the fact that the government’s
strict
control
over
the
financial system made it all
but
impossible
for
Argentinians to buy coins
from an online service like
Coinbase or Bitstamp. But
Argentinians were used to
figuring out less-than-official
ways to deal with the
government’s
twisted
financial policies. The most
prominent signs of this,
during normal times, were the
black market money changers
—known as arbolitos—who
were a regular presence in
downtown Buenos Aires. For
Bitcoin, a similarly informal
network of money changing
was developing. A few of
Wences’s friends, including
Diego, offered to meet up
with people in person to
exchange pesos for Bitcoins,
turning themselves into the
first digital money changers.
The vision that Wences had
back in 2012—of an online
gold that offered Argentinians
an alternative to the peso—
was beginning to come true.
WHILE
PEOPLE
CLOSE
to
Wences were leading the
charge in Argentina, Wences
himself did not have time to
think
much
about
his
homeland. He was too busy
dealing with the problem that
he faced with his digital
wallet, Lemon.
Since the spring, Wences
had been trying to find ways
to integrate Bitcoin into
Lemon and had been looking
for investors to support him.
The people excited about
Bitcoin asked why they
should put their money into a
company like Lemon, which
Wences had been struggling
to get off the ground for two
years.
Perhaps
more
dispiritingly, Wences was
unable to bring around the
existing board of Lemon, and
particularly his chairman and
old friend, Micky Malka.
“These
people
didn’t
invest in a Bitcoin company,”
Micky would tell Wences
about the Lemon investors.
“What they invested in you
created and it has value, and
you are deciding for them to
do something they would
prefer not to do, which is
throw it in the trash and do a
Bitcoin company. If you want
to do it, they will follow you,
but that wouldn’t be their
preference.”
Micky’s
continued
resistance over the course of
the summer left Wences with
an
unfamiliar
sense
of
uncertainty. He did not want
to give up Lemon—he had
put too much energy into it
and felt he owed it to his
employees and investors to
see it through. What’s more,
he had long ago told his wife
that he would not do another
startup. But Lemon was not
his true passion, Bitcoin was,
and he felt he was missing
out every day he was not
working on it full-time.
Wences’s
chiseled
face
carried lines of discontent
that his friends had not seen
before.
In September he went to a
number of his closest friends
to ask for their advice. One of
those friends, a banker at
Allan & Co., expressed
surprise that Wences hadn’t
reached this point sooner.
“You are too successful
and too wealthy to do things
that aren’t your passion,” this
friend told Wences.
When Wences told his
friend about the obligation he
felt he had to Lemon’s
employees and investors, the
friend
frowned
in
disagreement
and
told
Wences that if Lemon could
be sold it would allow the
employees
to
continue
working on Lemon while also
getting
money
back
to
investors.
“You aren’t an indentured
servant to these people,” the
friend said. “If you can land
the plane, it’s good for the
employees and you can
reboot with something new.”
After hearing something
similar from another trusted
friend, Wences went to his
wife, Belle, and asked her
what she thought. Belle
surprised Wences by fully
siding with his friends.
“You
need
to
stop
everything you are doing and
do Bitcoin,” she told him.
“But Belle,” he said, “it’s
going to be another startup.”
She wasn’t listening to it:
“I’ve never seen you so
intensely held by something.”
Wences
immediately
began
offering
Lemon
around. He found that lots of
big-name
companies,
including Facebook, PayPal,
and Apple, were interested in
buying Lemon, but only if
Wences stayed on board.
Wences turned them down.
He didn’t need the money
they were offering him—the
Bitcoins he had bought when
they cost a few dollars each
were now worth tens of
millions
of
dollars,
in
addition to his previous
wealth. More important, he
was now certain that his
primary goal was to be able
to work on Bitcoin full-time.
Another company that was
pursuing Wences, the security
company Lifelock, offered to
buy Lemon and let Wences
go pursue his passion. He
quickly began the paperwork
to get his board’s approval
and free himself.
CHAPTER 24
September 30, 2013
The spinning top that had
been Ross Ulbricht’s life for
much of the last three years
was wobbling out of control
in late September. He was
trying to chase down the truth
of a tip he’d gotten about one
of his most prolific vendors
getting busted. At the same
time, Ross was angling to
arrange
a
meeting
with
redandwhite, the user who
had been hired as an assassin
earlier in the year. Ross had
lent redandwhite $500,000 so
he could become a vendor on
the
site,
but
recently
redandwhite had disappeared.
Meanwhile,
when
Silk
Road’s biggest imitator and
competitor,
Atlantis,
shut
down, the operators of the
site told Ross they’d heard
that the FBI had found a way
to crack the anonymity of
Tor. To add insult to injury,
while he was trying to get a
piece of trash out of a tree
near his apartment in San
Francisco, he got covered in
poison oak.
“I have poison oak rash
from head to toe,” he wrote to
an old girlfriend in mid-
September. “I wish you were
here to comfort me :( ”
On the last day of
September, he wrote in his
diary that he was taking steps
to get his life back under
control:
“Had
revelation
about the need to eat well, get
good sleep, and meditate so I
can
stay
positive
and
productive.”
It would be his last
journal entry.
The next day he spent the
morning working at home on
his Samsung 700z laptop. In
the early afternoon, he left
home in his jeans and T-shirt,
with his computer in a bag
tossed over his shoulder. He
made the quick five-minute
walk, past the local BART
transit station, to one of his
favorite haunts with good
wifi, Bello Café. When he
walked in and saw how
crowded it was, he turned
around to go next door to the
local branch of the San
Francisco Public Library. He
did not take any particular
notice of the two men sitting
on a small metal bench across
the street, one of them
holding a Mac laptop.
Ross walked across a
narrow alleyway and upstairs
to
the
newly
renovated
library, which sat above a
gourmet grocery store. He
headed to the far side of the
library,
away
from
the
reference desk, where he
chose a seat next to the
science
fiction
section,
looking out a window at the
cute commercial strip across
the street. He took his laptop
out and went through the
laborious process of logging
into his carefully secured
computer, onto the library’s
public wifi, and through to
the encrypted programs he
used to run Silk Road. When
he opened the encrypted chat
program, Pidgin, that he used
to communicate with his staff
he saw that one of his newer
moderators, cirrus, had just
pinged him: “Are you there?”
cirrus was the Silk Road
member who used to go by
the name scout. Early in the
year, Ross had convinced
scout to become a staff
member by pointing out how
unlikely it was that they
would ever be caught.
“sure,
someone
could
stand behind you w/o you
realizing it,” he had said back
then. But he said the chances
of that were “incredibly
small.”
On
this
Tuesday
afternoon, cirrus asked Ross
—or dread, as he appeared on
cirrus’s screen—how he was
doing.
“dread: im ok, you?”
“cirrus: Good, can you
check out one of the flagged
messages for me?”
“dread: sure”
“dread: let me log in.”
To get to the flagged
messages, Ross signed into
his administrative account on
the Silk Road marketplace, an
account
that
he
had
nicknamed
mastermind.
While he was getting in, he
passed the time by asking
about cirrus’s past work
exchanging Bitcoins. When
cirrus told Ross that he had
stopped the work because of
the “reporting requirements,”
Ross
shot
back:
“damn
regulators, eh?”
Finally Ross was into his
account,
and
the
plain-
looking boxes on the screen
showed just how successful
the business still was. There
were 25,689 orders in transit
from the site’s 1,468 vendors.
In his own administrative
account, Ross had 50,577
Bitcoins, worth some $6.8
million at that day’s exchange
rate of around $140.
“ok, which post?” he
asked cirrus.
This was the signal that
cirrus had been waiting for. It
told cirrus that Ross was now
logged into the fortified inner
sanctum of Silk Road. cirrus
was, in reality, one of the
men who had been sitting on
the bench across from the
café, Jered Der-Yeghiayan, a
federal
agent
with
the
Department
of
Homeland
Security. Der-Yeghiayan had
convinced the woman who
had previously been cirrus—
and before that, scout—to
hand over the account to the
authorities.
Der-Yeghiayan was still
outside,
now
with
his
computer open, and when he
saw Ross’s words pop up on
his screen, asking him which
flagged
post
cirrus
was
referring to, Der-Yeghiayan
made sure to keep the chat
with Ross alive, but he also
signaled to the FBI agent
sitting next to him, who in
turn, signaled to a team inside
the library.
Sitting at his computer,
Ross heard a man and a
woman fighting behind him.
“I’m so sick of you,” the
woman shouted.
As Ross turned around to
see what was happening, he
saw out of the corner of his
eye that someone swooped in
on his table and grabbed his
open laptop. Before he could
turn around and do anything
about it, several other people
who had apparently been
browsing in the stacks came
at him and pinned him against
the window. After he was
handcuffed, other people who
had been milling around the
library converged on him and
quickly walked him down the
stairs and outside, where he
was put into an unmarked van
and read his Miranda rights.
The
plainclothes
federal
agents milling around outside
the van had flown to San
Francisco over the previous
days. They came in from the
many offices around the
country that had been chasing
Ross—or
Dread
Pirate
Roberts—for months, and in
some cases, years.
Ross didn’t know it at the
time, but his downfall had not
come
through
the
sophisticated
hacking
techniques and leaking IP
addresses that he had worried
about so much. The Internal
Revenue Service agent who
finally identified Ross did so
by searching on Google
through old posts on the
Bitcoin forum. There the
agent found a single job
advertisement that Ross had
placed in late 2011, under the
screen
name
altoid—the
account he had used to post
the first ad about Silk Road in
early 2011. The job ad from
altoid was seeking someone
who wanted to be a “lead
developer in a venture backed
Bitcoin startup company.”
The post had told interested
applicants
to
contact
“rossulbricht at gmail dot
com.” This was the one time
Ross had connected his own
e-mail address with altoid and
Ross had realized his mistake
and deleted it. But his e-mail
was captured in the forum
posting of someone else who
had
responded
to
Ross,
leaving his name out there for
the search engines. As much
as Ross had wanted to create
a new world, he still had to
occasionally interact with the
old
one,
searchable
by
Google, and that, rather than
any mistakes in the new
world, was what did him in.
The next morning, as
Ross sat in a cell in Glenn
Dyer Jail in Oakland, federal
prosecutors in New York and
Baltimore unsealed their own
cases against him in federal
court. The charges included
narcotics
conspiracy,
conspiracy
to
commit
computer
hacking,
and
money laundering conspiracy,
as well as an accusation that
he had solicited a murder for
hire to protect his site—the
$80,000 he had allegedly paid
to kill Curtis Green back in
January. Almost any of the
counts, individually, could
lead to a life sentence.
“Silk Road has emerged
as the most sophisticated and
extensive
criminal
marketplace on the Internet
today,”
the
New
York
complaint said.
The Government’s
investigation has
revealed that, during
its two-and-a-half
years in operation,
Silk Road has been
used by several
thousand drug dealers
and other unlawful
vendors to distribute
hundreds of kilograms
of illegal drugs and
other illicit goods and
services to well over a
hundred thousand
buyers, and to launder
hundreds of millions
of dollars deriving
from these unlawful
transactions.
Users
of
Silk
Road
visiting the hidden site that
morning, hoping to score
some heroin or pot, found an
FBI
emblem
over
the
announcement: “THIS HIDDEN
SITE HAS BEEN SEIZED.”
WHEN ROSS’S ARREST was
made public at around noon,
New York time, on October
2,
Cameron
and
Tyler
Winklevoss
were
sitting
together, with their laptops, at
the dining room table in their
family vacation home on
Long Island.
It was an unseasonably
warm day and they had spent
the morning in the ocean on
their
paddleboards.
They
were no longer spending time
on BitInstant, but they were
still building up their stash of
virtual currency and working
with
regulators
to
get
approval for the Bitcoin ETF.
At the dining room table
where they had done their
initial research on Bitcoin a
year earlier, they read through
the Silk Road indictment as
they watched the price of
Bitcoin begin to fall.
There had never been a
reliable accounting of how
much Silk Road was driving
the overall Bitcoin market.
But many of the headlines
that the Winklevoss brothers
read out to each other
assumed
that
illegal
transactions were a major
force in Bitcoin that would
now go missing.
“I
just
hope
that
mainstream
adoption
has
surpassed the adoption of
criminals and drug dealers.
LOL! Otherwise its time to
SELL! SELL! SELL!” one
forum user wrote.
Selling is what a lot of
people were doing, sending
the price down to $110 from
$140 within two hours after
the news came out.
The panic was, of course,
much worse on the Silk Road
forums, where users were
assuming that the government
now had access to computers
with information about every
single Silk Road customer
and vendor.
