actual legal charge is based on. They'll also hate it because it makes taxation much more difficult. You may argue that cash does the same, but cash still originates and terminates in the government's officially sponsored banking system and it bears official government markings that are used to track its movement. Cash has also been (intentionally) corralled into disuse by the major financial players (governments, banks, huge businesses).

The banks will hate it because it cuts them out of their usual money-shifting shenanigans, which are both obscenely profitable and generally amoral, if not in principle, then in practice due to gouging and misrepresentation.

Bitcoin allows easy and practically free e-commerce. Bitcoin allows for extremely innovative new banking interfaces and practices. Bitcoin is at least practically if not technically unbound by the onerous regulations and rules that bankers have installed for themselves to help control which people are allowed to play with them. Banks aren't going to like that kind of competition at all.

Bitcoin is in for it as soon as any kind of normal usage begins to occur. It is silly to pretend otherwise. I have extremely high doubts that btc will be allowed to stand; the only way I can see that happening is intervention from US intelligence services, requesting that btc be allowed to continue to operate without molestation because of that agency's specific plans for the platform.

I also really dislike the fatalistic attitude that those in power will always get their way, and that we should never try to change the status quo because we will always fail.

Bitcoins are not inherently anonymous, and in some ways it makes things easier for law enforcement, because all transactions are public and accessible without the need for a warrant. The hard part would be matching a Bitcoin address to an individual or organization, but maintaining anonymity against a determined investigator is hard, and requires a high degree of technical expertise to pull off. I don't think Bitcoins actually make things any harder to find criminals.