Use an Android phone and an USRP (GNURadio) to create a GSM "Cell" (BTS)
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Other posters have made reference to Special Temporary Authority that one can apply for from the FCC in order to legally operate radio experiments in licensed spectrum. A relevant example is the OpenBTS GSM network at Burning Man-- http://openbts.sourceforge.net/FieldTest3/STAGrant.pdf
The so-called "GSM guard band" between the DECT cordless phone band and the DCS1800 European GSM band being opened up in Western Europe. Unlicensed low-power GSM installations have in fact been legalized in the Netherlands. This swath of spectrum, 1781.7-1785 MHz paired with 1876.7-1880 MHz, was also auctioned off for cheap to 12 companies in the UK by Ofcom (the British equivalent to the FCC) in 2006.
OpenBTS and OpenBSC are complementary but not cooperative (at least not yet) projects. The Base Transceiver Station (BTS) and Base Station Controller (BSC) are different key components in a GSM network. For clarification, see: http://gnuradio.org/redmine/wiki/gnuradio/OpenBTSFAQ#What-is...
OpenBTS currently supports GSM full rate voice and SMS and allows GSM phone to connect to the telephone network via SIP using Asterisk or FreeSwitch. OpenBSC supports GPRS inasmuch as the commercial BTS (e.g., the ip.access nanoBTS) connected to it supports GPRS.
An iPhone in the US, for instance, connects to AT&T for voice calls on the 850 or 1900 MHz bands, depending on what chunk of spectrum the carrier owns in the caller's particular location. If Joe Caller got on a plane to Europe, the phone might roam onto a GSM900 network. But in the US, part of the 900 MHz European GSM band happens to be allocated to ISM.
What people experimenting with OpenBTS in the US tend to do is test with old 900/1800 MHz-only phones that can be procured for a pittance on eBay. That way, they're guaranteed not to connect to AT&T or T-Mobile.
As a sidenote, before the GSM carriers started upgrading to 3G networks, most GSM phones didn't actually have GPS chips. Sprint & Verizon (CDMA) phones did, because GPS timing information is a crucial part of the standard (see http://alumni.cs.ucr.edu/~saha/stuff/cdma_gps.htm for gory details).
Is this the beginning of GSM hacking for the normal people (for a loose definition of normal of course)?
If you use it in a large metropolis, I'd expect you'd interfere with other operators basestations, and as soon as they figure it out, they'd be on you. And the FBI. Maybe the SWAT.
Keep in mind that the GSM/CDMA spectrum was auctioned for billions to the operators.
Update: someone mentioned a "developer's license" - a bit of research turns out something even better - some countries, like the Netherlands, allow unlicensed very-low-power base stations, up to 100mW, essentially pico- and femto-cells. Many Wifi routers have higher TX power than that. This will cover a room, a large hall, or an open air space large like a football stadium. No mention of a developer's license though, as this seems to cover its needs.
Umts requires mutual authentication, so any devices that will connect must be preconfigured to do so. This means that attaching to your own tower becomes a lot less simple: each device must be configured to work with your own cloud.
I think it is a dead end because gsm will be phased out eventually. This is only "easy" today because many phones are dual stacked gsm/umts.
OpenBTS really started some interesting work in this space, but I think openBSC is the more advanced (and less approachable) soloution. OpenBSC recently reported some small ability to support a little bit of GPRS. Without GPRS support, there is no ability to do data on your phoney tower. Unfortunately, the hardware on openBSC is less accessible.
The story is they had this at burning man a few years ago. Great technology for setting up little "communal" nodes in different parts of the world.
Could easily be abused. Would probably drive the cost up.
If shared between a small group though, could be a cost effective way to bridge small&remote communities across the world.
Could diversify our internets.
Broadcasting on licensed frequencies without a license is generally not legal, and can carry stiff penalties, especially if it ends up tying up a licensed operators staff in tracking down the rogue transmitter and they decide to go after you for punitive damages as well.
There is probably (I'm not versed in US law) a type of developer license you can apply for to be allowed to operate on those frequencies within certain specific power limits at a specific location - otherwise nobody would be able to design or experiment with them.