But the Winklevoss twins
saw an opportunity. The best
analysis
they
had
seen
suggested that Silk Road
accounted for no more than 4
percent
of
all
Bitcoin
transactions, hardly a driving
force. More important, they
knew that Silk Road was one
of the biggest black marks
holding Bitcoin back with
ordinary
people,
who
assumed the blockchain was
just a payment network for
drug dealers. This arrest
could help sever Bitcoin’s
association with crime. The
criminal
complaint
itself
stated
explicitly
that
prosecutors did not view the
cryptocurrency only as a tool
for breaking laws.
“Bitcoins are not illegal in
and of themselves and have
known legitimate uses,” the
FBI agent, who drew up the
complaint, wrote.
This brief sentence was
one
of
the
strongest
statements to date about the
legality of Bitcoin in the
United States—and it came
from one of the divisions of
the government most likely to
want to shut Bitcoin down.
The twins didn’t want to
buy coins while the price was
still dropping, but when they
saw it begin to stabilize,
Cameron, who had done most
of the trading, began placing
$100,000 orders on Bitstamp,
the
Slovenian
Bitcoin
exchange.
Cameron
compared the moment to a
brief time warp that allowed
them to go back and buy at a
lower price. They had almost
$1 million in cash sitting with
Bitstamp for exactly this sort
of situation, and Cameron
now intended to use it all.
The twins were not the
only people to seize this
opportunity. About an hour
after the price fell to $110, a
surge of buying pushed it
back above $130. By the time
Ross was brought to court on
Friday for a bail hearing, the
price was just a few dollars
shy of the $140 mark, where
it had been before his arrest.
In court, Ross was in shackles
and wore a red prison
jumpsuit. He said little and
showed no obvious emotion.
His publicly assigned lawyer
said that Ross denied all the
charges. The judge began
preparations for moving Ross
to New York, where he
would await trial.
ON THE SAME day as Ross’s
court appearance in San
Francisco, a very different
side of Bitcoin was on display
at a gathering south of the
bay. Some of the most
influential Bitcoin players
were gathered at the San
Carlos Airport outside San
Jose. They were there to
board
privately
chartered
flights to Truckee, California,
the closest town to Dan
Morehead’s vacation house
on the shore of Lake Tahoe.
Morehead
had
been
helping Pete Briger examine
the
Bitcoin
opportunities
available to Fortress. He had
set up a sort of mini hedge
fund that would buy and hold
Bitcoins and sell shares to
rich investors, while also
looking to make investments
in
Bitcoin
startups.
In
October, he invited leading
virtual-currency advocates to
his home in Tahoe for the
first-ever Bitcoin Pacifica, a
weekend of socializing and
conversation
about
his
favorite digital money.
Among
the
people
boarding the planes were the
two founders of Bitstamp.
Morehead had paid to fly
them in from Slovenia and
was hoping to finalize a $10
million investment in the
exchange.
Roger Ver was in from
Tokyo and spent most of the
weekend in a sweatshirt he
had made with a picture of
two
honey
badgers
copulating.
Roger
also
brought along Nic Cary, the
young man he had hired to
run
Blockchain.info.
Morehead was pushing Roger
to sell part of his stake in
Blockchain.info, which was
coming to look increasingly
valuable.
Morehead had also roped
in Neal Stephenson, the
author of the science fiction
book Cryptonomicon, which
had popularized the idea of
virtual currencies when it was
published in 1999. Roger
quickly got Stephenson set up
with his first Bitcoin wallet,
from Blockchain.info.
Wences Casares couldn’t
make the trip to Lake Tahoe
—he was too busy closing the
sale of Lemon—but his
longtime collaborator, Micky
Malka, made the journey.
Jesse Powell, Roger’s old
friend, had volunteered to
drive up to Morehead’s house
with a few people, so that, in
the event that Morehead’s
chartered plane crashed, there
would be a few people left to
continue leading Bitcoin.
Once everyone was at
Morehead’s
house,
the
conversations
predictably
came back again and again to
Silk Road. Few of the
attendees were pessimistic
about what Ross’s arrest
would mean for Bitcoin. This
seemed to many of them like
the exact line in the sand that
Bitcoin had needed to mark a
division between its early,
renegade years and its future
in the mainstream. At dinner
in
Morehead’s
enormous
living room, Roger sat with
Briger and Nejc Kodric, the
chief executive of Bitstamp.
The men placed their bets on
where the price would be in a
year.
While
Briger
was
somewhat cautious, betting
that the price would fall to
$120, slightly below where it
was that day in October 2013,
Nejc guessed that it would be
thirteen times as much, or
$1,300, and Roger was even
more optimistic, guessing
$1,320.
CHAPTER 25
October 2013
The Cross Regions Plaza
was an exemplar of the
hastily built skyscrapers that
littered
the
Shanghai
landscape like so many gilded
toothpicks. It had a lobby
with gleaming marble floors
and an entire wall covered by
a leaping golden horse. But
the elevator doors opened at
each floor to reveal narrow,
scuffed hallways reeking of
smoke.
Just
across
from
a
smoking closet and next to
the Yu Cheng Vacation Club,
suite 23N was a small office,
but still too big for the tiny
staff it housed. Amid a few
whirring upright black fans,
one of the few people tapping
away at a desk was a boyish,
bespectacled thirty-year-old
programmer, Huang Xiaoyu,
who had recently moved to
Shanghai from Hunan, where
he had been living with his
wife’s family.
Xiaoyu
had
founded
China’s
first
Bitcoin
exchange, BTC China, back
in 2011 with the husband of
his wife’s college roommate,
Yang Linke, who handled the
nontechnical aspects of the
company. It was Xiaoyu, on
the Chinese-language Bitcoin
forum, who had given Bitcoin
its
Chinese
name,
three
characters
that
were
pronounced bee-te-bee, a play
off the Chinese word for
currency.
Until recently Xiaoyu and
Linke had run their exchange
from opposite ends of the
country as a sort of hobby, in
time snatched from their real
jobs. The small amounts of
money moving into and out
of the exchange went through
the personal bank accounts of
Linke. Nothing more was
needed to sustain the light
volume on the one and only
exchange
where
Bitcoin
could be bought and sold for
yuan.
That had all changed
owing to the commanding
presence in suite 23N—a
thirty-eight-year-old
man
with a stout, penguinlike
body, and a wide face with
round curious eyes. Bobby
Lee, who generally wore the
same khaki pants and blue
dress shirt day in and day out,
alternated between flawless
English
and
imperfect
Shanghainese as he explained
his
vision
for
Bitcoin’s
potential in the world’s most
populous nation.
WHEN BOBBY LEE had first
reached out to the founders of
BTC China in February 2013,
he was much less well known
in the Bitcoin world than his
younger brother, Charlie Lee,
the California-based Google
engineer
who
had
been
involved in Bitcoin since
2011 and who was perhaps
best known as the creator of
Litecoin, one of the most
successful alternative virtual
currencies. It was Charlie
who had pushed Bobby, and
the rest of his family, to first
look at Bitcoin back in 2011.
Bobby had a natural
interest for the same reasons
as his brother. The two men,
who grew up sharing a
bedroom, had both studied
computer science, Charlie at
MIT, Bobby at Stanford.
Perhaps more important, both
grew up in the Ivory Coast as
the
children
of
Chinese
immigrants who had escaped
the communist revolution
with only the wealth they had
stored in gold. When Bobby
and Charlie roomed together
in Silicon Valley, soon after
college, Charlie had gotten
Bobby into collecting gold
coins and buying precious
metals
online.
They
understood cryptography as
well as the importance of
easily transferrable places to
keep money.
Bobby, though, was less
of a programming whiz than
his little brother and had
spent much of his career as a
manager. His jobs in the e-
commerce divisions of Yahoo
and Wal-Mart had afforded
him a comfortable life in
Shanghai, where he and his
wife
lived
in
a
gated,
manicured
community
of
apartment towers. But after
years of working for someone
else, Bobby had developed a
hankering, common among
many older brothers, to run
something
himself.
And
Bitcoin looked increasingly
attractive
in
a
Chinese
context.
Bobby recognized that
Chinese people would have
little interest in the libertarian
ideas of American Bitcoiners
—decades of state-sponsored
communism had killed most
interest in ideologies. But
after six years in Shanghai,
Bobby believed that Bitcoin
could have a unique, thus far
untapped appeal in China.
The
most
convincing
evidence that it could take off
was
China’s
previous
experience with a successful
virtual currency, Q coin, a
digital money launched in
2002 by a Chinese online
company. Q coin had started
as a way to buy digital goods
like greeting cards, but by
2006 Chinese people were
buying and selling the coins
themselves, bidding the price
up. The frenzy did not stop
until
2009,
when
the
government stepped in and
said that Q coins could be
used only for their original
purpose. To Bobby, it seemed
that the main things holding
Bitcoin back from becoming
the next Q coin were the lack
of good information about
Bitcoin in Chinese and the
lack of reliable places to buy
coins.
With this history in mind,
in early 2013 Bobby had
begun talking with his little
brother about doing some sort
of Bitcoin startup together.
Charlie could do the coding
and Bobby, as the more
outgoing
and
confident
brother, would be in charge.
At the same time, to broaden
his options, Bobby e-mailed
the founders of BTC China.
After using the exchange for
many months, Bobby thought
it had the potential to expand
and improve. Within a few
weeks of his first e-mail,
plans were afoot to meet in
Beijing, where the business-
minded cofounder, Linke,
lived. (Bobby had already
become so excited about the
prospect
of
working
on
Bitcoin that he turned down
an offer to return to Yahoo.)
Xiaoyu flew to Beijing
from Hunan and Bobby came
up from Shanghai. During a
dinner
at
Quanjude,
a
restaurant famous for its
Peking duck, Bobby put it to
Linke and Xiaoyu simply: if
they would be willing to
make him the cofounder and
chief executive of BTC
China, he would invest his
own money and go out and
raise funds to expand the
company. He also said the
company had to be based in
Shanghai, given his wife’s
unwillingness to move from
what she viewed as the most
cosmopolitan city on the
mainland. Bobby was not an
easy person to say no to. He
had a sincere demeanor that
made it hard to doubt his
honesty. His résumé also
made it clear that he had
about as many accolades as
one could collect by the age
of thirty-seven, including two
degrees from Stanford and
several years as an early
employee at Yahoo.
Neither
of
the
two
cofounders of BTC China
spoke English well or knew
how to run a company, and
both had been overwhelmed
by even the small amount of
business they had attracted.
Bobby, meanwhile, had the
perfect
unthreatening
teacherly way needed to
introduce
a
foreign
and
potentially
scary
new
concept. He explained things
in
careful
steps,
never
speaking down to anyone. By
April the founders had struck
a deal for Bobby to join them.
A FEW WEEKS after Bobby
signed his deal, Bitcoin had
gotten its first major media
exposure on the mainland,
from
China
Central
Television’s
Channel
2,
which showcased just how
immature the virtual-currency
ecosystem was in China. The
reporter
for
Channel
2
tracked
down
what
he
believed was the only place in
the country that had accepted
Bitcoins for purchase—an
Internet café in Beijing,
which had accepted its first
Bitcoins at the urging of a
young American expatriate
living in the city.
But while there wasn’t
much visible activity in China
of the sort that so many
American entrepreneurs were
pushing in the United States,
there was quite a bit of work
going on in the shadows. The
reporter dug up a few young
men who had set up fleets of
computers with ASIC chips
that were doing nothing but
mining Bitcoins. Mining was
a business that made sense in
China, given the legions of
tech-savvy youngsters and
easy
access
to
cheap
electronics. But there was
another,
more
systemic
explanation for why the
Chinese preferred less visible
ways
of
acquiring
their
Bitcoins.
Like Argentina, China
had
incredibly
restrictive
rules about moving money
into and out of the country.
But
in
China,
unlike
Argentina, these rules were
not a response to runaway
inflation, but instead part of
the government’s effort to
keep tight control over the
exchange rate of the yuan, in
order to promote the export
economy. The authoritarian
government also wanted to
keep a close check on what
its citizens were doing. Each
Chinese citizen could move
only
the
equivalent
of
$50,000 out of the country
each year. As a result, it
became difficult for wealthy
people, including government
officials, to get their riches
out of China and into more
secure foreign bank accounts.
Living
in
Shanghai,
Bobby saw how capital
controls did not just make it
hard for rich people to hide
their
money
in
other
countries. The controls also
made it harder for China’s
rising middle class to invest
in
anything
that
wasn’t
Chinese. It was all but
impossible to buy American
or European stocks and
bonds.
This
meant
that
ordinary Chinese investors
eagerly latched onto every
half-plausible new investment
opportunity that presented
itself. Money had poured into
the Chinese real estate and
stock markets, pushing both
into elevated territories that
many
thought
were
unsustainable.
Bitcoin
presented
an
intriguing new investment
that almost anyone with a
computer
could
access.
Bobby believed the Chinese
would be all too willing to
put their money into this
unproved digital currency,
despite the hazy legality—as
the market for Q coins had
demonstrated. Decades of
communism had turned black
markets into the norm.
There was also a more
suspect explanation for all of
this behavior and for Bobby’s
belief in his business. As a
gambling man, Bobby knew
that China was a nation of
people
with
an
unusual
willingness to place a bet on
just about anything. That is
what made the Las Vegas of
China, Macao, seven times
bigger, in revenue terms, than
Las Vegas. While Bitcoin’s
speculative
nature
and
volatility were a strike against
it in many countries, in China
these had the potential to be
its most attractive qualities.
OVER THE SUMMER, as the
price
of
Bitcoin
was
stagnating, Bobby had raced
to get his company set up for
the next surge of interest. He
went
to
the
Bitcoin
Foundation meeting in San
Jose and looked for investors.
In July he rented an office in
Cross Regions Plaza, little
more than a single room with
two small conference rooms
carved out with glass walls.
The room looked down into
the
Shanghai
National
Stadium and out toward the
hazy skyline sprawling into
the distance.
Bobby’s main focus was
on striking a deal with the
country’s two major online
payment
processors—the
Chinese
counterparts
of
PayPal—so that BTC China’s
customers would have a way
to get money into the
exchange that didn’t involve
the personal bank account of
the
company’s
founder,
Linke. The largest payment
processor, Alipay, owned by
the Chinese Internet giant
Alibaba, was put off by the
sound of Bitcoin, which it
had not heard about before.
But the smaller company,
Tencent—not coincidentally,
the creator of the old digital
currency Q coin—was eager
to provide something that
Alipay didn’t and signed up
with Bobby in September.
In the United States,
PayPal’s unwillingness to
work with Bitcoin exchanges
had been a major hindrance.
Once Bobby got Tencent
integrated into BTC China’s
website in September, it was
suddenly
easier
to
get
Bitcoins onto an exchange in
China than it was anywhere
else in the world.
Bobby was not the only
one who had spotted the
potential
appeal
of
cryptocurrencies in China.
During the summer of 2013,
the
number
of
people
downloading
the
basic
Bitcoin software in China had
regularly been second only to
the number in the United
States, and mining operations
continued
to
grow.
By
September
two
other
exchanges
were
up
and
running with a full-time staff.
But BTC China was already
doing twice the volume of the
other
exchanges
in
the
country, and Bobby Lee
didn’t intend to lose his early
lead. He inked a deal to take a
$5 million investment from
Lightspeed
Capital,
the
venture capital firm that had
previously backed Wences
Casares’s company Lemon.
Shortly
thereafter,
as
a
promotional tool, BTC China
marked China National Day
by removing the 0.3 percent
commission that customers
had to pay on every trade. In
China, unlike anywhere else
in the world, it was now
essentially
free
to
trade
Bitcoin.
The real ascent in China
began in mid-October, after
the arrest of Ross Ulbricht,
when a division of Baidu, the
search engine giant and the
fifth-most-visited website in
the world, announced it
would be accepting Bitcoin
payments. A close look at the
announcement revealed that it
applied only to a tiny security
service run by Baidu, Jiasule,
but it gave Bitcoin a patina of
legitimacy that it had so far
lacked in China.
In the week after the
Baidu
announcement,
the
price of Bitcoin moved up not
just in China but around the
world, from about $140 to
$200, with the volume of
trading climbing faster in
China than anywhere else. On
October 19, forty thousand
Bitcoins changed hands on
BTC China, nearly twenty
times the number that had
been traded on most days in
September. In mid-October,
BTC China saw the most
volume of any exchange in
the world during a few days
—the first time that any
exchange other than Mt. Gox
or Bitstamp had held this
record. It was evident that
China was leading the price
up because the price was
rising faster in yuan than it
was in dollars. In Shanghai,
Bobby began furiously hiring
people to try to fill the space
in his still half-empty office.
China was not the only
source of momentum in the
markets during this period.
Many of the people who had
attended Dan Morehead’s
gathering in Lake Tahoe had
traveled on to Las Vegas for
the Money 2020 conference,
the same financial-industry
conference that Roger Ver
and
Charlie
Shrem
had
attended the year before.
When Charlie was there, only
one Bitcoin company had
been exhibiting, BitInstant.
This time around, Bitcoin
companies
flooded
the
exhibition hall and there were
three
different
panels
dedicated to the subject.
Then on November 3, the
chief executive of eBay, John
Donahoe, said in an interview
with the Financial Times that
PayPal
was
looking
at
creating a digital wallet that
could
eventually
hold
Bitcoins. After Donahoe’s
comments came out, the
price,
which
had
been
hovering around $215, began
rising, and three days later it
surpassed the previous record
price of $267 that had been
set on Mt. Gox during the
April pandemonium.
That same day, Bobby
Lee was with his staff on a
retreat to Shengsi Island.
Much of the trip was spent
trying to deal with the
onslaught of new accounts
and
customer
service
requests. The pressure didn’t
relent for the trip back the
next day. Bobby’s exchange
handled sixty thousand coins
in one day for the first time
ever, as the price leaped
above $300 on Mt. Gox.
During this period, BTC
China
was
seeing
more
trading volume than any other
exchange in the world almost
every day, and the price in
yuan was about 5 to 10
percent higher than it was on
Mt. Gox and Bitstamp (when
the exchange rate between the
dollar and yuan was taken
into account). On Saturday,
with everyone still in the
office, the price surged again,
jumping from 2,100 to 2,500
yuan, or some 20 percent, in
the course of a few hours. On
the dollar exchanges the price
was approaching $400. At the
end of a nonstop weekend of
work, Bobby sent an e-mail
to motivate his staff:
During the coming
days, the market will
continue to be super
hot, and our workload
will be non-stop.
I urge everyone to
stay focused, do our
job, and keep up the
high quality.
Once the market
cools down, with
more normal trading
volumes, then we can
take a break and
evaluate how things
go.
Everyone
looked
for
reasons that could explain the
continuing rise but, as is often
the
case
in
speculative
markets, the upward moves
seemed to be less dependent
on outside events than they
were on previous upward
moves in the market. Bobby
had guessed so many months
before that the Chinese would
want to bet on something that
seemed to have momentum,
and Bitcoin’s ascent was
proving him right.
In the midst of this,
Bobby and his cofounders
decided to do their part to
increase the excitement by
making
a
public
announcement about the $5
million investment they had
secured back in September
and had kept quiet until now.
Over
the
weekend
of
November 16 and 17, Bobby
worked with his investor and
a few news sites to prepare an
announcement for Monday
morning. When the story hit,
the already rising price began
to move that much faster,
rising 15 percent in the course
of a few hours, to a price that
was already more than twice
what it had been at the
beginning of the month. But
this was to be only the start of
a very long day.
CHAPTER 26
November 18, 2013
Several hours after Bobby
Lee announced the $5 million
investment
in
Shanghai,
Patrick Murck, the general
counsel
of
the
Bitcoin
Foundation, woke up in a
hotel room in Washington,
DC, and checked on Bitcoin’s
rising price. After putting on
his plain black suit and
carefully
attaching
an
American flag pin to his
lapel, he left his room,
carrying the testimony that he
had been writing for the last
few weeks and that he was
about to present to the United
States Senate.
Since appearing at the
private
meeting
with
lawmakers back in August,
Patrick had spent much of his
time helping a staffer for
Senator
Tom
Carper
of
Delaware, who wanted to
hold a hearing on Bitcoin in
the Homeland Security and
Governmental
Affairs
Committee. A young aide,
John Collins, had gotten
excited about Bitcoin earlier
in the year and had been
holding private conversations
across Washington about the
technology. When Bitcoin
took off in the fall, it helped
Collins finally make the
hearing happen.
Collins and Patrick shared
a similar genial sensibility
and a dry sense of humor, and
they
fell
into
an
easy
relationship. Patrick made
sure Collins had all his
questions answered by the
most presentable people in
the Bitcoin world, including
representatives of all the
companies that had won
funding
from
venture
capitalists earlier in the year.
For the hearing, Patrick’s
goal was to present the most
mainstream image of Bitcoin
possible. He volunteered to
testify himself, alongside a
few other relative newcomers
to the Bitcoin world who
Patrick knew would say the
sorts of things that would
make lawmakers happy.
The night before the
hearing, Patrick had trouble
sleeping and kept rising to
make tweaks to his prepared
remarks. Patrick also worried
about the first part of the
hearing, which was a panel of
government officials whom
he had not been able to prep.
Over the summer, Patrick had
spoken with all the agencies
represented on the panel, but
he didn’t know if the lower-
ranking
officials
had
conveyed his message to their
bosses at the Department of
Justice
and
the
Secret
Service.
When Patrick got to the
hearing room and took his
seat in the audience for the
panel of government officials,
he was exhausted and jittery.
There were, though, already
good headlines trickling out.
In response to a questionnaire
from
Senator
Carper’s
committee, the chairman of
the Federal Reserve, Ben
Bernanke, had written down
his take on Bitcoin and was
surprisingly positive, praising
its
“long-term
promise,
particularly if the innovations
promote a faster, more secure
and more efficient payment
system.”
First up to testify was the
head of Financial Crimes
Enforcement
Network,
or
FinCen,
Jennifer
Shasky
Calvery, who had helped set
up
the
August
meeting.
Patrick had developed a good
relationship
with
Shasky
Calvery, but she was even
more positive than Patrick
expected, using his frequent
line that cash dollars were
actually the most commonly
used currency for drug deals
and money laundering. The
head of the Department of
Justice’s criminal division
went next and emphasized
that Bitcoin was not as hard
to track as many people
seemed to believe and had
many legitimate uses. Finally,
the
head
of
criminal
investigations at the Secret
Service said that his agency
was not overly worried about
its ability to deal with crimes
involving virtual currencies.
In response to questions
from Senator Carper, the
panelists pointed to all the
activity in China and noted
that if the United States came
down too hard on Bitcoin, or
pushed it out of the country,
the innovation would be
likely to move overseas to
places like China where it
would be harder to control.
By the time the first panel
was over, the Washington
Post already had a headline
that
read
“THIS
SENATE
HEARING
IS
A
BITCOIN
LOVEFEST.”
When Patrick and the
other Bitcoiners got their
chance to testify, Patrick was
still nervous enough that he
forgot
to
turn
on
his
microphone. But he had a
simple message for himself
that he repeated over and
over: “I’ve already won, just
don’t fuck it up. Just read the
script.”
He didn’t fuck it up, and
neither did the men sitting
next to him. The hearing was
streamed
live
over
the
Internet
and
Bitcoiners
watching it around the world
responded by buying coins
and then more coins, pushing
the price up as the hearing
went on. When Senator
Carper brought the gavel
down, the price on Mt. Gox
stood above $700, $150
higher than where it had been
that morning.
Patrick wanted to crawl
into bed but first he had to
make it through a series of
press interviews, including
one with a Chinese journalist
from CCTV.
THE NEXT MORNING, Bobby
Lee arose in Shanghai to
discover that BTC China
customers
had
responded
with more vigor than even the
customers trading dollars on
Mt.
Gox
and
Bitstamp,
sending the price above 7,000
yuan. In other words, since
the previous morning, the
Bitcoin price in yuan had
gone up more than it had in
the first five years of the
virtual currency’s existence.
Bobby raced to his office,
where there was already a
journalist from the Xinhua
News Agency waiting for an
interview. Everyone wanted
to know what Bitcoin was
and how long this surge could
continue.
After
the
interview,
Bobby grabbed Ling Kang, a
slight man who had become
Bobby’s all-around fix-it guy
since he came on two months
earlier, handling all relations
with the government thanks
to his incredible connections,
or guanxi as the Chinese put it. Once they were in the
glass-walled conference room
behind Bobby’s desk, they
gave each other dazed looks.
They both agreed that the
speculative frenzy, which had
once been exciting, was now
a potential problem. Unlike
officials in the United States,
Chinese officials had given
no encouraging signs about
Bitcoin. Also, compared with
those in the United States,
officials in China tended to
act much more swiftly and
decisively when they didn’t
like something. Bobby and
his deputy couldn’t help
recalling how the speculation
in Q coins had been shut
down. Communist officials
now had no shortage of
indications that Bitcoin was
the new Q coin. A story the
previous week in Xinhua had
said that even “Chinese
mothers” were plowing their
money
into
the
virtual
currency.
They began talking about
what they might do to rein in
the
excess,
including
reintroducing trading fees so
that buying and selling coins
would no longer be free. But
other Chinese exchanges had
also
removed
trading
commissions
and
were
nipping at BTC China’s
heels. If Bobby imposed fees,
customers would simply flee
to
the
other
exchanges.
What’s more, Bobby and
Ling didn’t want to give any
sign of panicking.
Before they could make
any moves, more encouraging
news
came
out
of
Washington—the last thing
Bobby needed. A day after
the
hearing
chaired
by
Senator Carper, the Senate
Banking Committee had its
own
hearing
on
virtual
currencies, which covered
much of the same territory
and drew much less attention.
At the end, though, Senator
Chuck Schumer, a member of
the
banking
committee,
entered the hearing room.
This was the man who, back
in 2011, had called for a
crackdown on Silk Road and
implied that Bitcoins were a
part of the problem. Now, he
wanted to let it be known that
he had been misunderstood.
“I do not want to shut
down or stamp out Bitcoin,”
Schumer said. “The potential
for a new payment platform
and the rise of alternative
currencies
could
have
profound
and
exciting
implications for the way we
conduct
financial
transactions.”
THE UNMISTAKABLE IRONY of
these wild days was that a
technology that had been
designed, in no small part, to
circumvent
government
power was now becoming
largely
driven
by
and
dependent on the attitudes of
government officials.
This was no accident.
Patrick Murck and the new
Silicon Valley advocates for
Bitcoin had been arguing for
months that the technology
was not, as Satoshi Nakamoto
had initially intended, a
network
that
allowed
participants
to
make
anonymous
transactions
outside the reach of the
government. At the Senate
hearings, the Bitcoin panelists
all emphasized that the virtual
currency was actually a
terrible way to break the law.
With the full record of
transactions
on
the
blockchain,
the
Bitcoin
advocates said, it was often
possible to identify the people
involved in transactions, or at
least more possible than it
was
with
transactions
involving cash.
But the advocates for the
original vision of Bitcoin
were not folding their tents
and going away. Not long
after Ross’s arrest, Silk Road
2.0 showed up on the dark
web,
offering
the
same
services in essentially the
same format that Ross had
used.
The
arrests
of
moderators
and
administrators
from
Silk
Road 1.0 kept coming, but
this wasn’t serving as a
deterrent.
Beyond
merely
resurrecting the old Silk
Road, some developers began
trying to devise a truly
decentralized online market,
which would not have to rely
on the sort of centralized
escrow service that Ross
Ulbricht and his staff had
provided
and
that
had
ultimately proved to be the
site’s worst weakness.
Meanwhile,
on
the
Bitcoin forums and Reddit
the libertarians and anarchists
were more passionate than
ever in their defense of the
original spirit of Bitcoin and
in their criticism of the
accommodationists
at
the
Bitcoin
Foundation
and
elsewhere.
Roger had evolved into
the spiritual leader of this
wing
of
the
Bitcoin
community. He had been one
of the only people who had
chosen not to respond to the
inquiries from the Senate
committee.
In
early
December Roger used some
of his Bitcoin holdings, which
had
gone
up
in
value
thousands of times, to make a
$1 million donation to the
Electronic
Frontier
Foundation, an organization
that had been started by a
former Cypherpunk to defend
online privacy, among other
things.
Roger
had
also
continued to be outspoken in
his advocacy of a Bitcoin
network that didn’t require
users to hand over lots of
personal
information.
At
Blockchain.info, he supported
the development of Shared
Coin, a service that mixed up
coins
from
different
transactions so that it was
impossible to tell which ones
came from which addresses.
Roger
spent
most
of
November in England with
the
founder
of
Blockchain.info
and
his
newly hired CEO, looking at
ways to expand the company.
The
number
of
Blockchain.info wallets had
grown to almost 700,000
from 350,000 just a few
months earlier. When Roger
needed a break from the
work, he would visit the local
jujitsu dojo with his custom-
made
kit,
or
uniform,
featuring a big gold Bitcoin
emblem on the back.
There were several other
programmers
and
entrepreneurs pushing in a
similar direction. Tinkering
with the Bitcoin protocol,
programmers
had
created
whole new cryptocurrencies,
like Anoncoin and Darkcoin,
which
were
explicitly
designed to preserve the
anonymity of their users.
Within Bitcoin, the most
ambitious projects aimed to
build services that allowed
for the exchange of dollars
and
euros
for
Bitcoins
without going through a
central service like Coinbase
or Bitstamp. Everyone now
saw that any company that
handled traditional currencies
would inevitably be subject to
traditional regulations.
Events in the broader
world validated many of the
fears that had originally
driven the Cypherpunks and
Satoshi
to
imagine
a
revolutionary new currency.
Government
documents
leaked by Edward Snowden
showed, over the course of
2013,
that
the
National
Security Agency had indeed
been secretly monitoring the
electronic communications of
a wide swath of American
citizens. But the relatively
apathetic public response to
the tales of NSA surveillance
suggested
that
most
Americans didn’t actually
care much if the government
was collecting information
about them. What did it
matter to the ordinary citizen
if he or she wasn’t doing
anything wrong?
Within
the
growing
Bitcoin community, there was
a similar sense that most
users
weren’t
all
that
concerned about the total
privacy of their transactions.
Perhaps more important, with
the price of Bitcoin now
hovering near $1,000, there
was a growing swell of voices
talking about the virtues of
Bitcoin that had nothing to do
with whether a government
could or could not track
users.
On December 1 the first-
ever research on Bitcoin from
a Wall Street firm was
released; this report called it a
“potentially
game-changing
disruption” to the payments
industry. Gil Luria, a research
analyst at the trading firm
Wedbush, wrote about the
technology with the kind of
excitement normally found at
Bitcoin meetups.
“We see the intrinsic
value of Bitcoin as the
conduit in a new global
crowd-funded
open-source
payment
network,”
Luria
wrote.
By
Luria’s
analysis,
Bitcoin had tapped only 1
percent of its potential market
and the price of each coin
could easily go up to ten or
even a hundred times its
current
level,
to
some
$100,000 a coin.
The same points got more
attention when they were
made four days later in a
research report from Bank of
America Merrill Lynch, the
first of the major banks to
chime in. Bank of America’s
chief
foreign
exchange
strategist,
David
Woo,
expressed more notes of
skepticism
than
Luria,
pointing to the dangers of
Bitcoin’s
volatility
and
association
with
the
underworld.
But
Woo’s
fourteen-page report noted
that in addition to the
possibility of a new payment
network,
Bitcoin
could
“emerge
as
a
serious
competitor”
to
money-
transfer
businesses
like
Western Union.
Woo’s price forecast for
Bitcoin was not as optimistic
as Luria’s, but he argued that
the services Bitcoin offered
could be worth, in total, as
much as $15 billion, or
$1,300 per coin.
The notion that Bitcoin
could provide a new payment
network was not terribly new.
This is what Charlie Shrem
had been talking about back
in 2012, and BitPay was
already using the network to
charge lower transaction fees
than the credit card networks.
But the idea took on a
different weight when it came
from employees at banks that
had the potential to adopt and
popularize the technology.
The clearest indication of
how quickly this was moving
came not from the public
research reports, but instead
from an e-mail that Pete
Briger,
the
chairman
of
Fortress Investment Group,
got from a top executive at
Wells Fargo, the nation’s
largest
bank
by
certain
measures.
Briger
had,
in
the
summer, floated the idea of
Fortress
partnering
with
Wells Fargo on a mainstream
Bitcoin exchange. Then, the
bank had declined to pursue
the opportunity and Briger
had pulled back on his big
ambition to get Fortress into
the virtual currency space.
Now, though, Wells Fargo
was back and wanted to
reopen the conversation. The
men
began
planning
a
meeting at Fortress’s New
York
headquarters.
Wells
Fargo
would
never
do
anything that conflicted with
its government regulators, but
it now seemed possible to do
Bitcoin
work
with
the
blessing of those regulators.
WHILE BITCOIN WAS winning
mainstream approval in the
United States, it was moving
in the opposite direction in
China. On December 5, just
after Bobby Lee had boarded
a plane in Shanghai for his
first business trip to the
United States since Bitcoin
had exploded in China, he got
a call from a reporter at
Bloomberg
News,
who
explained that sources were
telling him that China’s
central bank, the People’s
Bank of China, was about to
release
virtual-currency
regulations.
This was news to Bobby.
The deputy governor of the
People’s Bank had said back
in November, in unscripted
comments, that Bitcoin was
unlikely to get legitimacy, but
that people were nonetheless
free to participate in the
market. That had led many
people to assume that the
central bank would take a
hands-off approach. This had
helped the frantic speculation
on Bitcoin to continue, with
the price above 7,000 yuan on
the day Bobby was flying to
San Francisco.
But
as
a
longtime
observer of markets, Bobby
knew this frenzy was unlikely
to end with anything other
than a dramatic crash and,
when it did crash, it was not
going to help Bitcoin’s long-
term popularity or status with
the
Chinese
government.
Bobby had been warning
people that the price was
unlikely to keep rising, but he
wasn’t averse to some help
from the central bank.
“We’re happy to see the
government start regulating
the
Bitcoin
exchanges,”
Bobby told the reporter
before quickly signing off.
Bobby spent the flight in
an
optimistic
mood,
imagining that the uncertain
state in which he’d been
operating would soon be
cleared up. But when the
plane landed and he turned on
his phone, he had over a
dozen messages waiting for
him. In one of them, his head
of government relations, Ling
Kang, said, “Whatever you
do, call me first.”
On the long walk to
customs, Bobby got Ling on
the phone and told him he
had
heard
about
the
regulations before taking off.
“No, no,” Ling said in the
Mandarin
they
used
in
conversation, with an audible
note of fear in his voice.
“Bobby, this is the real deal.”
The document that had
been released while Bobby
was in the air was indeed
from the People’s Bank, but it
was also signed by four other
major
ministries,
and
it
created deep uncertainty for
the future of Bitcoin in China,
Ling said.
The good news was that
the agencies had declared that
Bitcoin was not in itself
illegal
and
could
be
considered a kind of digital
asset that people should be
allowed to buy and sell. The
document also said that
virtual-currency
exchanges
needed to register with the
Ministry of Information; this
suggested that the exchanges
weren’t going to be shut
down.
The bad news, Ling
explained,
was
that
the
government had ruled that
Bitcoin was not a currency,
but was, instead, a digital
commodity.
The Chinese government
had stepped right into the
middle of the ongoing debate
about how to define Bitcoin
and had actually found itself
in agreement with Wences
Casares and many other
advocates for Bitcoin, who
believed that in 2013 the files
on the blockchain were more
similar to commodities, like
gold, than to currencies, like
dollars and euros, because
Bitcoins were not yet widely
or easily used as a medium of
exchange or as units for
accounting. Beyond those
qualities,
the
Chinese
government had also said that
Bitcoin lacked the most
important characteristic of a
currency:
government
backing.
The
Chinese
government’s categorization
of Bitcoin as a digital
commodity didn’t, on its face,
seem terrible to Bobby.
Within China, almost no one
was using Bitcoin to buy and
sell things—it was still just a
speculative investment. The
problem, though, was that
because it was not considered
money, the government had
declared that banks and
payment processors could not
deal with Bitcoin, either
directly or indirectly.
Bobby grilled Ling on
what this meant. Would
Tencent,
the
payment
processor,
have
to
stop
transferring yuan to BTC
China
for
customers
if
Tencent
itself
wasn’t
touching Bitcoins? If so, that
could be deadly.
As was often the case
with Chinese government
statements, the specifics were
left unclear, giving party
officials flexibility to deal
with the situation as it
progressed.
Ling
wasn’t
hopeful about where this
would lead. The statement
made it clear that government
officials were not happy with
the degree of speculation they
had seen.
But
Bobby
was
an
American-educated optimist
and Tencent hadn’t shut BTC
China down yet. What’s
more, there was obvious
room in the statement for
them
to
continue
doing
business.
The market seemed to
agree with Bobby. In the hour
immediately after the Chinese
government statement had
come out, the price of Bitcoin
had entered a free fall,
dropping 25 percent to 5,200
yuan. But soon thereafter the
price began recovering, and it
was already back to around
6,400 by the time Bobby was
through customs.
That afternoon Bobby
gave a talk at his alma mater,
Stanford, and explained that
he
was
“cautiously
optimistic” about the new
rules.
But
that
day’s
statement was not the final
word from the government.
CHAPTER 27
December 7, 2013
The extent to which Bitcoin
could survive and grow
without government approval
was on display in Buenos
Aires, at the first conference
hosted by Bitcoin Argentina.
The group had been founded
by Wences Casares’s old
friend Diego along with a
partner he had met at a
Bitcoin Meetup earlier in the
year. For the conference the
men had booked a big hotel
in downtown Buenos Aires
and managed to sell four
hundred tickets, with about
40 percent going to foreigners
like
Roger
Ver,
Erik
Voorhees, and Charlie Shrem.
The ticket-buying process
itself had put a spotlight on
one of the most promising
Bitcoin startups to emerge
from Argentina and one of
the first companies anywhere
using the network to legally
provide a service that wasn’t
possible with the traditional
financial system.
In Argentina, credit card
transactions with foreigners,
like the sale of conference
tickets
to
Americans,
normally took a long and
expensive route before paying
out
in
Argentina.
The
American customer’s credit
card company would deduct
around $2.50 from the $100
ticket price to send the money
to Diego’s Argentinian bank.
From there, the Argentinian
bank would generally charge
another 3 percent for the
foreign exchange, leaving
$94.50. The big hit, though,
happened
when
the
Argentinian bank turned the
dollars into pesos. If Diego
converted the $94.50 with a
money changer on the street
he could have gotten the
unofficial rate of around 9.7
pesos for each dollar, leaving
him with 915 pesos. But the
bank exchanged the money at
the official exchange rate set
by
the
government—6.3
pesos at the time of the
conference—giving
him,
instead, 595 pesos. On top of
that, Diego’s bank wouldn’t
give him those pesos until
twenty
days
after
the
customer
purchased
the
ticket.
The Argentinian Bitcoin
startup, BitPagos, provided a
clever
way
around
this
expensive morass. BitPagos
took the $100 credit card
payment in the United States
and charged a 5 percent fee.
But instead of transferring the
remaining
$95
to
an
Argentinian bank, BitPagos
used the dollars to buy
Bitcoins in the United States.
BitPagos then transferred the
Bitcoins directly to Diego. He
could either keep the Bitcoins
or exchange them for pesos at
the unofficial exchange rate,
thus ending up with around
920 pesos, instead of 595.
And rather than taking twenty
days, BitPagos gave him his
Bitcoins in two days.
BitPagos had been started
earlier in the year by two
young Argentinians, a man
and a woman, who had been
running
a
consulting
company and struggling to
take payments from foreign
customers. In addition to
collecting ticket payments for
the foundation, the new
company was getting traction
with hotels that took money
from foreign tourists and
didn’t want to pay the cost of
getting those payments into
pesos. By the time of the
conference,
BitPagos
had
already signed up around
thirty hotels. Most of these
hoteliers didn’t care about the
ideas behind a decentralized
currency; they were just
happy to find a way around
the expensive tollbooths that
littered
the
Argentinian
financial system. As an added
bonus, they could end up with
money in Bitcoins rather than
the rapidly depreciating peso.
This was an eminently
practical use of Bitcoin to
deal with the inflationary
mess in Argentina, but it was
so practical that it actually
swung
around
into
the
domain of the ideological
ambitions
that
Satoshi
Nakamoto
and
the
Cypherpunks had imagined.
The Argentinian hoteliers
might
not
have
been
libertarians, but they would
have
easily
understood
Satoshi’s early writing about
Bitcoin, which explained that
“the
root
problem
with
conventional currency is all
the trust that’s required to
make it work. The central
bank must be trusted not to
debase the currency, but the
history of fiat currencies is
full of breaches of that trust.”
Mismanagement
of
currencies was a part of daily
life in Argentina.
The
conference
in
Argentina attracted many of
the
more
ideologically
minded
Bitcoin
followers
from around the world. The
old team from BitInstant
gathered for a reunion of sorts
and the team members were
all given prominent speaking
spots. They lived it up in
Buenos Aires, eating steak,
drinking Argentinian wine,
and
going
to
a
tango
performance with the other
presenters at the conference.
But for them and most of the
foreigners at the conference,
the most memorable thing
about the event was not a part
of the official proceedings.
Everyone coming into the
Hotel
Melia,
where
the
conference was held, passed
two teenagers, a boy and a
girl, whose wispy, almost
ethereal features gave them
away as twins. Both of them
were wearing the same white
T-shirt
with
the
word
Digicoins on the front, and
both asked people entering
the conference, in a gentle
voice, if they wanted to buy
or sell Bitcoins. Those who
took them up on the offer
were guided to a Subway
sandwich shop across the
street. There at a table sat a
man with wavy silver hair,
dark eyes, a computer, a
white
shirt
unbuttoned
enough to reveal his chest
hair, and a backpack full of
cash.
The man, the father of the
twins, had his Bitcoin wallet
up on the laptop and he could
change money in either
direction, in much the same
unofficial way as all the other
black-market money changers
on
Buenos
Aires
street
corners. Dante Castiglione,
the owner of Digicoins, had
not created Digicoins just for
this conference. He had, by
this time, been serving as one
of
Argentina’s
most
successful
virtual-currency
exchangers for a few months.
His twins were his runners,
going out into the city each
day to visit the customers in
need of pesos or virtual
currency. When people asked
about his business, he was
stingy with details and gave a
wry smile, as if to ask, “Why
do you think I’m doing this?”
But he was willing to say that
this was only the latest stop in
an itinerant career built by
finding
opportunities
in
Argentina’s broken financial
system.
“I am a working man,” he
would say when pushed. “We
are trying to give our service.
We are earning our food and
our rent.”
Bitcoin’s evolution in the
United States and China was
showing how the technology
could become dependent on
the official financial system
and government approval.
Argentina, on the other hand,
was showing how it could
develop without any of that.
It certainly moved more
slowly,
but
there
was
something more tangible and
grounded about what was
being created.
THE MAN WHO had gotten this
ball rolling in Argentina,
Wences, couldn’t make it to
the conference in Buenos
Aires. At the time, he was
finalizing the sale of his most
recent startup, Lemon, for
$42.6 million. When he
wasn’t winding down his
work with Lemon, he was
working on the new Bitcoin
company he was creating
with Fede Murrone, his
longtime
collaborator
in
Argentina.
The core of the new
business was the system that
Wences and Fede had begun
developing early in the year
to store their own, significant
holdings of Bitcoin, having
come to distrust Mt. Gox and
the other available services.
Their main goal had been to
get the private keys for all
their
addresses
off
any
computer hooked up to the
Internet. Wences and Fede
had begun by putting their
private keys on an offline
laptop and storing that laptop
in a safe-deposit box at a
bank
in
California;
this
allowed them to delete all the
private keys from their online
computers.
Over the course of 2013,
the value of their Bitcoins had
grown, as had the number of
people who heard about their
system and asked to store
Bitcoins on the laptop. This
had provoked Wences and
Fede to take more and more
strenuous measures to secure
the private keys. First, they
encrypted all the information
on the laptop so that if
someone got hold of the
laptop
that
person
still
wouldn’t be able to get the
secret keys. They put the keys
for decrypting the laptop in a
bank near Fede in Buenos
Aires. Then they moved the
laptop from a safe-deposit
box to a secure data center in
Kansas City. By this time, the
laptop was holding the coins
of Wences, Fede, David
Marcus, Pete Briger, and
several other friends. The
private keys on the laptop
were worth tens of millions of
dollars.
The interest shown by
friends suggested to Wences
that there was a broader need
for a more reliable way to
store Bitcoins. People didn’t
want to hold the private keys
on their home computers, but
they also didn’t trust Mt. Gox
and Coinbase to keep digital
files worth millions. The
vault, as Wences and Fede
called it, was just a starting
point. Wences imagined that
this would be the first
offering
in
what
would
become a full-service Bitcoin
company that could provide a
place for people everywhere
to store and spend their coins.
Unlike the previous startups
that Wences had started and
sold, this one was intended to
be his lifework—the last
company he would ever
found. He called it Xapo, a
name that he and Fede settled
on after looking for a simple,
distinctive word for which the
dot-com domain name was
available.
Wences initially had little
interest in taking money from
investors for this company.
He didn’t want to give control
to anyone else and he had
enough money to pay for it
all himself. But over the fall
of
2013,
his
friends
convinced him that starting a
company without investors
would deprive him of all the
connections and marketing
possibilities
that
funders
bring.
The value of having
investors became very clear
to Wences the same day that
he completed the sale of
Lemon,
when
Coinbase
announced that it had raised
$25 million from Andreessen
Horowitz
to
grow
the
company. It was the biggest
public investment in a Bitcoin
company, by a good margin,
and Coinbase reaped the
reward in new customers and
attention.
A few days after this,
Wences journeyed to San
Francisco
to
meet
with
Benchmark, a venture-capital
firm that had been vying with
Andreessen
Horowitz
to
invest in Coinbase. Wences
had been friendly with the
Benchmark partners for some
time, and he had hoped he
might find an opportunity to
work with them. One of them
was the brother-in-law of
Fortress’s Pete Briger.
The
meeting
at
Benchmark’s
offices
was
unlike Wences’s earlier fund-
raising efforts. This time, he
laid out what he needed from
Benchmark to make it worth
his while. After Wences’s
presentation, the Benchmark
team huddled briefly and then
offered to put $10 million
into
Wences’s
company,
valuing it at $50 million. As
in all of Wences’s past
startups, there was no term
sheet, just a handshake.
When Wences walked
out, he immediately called his
old friend Micky Malka to
tell him the exciting news.
Micky responded not with
excitement, but instead with
pique,
because
Wences
hadn’t offered Micky and his
firm, Ribbit, a place in the
deal. After demanding an
opportunity
to
put
$10
million
into
Wences’s
company,
Micky
finally
settled for $5 million. A short
while after that, Pete Briger
called to demand a place in
the round too, and Wences
agreed to let him put in $5
million. This left Wences
with $20 million before he
even
had
a
functioning
business.
DURING HIS TWO-WEEK stay in
the United States, Bobby Lee
visited his brother Charlie,
who had quit his job at
Google over the summer and
joined Coinbase to work on
Bitcoin
full-time.
Bobby
showed up at the company’s
makeshift
offices
in
a
converted
three-bedroom
apartment a day after the
company announced the $25
million
investment
from
Andreessen Horowitz.
Charlie Lee didn’t need to
work another day of his life.
Litecoin,
his
alternative
cryptocurrency, which was a
slightly faster, lightweight
version of Bitcoin, had now
become
the
second-most-
popular cryptocurrency in
what
was
becoming
an
increasingly crowded field of
Bitcoin knockoffs. In part
because
of
Charlie’s
transparency in launching
Litecoin, people trusted it and
were betting that it would be,
as Charlie had intended, the
silver to Bitcoin’s gold.
In November the value of
all the outstanding Litecoins
had briefly surpassed $1
billion.
The
particular
computer chips that were
good for mining Litecoins
were sold out at nearly every
online electronics retailer.
Charlie had been mining
Litecoins since the beginning,
so he owned a sizable number
of the coins, along with his
significant Bitcoin holdings.
His work at Coinbase was
primarily due to his desire to
help bring virtual currencies
into the mainstream.
Charlie saw that Bitcoin
had done similarly good
things for Bobby. Despite all
the
long
hours
and
uncertainty
Bobby
had
endured over the last few
months, his position as a
CEO, after years in middle
management, had given him a
confidence and self-assurance
that seemed to outweigh the
stresses of the job.
Bobby had spent much of
his time in the United States
looking for new investors and
partners for BTC China. But
he was still trying to figure
out what the People’s Bank of
China statement on December
5 would mean for his
company moving forward.
On Bobby’s exchange, the
price of Bitcoin had fallen
from the all-time highs, but it
stabilized at around 5,500
yuan, or $875, on Western
exchanges. Bobby learned
from his staff that the
December 5 statement had
come
about
after
the
enormous price spike in
November. Several reports
had gone up to the State
Council,
the
highest
administrative authority in
China, and one of the four
vice premiers of the council
had ordered the People’s
Bank to do something about
the situation. As is generally
the case in China, the whole
process was enshrouded in
secrecy and seemingly driven
by officials trying to protect
their backs.
On Bobby’s last night in
the
United
States,
his
government-relations
guru,
Ling Kang, called again. The
payment processor Tencent
had just called BTC China to
explain that Tencent was
going to stop doing business
with Bobby’s exchange in the
next few days. Bobby was
furious.
Tencent
had
previously agreed to provide
at least a ten-day notice of
any changes. That night, he
called everyone he could
think of to argue his case. But
he and Ling heard back that
Tencent had gotten orders
directly from the local branch
of the People’s Bank and
there was no fighting it.
When Bobby flew back to
China the next day, everyone
at
his
company
was
scrambling to get a new
payment processor set up
before Tencent shut the
company off on Sunday at
noon. But it now appeared
that the problem wouldn’t
end with Tencent. Bobby
learned that all the payment
processors had been called to
the
People’s
Bank
on
Monday to discuss the issue.
The Monday meeting did
not generate any official
change in policy or new
documents. But the real-time
reports from the meeting that
Bobby’s team was receiving
revealed that the payment
processors were all being
encouraged to reconsider any
business
with
Bitcoin
companies. As the rumors
began to leak, the price
dropped, falling to around
$600 on Western exchanges.
Two days later, when Bobby
officially confirmed that his
company would stop taking
new deposits, a new sell-off
began, taking the price down
to $430 on Bitstamp and
2,100 yuan on BTC China, or
less than a third of what it had
been at the high just two
weeks
earlier.
Whereas
100,000 Bitcoins had been
trading hands daily on BTC
China a few weeks earlier,
now the trading volumes
were less than a tenth of that.
Bobby was in back-to-
back meetings with his staff
contemplating ways to stay
alive without the payment
processors. One of the other
Chinese exchanges, Huobi,
began taking in customers’
money through the personal
bank
account
of
the
company’s
CEO.
The
December guidance from the
Chinese central bank seemed
to bar banks from working
with Bitcoin, but Bobby was
surprised to see that the banks
eagerly took the business
from
his
competitors.
Bobby’s Chinese deputies
explained that the banks were
doing this because, unlike the
payment processors, they had
not been called into a meeting
and warned not to work with
Bitcoin. Whereas in the
United States, banks were
unwilling to do work unless
they were explicitly given a
green light by regulators—
and sometimes not even then
—in the Wild West of China,
the banks would try just about
anything until they were
explicitly told it was not
allowed.
Bobby,
though,
had
worked most of his adult life
for American companies and
he
was
uncomfortable
skirting the rules. The best
alternative seemed to be some
sort of voucher system, in
which third-party vendors
would sell credit for BTC
China, similar to the way
vendors sell cards with cell
phone minutes. But as his
staff rushed to get this set up,
Bobby watched customers
flock to the competitors who
had set up bank accounts. In
China,
scrupulously
following the rules seemed to
be
a
recipe
for
losing
business.
EACH NEW RUN-UP in the price
had drawn new and more
sophisticated scrutiny of the
principles underlying Bitcoin,
and the December rise and
fall were no different. This
time, the people training their
sights on Bitcoin were some
of
the
highest-profile
economists in the United
States—including
Paul
Krugman, the progressive
Nobel Prize winner; and
Tyler Cowen, the prolific
libertarian-leaning
blogger.
Few of them had much good
to say.
Krugman focused largely
on Bitcoin’s claim to be a
currency, given the difficulty
it seemed to have fulfilling
one of the basic roles of
money: serving as a reliable
store of value. Why would
people store their wealth in
Bitcoin if they knew the value
was going to fluctuate so
violently? Krugman asked.
Cowen,
meanwhile,
argued that Bitcoin was going
to have difficulty sustaining
its value as new and better-
designed
cryptocurrencies
came along and drew users
away from it. Some people
were,
indeed,
already
choosing to hold Litecoin,
Charlie Lee’s creation, and a
hip, younger cryptocurrency,
Dogecoin.
But
a
deeper
strain
lurking
beneath
these
critiques was an awareness
that one of the fundamental
premises that had driven
Bitcoin’s popularity seemed,
increasingly, to have been
disproved.
Many
early
Bitcoiners, particularly in the
libertarian
camp,
had
believed that the Federal
Reserve’s efforts to stimulate
the economy in the wake of
the
financial
crisis,
by
pumping lots of new money
into banks, would devalue the
dollar and lead to high
inflation, similar to what had
happened in Argentina.
This idea made a scarce
asset like Bitcoin or gold look
like a safer bet than holding
dollars. But in late 2013 none
of the fears about inflation
had been borne out. In fact,
the
problem
facing
the
American economy was not
inflation,
but
deflation,
because banks were holding
much of the new money,
rather than putting it out into
the economy. The Fed’s
stimulus program had been
successful enough that the
European
and
Japanese
central banks were now
copying it. This was a living
economics experiment and it
didn’t seem to be going the
way libertarians expected. At
the same time, the scarcity of
Bitcoins still had the effect
that early critics had warned
about: it was encouraging
people to hoard Bitcoins
rather than actually use them.
Perhaps the most stinging
criticism came from a well-
known British science fiction
writer, Charlie Stross, who
wrote out a long list of
Bitcoin’s
potentially
damaging effects, of which
some were intended by the
Cypherpunks (for example,
tax evasion and weakening
government
social-welfare
programs) and some were
not. Stross noted that in the
latter category, the hoarding
encouraged
by
Bitcoins’
scarcity was leading to a vast
inequality in the holdings of
Bitcoins, “to an extent that
makes a sub-Saharan African
kleptocracy
look
like
a
socialist utopia.” Indeed, a
few Bitcoin holders, like
Roger
Ver
and
Wences
Casares, owned a material
proportion
of
all
the
outstanding coins. This was
unlikely to sit well with the
Occupy Wall Street crowd,
who objected to the undue
power of the wealthiest 1
percent of the population.
The Bitcoiners had their
ready responses to all these
critiques and voiced them
loudly. Bitcoin’s volatility
would go away as it matured,
the believers said, and Bitcoin
had a first mover advantage
against other cryptocurrencies
that was showing no signs of
abating. Meanwhile, inflation
might not be a problem in the
United States yet, but it was a
problem in other countries.
Whatever the merits of
the criticisms, they did not
seem to be dulling the
growing
curiosity
about
Bitcoin within major financial
institutions. The most notable
name to show signs of
interest was Wells Fargo,
perhaps the nation’s most
successful and most respected
bank in the wake of the
financial crisis. After the
Senate hearings in November,
Wells Fargo executives had
reached out to Pete Briger to
reopen the conversation about
working together on a Bitcoin
exchange. One sign of Wells
Fargo’s openness was that
executives of the bank agreed
to
travel
to
Fortress’s
headquarters in New York for
the meeting. Briger rounded
up a team of people to make
the case for Fortress, one that
included Wences and others
who flew in from California.
Fortress put aside a grand
conference room on the forty-
seventh floor of its Manhattan
headquarters, and executives
from several divisions of
Wells Fargo showed up. Once
the dozen or so people were
gathered
around
the
conference room, Pete stood
up and made his basic pitch
to the Wells Fargo team. He
explained why the Fortress
team was so intrigued by the
technology and pointed at the
smart people around the table,
such as Wences, who had
thrown themselves into it. He
hinted that Wells Fargo
should be keeping up with
Bitcoin, given the potential
for the new network to
challenge some of the basic
services,
like
payment
networks, that the bank was
providing. Pete closed by
talking about the lack of an
American-based
regulated
exchange
for
Bitcoin—
something that Fortress and
Wells Fargo could provide
together.
The questions from the
Wells Fargo executives did
not reveal much about how
serious the bank was about
the project, but they had
clearly done their homework
and
came
with
detailed
questions about what exactly
an exchange would look like
and how it might satisfy
regulators.
The
meeting
concluded
with
an
understanding that the bank
would take it all under
consideration.
The potential advantages
of Bitcoin over the existing
system were underscored in
late December, when it was
revealed that hackers had
breached
the
payment
systems of the retail giant
Target and made off with the
credit card information of
some 70 million Americans,
from every bank and credit
card issuer in the country.
This brought attention to an
issue that Bitcoiners had long
been
talking
about:
the
relative
lack
of
privacy
afforded
by
traditional
payment
systems.
When
Target customers swiped their
credit cards at a register, they
handed over their account
number and expiration date.
For online purchases Target
also had to gather the
addresses and ZIP codes of
customers,
to
verify
transactions. If the customers
had been using Bitcoin, they
could have sent along their
payments
without
giving
Target
any
personal
information at all.
During this period, it was
notable that some of the most
encouragingly
positive
statements
about
virtual
currencies
came
out
of
branches of the Federal
Reserve, the archetype of the
central bank that Bitcoin had
set out to supplant. Fed
officials didn’t love the idea
of a currency outside the
control of governments, but
they were very eager to see
methods of moving money
that cut out middlemen, who
introduced risk into each
transaction and into the
financial system. The Fed
had, in fact, been making
increasingly vocal calls for
technology that would allow
more
direct
methods
of
moving money. During late
2013 and early 2014, a
number of branches of the
Federal Reserve put out
papers
discussing
the
potential for the blockchain
technology to eliminate risk
in the financial system, if this
technology
could
be
harnessed properly.
“It
represents
a
remarkable conceptual and
technical achievement, which
may well be used by existing
financial institutions (which
could
issue
their
own
Bitcoins)
or
even
by
governments themselves,” a
Bitcoin primer released in late
2013 by the Federal Reserve
Bank of Chicago said.
Bitcoin’s use as a new,
more
secure,
and
more
private
way
to
make
payments online was given a
big boost in early January
2014 when the online retailer
Overstock announced that it
would
begin
accepting
Bitcoin for all purchases. The
eccentric chief executive of
Overstock, Patrick Byrne, had
a PhD in philosophy from
Stanford
and
was
an
outspoken
libertarian.
He
clearly
had
political
motivations
for
taking
Bitcoin, hoping to get the
country out from “under the
thumb
of
Wall
Street
oligarchs,” as he put it. He
also pointed to all the eager
Bitcoiners looking to spend
their money with anyone who
would take the currency. But
in interviews he emphasized
the more practical reasons for
any company to make the
move: no more paying the
credit card companies 2.5
percent of each transaction
(the
company
helping
Overstock
take
Bitcoin,
Coinbase, charged Overstock
1 percent); no more dealing
with
chargebacks
from
customers
who
received
shipments and then disputed
the charges; and no more
worrying about holding lots
of
sensitive
financial
information for customers.
On the first day, Overstock
processed
more
than
$100,000 in orders paid for
with Bitcoins.
CHAPTER 28
January 20, 2014
Wences Casares pulled his
white Subaru Outback into an
elegant, understated strip mall
off Woodside Avenue, one of
the main roads winding down
out of the hills above Palo
Alto. It was 7:30 a.m. and
Wences was looking forward
to his breakfast at Woodside
Bakery and Café, a favorite
spot for Silicon Valley deal
making that provided a bit
more seclusion than the
restaurants down in Palo
Alto.
The man waiting for him
inside was often referred to as
the best-connected person in
the Valley, and not just
because he had cofounded
LinkedIn,
the
business-
networking
site.
Reid
Hoffman’s girth and bearing
hinted at his larger-than-life
character. After studying at
Oxford, on an elite Marshall
Scholarship, Hoffman had
been brought in by Pete Thiel
to help build PayPal—Thiel
called him the “firefighter-in-
chief.”
Hoffman
later
introduced Thiel to Mark
Zuckerberg, an introduction
that led to Thiel’s making the
first major investment in
Facebook. By that point,
Hoffman had already begun
building LinkedIn with some
colleagues from an earlier
startup. When Wences first
met Hoffman, not long after
arriving in Silicon Valley,
Hoffman was looking for new
investments and serving on
the boards of startups. The
breakfast at Woodside Café
was one of their periodic
check-ins.
Wences
was
finalizing the investments in
his new company, Xapo, and
was eager to tell Hoffman
about his plans.
Wences
knew
that
Hoffman had first gotten
hooked on Bitcoin by Charlie
Songhurst, who had, in turn,
gotten hooked on Bitcoin by
Wences at the Allen & Co.
event in 2013. Hoffman, an
expert on social networks,
had
been
captivated
by
Songhurst’s arguments about
the power of the incentives
built into Bitcoin—primarily
through the mining process—
that encouraged new users to
join
the
decentralized
network
while
also
encouraging powerful miners
to do what was best for the
system so as not to see their
holdings lose value.
“That’s actually super
important,” Hoffman would
say later. “That makes it less
of
a
pure
technological
marvel and more of a
potential social movement.”
But
Hoffman
had
remained skeptical and was
particularly put off by the
suggestion that Bitcoin would
replace
credit
cards—the
possibility that all the bank
research reports were talking
about. Credit cards seemed to
work
pretty
well
in
Hoffman’s
estimation.
Despite the security risks and
costs to merchants, he didn’t
see too many consumers
complaining about their credit
cards failing them. If that
wouldn’t get people using
this new kind of network,
Hoffman
wondered,
what
would?
Hoffman
had
finally
gotten a satisfying answer to
this at a dinner with Wences
and David Marcus and a few
other Valley power players
late in 2013. Wences agreed
with Hoffman that Bitcoin
was unlikely to catch on as a
payment
method
anytime
soon. But for now, Wences
believed that Bitcoin would
first gain popularity as a
globally
available
asset,
similar to gold. Like gold,
which was also not used in
everyday
transactions,
Bitcoin’s value was as a
digital asset where people
could store wealth.
This was enough to get
Hoffman to go home from
that dinner and ask his wealth
adviser—the Valley’s most
prominent money manager,
Divesh Makan—to buy some
Bitcoins for his portfolio.
When Wences sat down for
breakfast with Hoffman at
Woodside Café in January,
Wences told him about the
progress he was making with
Xapo.
“Just to be clear, I’d be
super interested in investing,”
Hoffman told Wences.
Wences paused, a bit
chagrined.
“I wish you’d told me that
the last time we talked,” he
said.
“You told me you weren’t
interested
in
venture
investing,”
Hoffman
shot
back.
Wences explained that
things had changed since they
last talked, and that he had
decided to take on investors
and had struck a deal with
Benchmark Capital.
“I just don’t think I can
include you in that,” Wences
said. “It wouldn’t be the
honorable thing to do.”
Hoffman was not so
easily
deterred.
He
told
Wences he was going home
to figure out a way they could
make it work. Wences said he
would do the same.
Hoffman’s
newfound
enthusiasm was part of a
broader passion sweeping
Silicon Valley in early 2014.
While Wall Street research
reports were talking about the
possibility of a new payment
system, the best minds in the
Valley were thinking in much
more ambitious terms after
looking deeply at the code
underlying Bitcoin. These
views were crystallized, and
projected to a much broader
audience,
the
day
after
Wences’s
breakfast
with
Hoffman,
when
Marc
Andreessen, cofounder of the
investment firm that had put
$25 million into Coinbase,
published a lengthy cri de
coeur on the New York Times
website, explaining what had
the Valley so worked up.
“The gulf between what
the press and many regular
people believe Bitcoin is, and
what a growing critical mass
of
technologists
believe
Bitcoin
is,
remains
enormous,”
Andreessen
explained.
Andreessen’s list of the
potential
uses
for
the
technology was lengthy. It
was an improvement on
existing payment networks,
owing to its security and low
fees, but it was also a new
way for migrants to move
money
internationally,
as
well as a way to provide
financial services to people
whom banks had left behind.
Like many Valley firms,
Andreessen’s was thinking
about intelligent robots, and
Bitcoin seemed like a perfect
medium of exchange for two
machines that needed to pay
each other for services.
Beyond all that, though,
the
decentralized
ledger
underlying Bitcoin was a
fundamentally new kind of
network—like the Internet—
with possibilities that still
hadn’t been dreamed up,
Andreessen said. He went on:
Far from a mere
libertarian fairy tale or
a simple Silicon
Valley exercise in
hype, Bitcoin offers a
sweeping vista of
opportunity to
reimagine how the
financial system can
and should work in
the Internet era, and a
catalyst to reshape
that system in ways
that are more
powerful for
individuals and
businesses alike.
Less than a year earlier,
Wences had sat in Arizona
with Chris Dixon, a young
partner
at
Andreessen
Horowitz who had been
trying to get the firm to dive
into
Bitcoin.
Now
Andreessen
himself
was
becoming the most outspoken
public
advocate
for
the
technology, taking on a role
that had previously been
occupied by people like
Roger Ver and Hal Finney.
Andreessen had quietly
begun his investing in Bitcoin
a year earlier, when he put
some of his own money into
the Series A fund-raising
round of the secretive Bitcoin
mining
company,
21e6,
created
by
the
Stanford
wunderkind
Balaji
Srinivasan. Since then, in
addition to the $25 million
that Andreessen Horowitz
had put into Coinbase, the
firm had also made a secret
$25 million investment in the
confidential Series B round
for Balaji’s mining company.
That Series B also included
another $10 million from
other Series A investors and
$30 million more in venture
debt.
The
best-funded
company in the Bitcoin
world, with $70 million, was
one that only a small elite
even knew about. Andreessen
liked the investment in part
because while he and many
others in the Valley believed
that venture capital firms
should not buy Bitcoins
outright, he thought it was
kosher to invest in a mining
company like 21e6 that paid
out its dividends in the virtual
currency it mined.
Balaji’s mining company
had already started rolling out
its custom-fabricated mining
chips in the fall of 2013 and
had quickly come to account
for 3 to 4 percent of the
hashing power on the entire
network. In early 2014 the
company was planning to pay
the
first
dividends
to
investors and was building its
own dedicated data center
that would hold more than
nine
thousand
machines
containing the company’s
custom chips.
Balaji’s promise was so
great that in late 2013
Andreessen had invited him
to become the ninth partner at
Andreessen Horowitz, in no
small part to help scout out
new investments related to
virtual currencies and the
blockchain. Balaji was as
ambitious and utopian as
anyone out there about what
Bitcoin could do. He believed
that it could help open the
door
for
what
would
essentially be new breakaway
countries, created by people
wanting to push technological
experimentation to the limits.
For Wences, the more
immediate indication of how
quickly this was all moving
came in an e-mail from
Hoffman not long after their
breakfast.
Hoffman
had
talked with a friend at the
venture capital firm Index
Ventures, and together they
were
prepared
to
offer
Wences another $20 million
for Xapo. He could still take
the $20 million he already
had as a Series A, but this
could be a quick follow-on—
a Series A1. And while
Wences’s first investors had
valued Xapo at $50 million,
Hoffman and his partner were
ready to value it at $100
million. In little more than a
month, Wences had doubled
the value of his company.
STANDING BEHIND THE black
bar, Charlie Shrem opened a
fridge under the liquor and
pulled out two beers, a Blue
Moon for himself and an
Amstel Light for Nic Cary,
the chief executive of Roger
Ver’s
company
Blockchain.info, who was in
New York on a business trip.
The bar, EVR, was closed,
but
Charlie
lived
right
upstairs and had all-hours
access
thanks
to
his
investment a year earlier. His
girlfriend Courtney, who now
lived with him, stopped by to
see
if
Charlie
needed
anything.
Charlie looked noticeably
more weathered than he had
the previous summer when he
shut down the BitInstant site.
He had shaved off his
youthful curls and grown a
scruffy beard that matched
his bushy eyebrows. None of
this, though, signaled defeat.
Charlie
was,
in
fact,
benefiting as much as anyone
from the rising interest in
Bitcoin. He had taken on a
role as an unofficial money
changer for some of the big
holders of Bitcoin, allowing
them to sell large blocks of
coins without going on an
exchange, where big sales
could move the price.
More important, Charlie
had managed to connect with
a new group of investors who
were looking at putting up
money so that Charlie could
reopen
BitInstant.
The
potential investment was a
complicated deal, providing a
way to pay off the legal bills
from the previous summer
while also giving the site a
more
simple
regulatory
structure moving forward.
After taking a swig from
his beer, Charlie boasted that
one of the consultants who
had been helping him—one
who was a former regulator—
had told him: “You and some
of your friends have become
such super experts in finance,
law, and Patriot Act and all
these things. There are people
who have like thirty graduate
degrees who don’t know as
much as you do.”
“And
I’m
like,
‘It’s
Bitcoin,’” Charlie said with a
grin.
David
Azar,
his
old
investor, was ready to sign
off on the deal to reincarnate
BitInstant. The one hitch was
the Winklevoss twins. Charlie
had offered to give the new
investors more than half of
his
own
equity
in
the
company—bringing him from
a 27 percent stake down to a
12 percent stake. All the
twins and David had to do
was give the new investors 2
percent of their 25 percent
stake. When the twins shot
back a curt e-mail dismissing
Charlie’s
offer,
Charlie
quickly replied that he would
provide all the shares to the
new investors so that David
and the twins did not have to
dilute their stake in the
company at all. When Charlie
met with Nic, he was still
waiting to hear back from the
twins.
In the meantime, though,
Charlie was not twiddling his
thumbs. Earlier the same day,
he and his girlfriend Courtney
had lunch with a few guys
who wanted to sell shares in
private jets for Bitcoin.
“It’s fucking, excuse my
language, it’s an amazing
idea,” Charlie said. A few
weeks
earlier,
he
had
splurged and sold some of his
Bitcoins to pay for a private
jet to take him and Courtney
to the Bahamas.
He also was still working
with the Bitcoin Foundation,
preparing for its second
annual conference, this one in
Amsterdam.
“We’re looking for a
celebrity speaker,” Charlie
told Nic. “I want to get like
Snoop Dogg to come.”
“How
about
Richard
Branson?”
Nic
asked,
referring to the mogul who
had recently announced that
he
would
be
accepting
Bitcoin for tickets on Virgin
Galactic,
his
commercial
space company.
“A lot of these guys aren’t
even out of reach,” Charlie
said.
A few days after seeing
Nic, Charlie and Courtney
flew to Amsterdam. They
stopped by the convention
center where the foundation’s
conference would be held.
But the main purpose of the
trip
was
a
technology
conference in Utrecht that
had paid Charlie $20,000 to
speak about Bitcoin. Flying
home from the gig, in
business
class,
Charlie
couldn’t help feeling that,
after all his earlier struggles,
things were starting to work
out again.
After landing in New
York, he had just presented
his passport to the customs
officer when another agent
appeared, seemingly out of
nowhere, and said, “Mr.
Shrem, come with us.” When
Charlie asked why, the agent
said, simply, “We’ll explain
everything,” and led him to a
holding room. The agent
there
handed
Charlie
a
warrant for his arrest and told
him he was facing charges of
money laundering, unlicensed
money
transmission,
and
failure to report suspicious
transactions.
When Charlie asked for
more information he was told
the agents would be happy to
tell him more if he’d just
answer
a
few
of
their
questions. He knew better
than to talk without a lawyer
present and so he was left not
knowing what conduct had
led to the charges. He was
allowed into a larger holding
room, where Courtney was
waiting, crying hysterically.
He calmly told her to call the
lawyer
who
had
been
working on BitInstant and not
to answer any questions the
federal agents might ask her.
While he was talking to her,
he was put in cuffs and led
away to a black SUV, which
took off in a caravan of police
cars and traveled to the Drug
Enforcement Administration
headquarters in downtown
Manhattan.
After
getting
booked, Charlie was taken to
the Metropolitan Correctional
Center,
where
he
was
changed
into
an
orange
jumpsuit and locked up in a
cell by himself. He had the
rest of the night to cry and
nervously think through all
the things that might have
gotten him here and all the
ways it might play out.
In
the
morning,
the
marshals took him to a
holding cell under the federal
courthouse, where he met
with one of the lawyers he
had
worked
with
at
BitInstant, whom Courtney
had
called.
He
learned,
finally, that the charges
stemmed from his work in
early 2012, selling Bitcoins to
BTC
King,
the
money
changer who had helped Silk
Road
customers
secure
Bitcoins to buy drugs. The
prosecutors had e-mails in
which Charlie acknowledged
knowing what the coins were
being used for and doing it
anyway without filing any
suspicious-activity
reports
with regulators.
Charlie’s
lawyer
explained the basics. The
lawyer had reached Charlie’s
parents and they were ready
to put up their house in
Brooklyn as collateral for the
$1 million bail. But they had
conditions:
he
had
to
apologize to them and break
up with Courtney. When
Charlie
resisted
the
conditions, his lawyer told
him that he needed to bite the
bullet and do what it took to
get out.
Once he was released,
with an electronic ankle
bracelet on, Charlie found his
parents and Courtney in the
courthouse hallway. They had
never met before and clearly
had not been talking. When
he asked his parents if
Courtney could come home
with them, they reiterated that
if he wanted to be with
Courtney they would rescind
the bail and he would go back
to jail. He privately told
Courtney, who was weeping,
that he would try to figure
something out and call her
later. Outside, he climbed
into his parents’ black Lexus
SUV and headed toward his
childhood home.
While Charlie had been
sitting in the courthouse, the
United States attorney in
Manhattan, Preet Bharara, the
most powerful prosecutor in
the country and the same man
who had filed charges against
Ross Ulbricht four months
earlier, publicly announced
that his office had unsealed
criminal
charges
against
Charlie and the Florida man
known as BTC King, Robert
Faiella.
At
a
press
conference, Bharara said: “If
you want to develop a virtual
currency or a virtual currency
exchange business, knock
yourself out. But you have to
follow the rules. All of them.”
Charlie’s offense was not
of the magnitude that usually
caused a federal prosecutor to
hold a press conference, but
Bharara clearly wanted to
make a statement that he was
taking a close look at virtual
currencies.
THE DAY AFTER Charlie’s
release, and less than a mile
from where he’d been in jail,
the Winklevoss twins stepped
out of a black car in
downtown
Manhattan
to
testify
at
the
latest
government hearing about
Bitcoin. This one was being
held
in
the
somewhat
rundown offices of New York
State’s
top
financial
regulator, Benjamin Lawsky,
who had subpoenaed all the
major Bitcoin companies and
investors back in the summer
of
2013.
Lawsky
had
previously
worked
in
Bharara’s office. The arrest of
Charlie and Bharara’s press
conference, just a day before
Lawsky’s hearing, looked to
many Bitcoiners like a piece
of political theater, designed
to give Lawsky an excuse for
a more vigorous crackdown
on the industry.
The
hearing
itself
couldn’t help being colored
by
Charlie’s
arrest.
In
addition to the Winklevoss
twins, Barry Silbert, who had
wanted to invest in Charlie
back in 2012, was there to
testify, as was Fred Wilson,
the
respected
venture
capitalist who had a number
of run-ins with Charlie over
the years. The only panelist
with no tie to Charlie was
Jeremy Liew, the California-
based venture capitalist who
had put money into Bobby
Lee and BTC China.
The people who had been
invited to appear on the panel
showed that since the Senate
hearing three months earlier,
the center of influence within
the Bitcoin community had
shifted toward Silicon Valley
and away from the Bitcoin
Foundation that Charlie had
helped create.
When Lawsky, in his first
round of questions, asked
about Charlie’s arrest, none
of the panelists came to
Charlie’s
defense.
The
Winklevoss
twins
had
released a statement the
previous day suggesting that
they had been betrayed by
Charlie’s
behavior.
Both
Wilson and Liew emphasized
that Charlie was part of an
early Bitcoin community, in
which the seeming anonymity
of the technology was the
most attractive quality.
“It turns out that the
market of radical libertarians
is not very big,” Liew said in
his Australian accent.
The diminishing interest
in anonymity and central
banks did not mean that the
panelists
had
modest
ambitions for Bitcoin. They
talked about how this new
form of money—and the
ledger on which it ran—could
allow for new kinds of stock
exchanges and other things
that hadn’t even been thought
of yet.
“When you are offering
free,
radically
reduced
transactions costs, and when
you are offering the ability
for programmable money that
can put a lot of additional
functionality on money, then
you are talking about a
market size of everybody in
the world,” Liew said.
All
the
panelists
compared Bitcoin in its
current form to the Internet in
1992 or 1993, before the first
web browser. Back then,
there had been lots of
excitement in a small circle of
technologists about what the
Internet protocol could do,
but
the
programs
and
infrastructure did not yet exist
to make it accessible to
ordinary people. It had, at the
time, been dominated by
fringe communities willing to
try out untested technology.
In 2014, similarly, the Bitcoin
protocol wasn’t being used in
any particularly compelling
way, but that didn’t mean it
wouldn’t be in the future once
people discovered customer-
friendly ways to harness it.
“We are at the beginning
of an exciting time, not just
for investors but for all of
society,” Wilson said.
As the hearing went on, it
became increasingly clear
that Lawsky and the two
deputies who were helping
him ask questions were eager
to work with, rather than
against, their panelists.
“A lot of people initially
react to something new like
this
with
immediate
skepticism. All of us should
resist being overtaken by that
urge,” Lawsky said. “We
want to make sure we don’t
clip the wings of a fledgling
technology before it ever gets
off the ground. We want to
make certain that New York
remains
a
hub
for
innovation.”
Lawsky was a boyish
figure with big, attention-
grabbing ambitions. In late
2013 he had announced his
plans to create what he called
a BitLicense for virtual-
currency companies. At the
hearing he appeared less the
hard-edged interrogator and
more the slightly nerdy kid
trying to get in with the cool
tech kids. If nothing else, it
was evident that he thought
this
was
an
interesting
enough technology that he
did not want New York to be
left out as it developed.
“We
need
to
think
internally about how we can
be a more modern digital
regulator,” he said. “It’s not
simply what our rules are, it’s
also who we employ, how
quickly we act. There’s a lot
to do.”
WHILE
THE
BITCOIN
community seemed to have
made significant headway
with regulators, it was having
less success with the banks,
particularly after Charlie’s
arrest.
“Not good” was the
simple message that Patrick
Murck got, in an e-mail, on
the day that Charlie’s arrest
was
announced,
from
a
contact at Wells Fargo who
had been eager for the bank
to work with virtual-currency
companies.
Charlie resigned from his
position as vice chairman of
the Bitcoin Foundation on the
same day as the hearing in
New York, but that didn’t
help. Another executive at
Wells Fargo let Pete Briger
know that the bank would not
be able to move forward with
the joint project with Fortress.
Even before Charlie’s
arrest,
there
had
been
indications that the openness
that the banks had exhibited
toward Bitcoin, after the
Senate hearing in 2013, was
now coming to a close. Aside
from the reputational risks of
Bitcoin, the main hurdle that
most banks came up against,
internally, was concern about
money laundering. Regulators
expected banks to keep track
of the source and destination
of all transactions going in
and out, to ensure that the
banks
were
not
doing
business with terrorists and
mobsters. This was generally
not
hard
because
banks
around the world were forced
to keep records on all
accounts and all transactions.
But banks had faced billions
of dollars in fines in 2013 for
not adequately monitoring
transactions
coming
from
countries like Iran that faced
economic sanctions. Many
bank
compliance
officers
determined that it would be
all but impossible to know
where money flowing into
Bitcoin
companies
was
ending up. Customers at a
Bitcoin
exchange
could
convert their dollars into
virtual currency and then
transfer the virtual currency
to an unmarked address.
Jamie Dimon, the chief
executive of the nation’s
largest
bank,
JPMorgan
Chase, had told CNBC in late
January
that
he
was
extremely
skeptical
that
Bitcoin would ever amount to
anything real. Dimon said
that once Bitcoin companies
had to follow the same rules
as banks, when it comes to
money
laundering
and
compliance,
“that
will
probably be the end of them.”
Barry
Silbert
knew
Dimon personally. When he
saw
Dimon’s
comments
about Bitcoin, he quickly e-
mailed Dimon a link to the
pro-Bitcoin essay that Marc
Andreessen had written in the
New York Times. A few days
later, Dimon called Silbert.
Dimon had clearly read
Andreessen’s
essay
and
sympathized with the view
that virtual currencies could
provide some opportunity for
people outside the United
States who didn’t have access
to good banks.
But Dimon responded that
the potential of Bitcoin was
not going to be enough to
convince
government
officials to allow a competing
currency to exist. Dimon
knew what it was like to work
in an industry that came
under
government
supervision. Once Bitcoin
came
under
similar
regulation, it would require
all the same fees and rules
that bothered people in the
traditional financial system.
He didn’t dismiss Barry’s
arguments,
though,
and
invited him to come in and
present Bitcoin to some of
JPMorgan
Chase’s
executives.
Dimon’s perspective was
representative of a broader
shift in the banking industry’s
mind-set since the financial
crisis. Before the mortgage
meltdown had nearly brought
down the American economy,
Wall Street had hired some of
the best young minds in the
world and tasked them with
finding innovative ways to
make money. When many of
those
clever
innovations
ended up contributing to the
economic collapse, the banks
that survived were made
keenly
aware
of
how
financial
experimentation
could go awry. What’s more,
regulators put in place a raft
of new rules that forced banks
to think twice before taking
unnecessary risks. Just as
important,
government
officials were forcing banks
to pay billions of dollars in
fines for past infractions. Few
banks
paid
as
high
a
monetary price as JPMorgan.
By the time Dimon and
Silbert
talked,
the
most
important characteristic of
any
new
business
for
JPMorgan was not how much
money it would make, but
how it would sit with
regulators. JPMorgan had
gone further than most in
pulling back from potentially
risky activity. During 2013 it
had stopped working with
remittance companies, check
cashers, and even student-
loan providers, not because it
had to, but because it didn’t
want the headache. Other
banks were taking similar, if
less aggressive, steps.
As the comments at
Lawsky’s hearing suggested,
this was nearly the opposite
of the attitude in Silicon
Valley, which had not been
implicated in the financial
crisis. The tech industry was
increasingly confident about
its own ability to change the
world, emboldened by the
success of companies like
Apple,
Google,
and
Facebook. Some of the most
popular tech companies were
ones such as Airbnb and Uber
that
openly
challenged
cumbersome regulations like
those imposed on hotels and
taxis.
In
the
financial
networks that Bitcoin was
hoping to challenge, tech
investors like Fred Wilson
saw just another set of
regulations that could be
disrupted to create a more
efficient market. If anything,
the financial industry seemed
even more open to disruption
because
the
incumbent
businesses were so afraid of
breaking the rules.
Wences, who had been
working at the intersection of
technology and finance for
two decades, acknowledged
that for most of his career the
center of power and wealth in
the
United
States,
and
perhaps even the world, had
been the financial industry
and, specifically, New York.
But he was outspoken in his
belief that this was about to
change.
“It’s likely that the next
twenty or thirty years are
going to be the same for
Silicon Valley,” he liked to
say. “In no other area are we
going to see the passing of
the baton so clearly as with
Bitcoin.”
The only problem for the
Silicon Valley disrupters was
that they still relied on banks
to hold the dollars they used
to pay their employees—and,
in the case of Bitcoin
companies, the dollars they
received from customers to
pay for the virtual currency.
Wences
Casares
had
always used JPMorgan Chase
as the bank for his previous
startups—he had maintained
an allegiance to the bank after
it had given his first startup
an account back in the 1990s.
Now, though, when Wences
applied to JPMorgan to open
an account for his new
company, Xapo, he was, for
the first time, turned down.
He found another bank that
initially opened a corporate
account for Xapo, but then
shut it down right before
Wences
received
a
$10
million check from his new
investors, the venture-capital
firm Benchmark. Wences was
in the unusual position of
having an enormous check
and no one willing to accept
it. He was eventually saved
by Silicon Valley Bank, the
same bank that was holding
money for Coinbase and the
only
bank
showing
any
willingness to work with
Bitcoin companies.
In the long run, though,
Wences assured everyone he
knew that the cautiousness of
the banks would matter less
and less. At an event hosted
by JPMorgan in the Valley, to
discuss Bitcoin, Wences was
dismissive when the topic of
Jamie Dimon came up:
“I think whatever Jamie
does or doesn’t do will be as
relevant
as
what
the
postmaster general did or
didn’t do about e-mail.”
CHAPTER 29
February 2014
Mark
Karpeles
was
spending many of his days in
early 2014 in a space on the
ground floor of the Tokyo
office building that housed
Mt. Gox. Mark was turning
the space into what he called
the Bitcoin Café, a real-world
showcase for Bitcoin in
Tokyo—with a register that
would be powered by a point-
of-sale system that Mark had
been designing. Mark was
spending his time working
out the details of the café,
down to the programmable
LED lighting on the ceiling
and the recipes for the
pastries that would be served.
The café was almost ready to
open, with wine on the
shelves and light blue Bitcoin
Café mugs sitting next to the
register.
As he puttered around the
café, Mark did not look like a
man
responsible
for
a
financial company that was in
the throes of an existential
crisis. For most of January,
the price of a Bitcoin on Mt.
Gox had been almost $100
higher than on any other
exchange. This was a result
of the continued difficulty
that Mt. Gox was having in
transferring withdrawals to
customers
outside
Japan.
Mark
blamed
this
on
American
banks,
which
refused
to
accept
wire
transfers from his Japanese
bank. For all the people with
dollars stuck at Mt. Gox it
seemed that the only way to
get money out was by using
the dollars trapped in the
exchange to buy Bitcoins and
then transferring the Bitcoins
out of Mt. Gox. The pressure
of all these people trying to
buy Bitcoins on Mt. Gox,
with
no
ability
to
go
elsewhere, allowed sellers on
Mt. Gox to charge higher and
higher premiums for their
coins.
Then, in late January and
early February, something
even more worrisome started
happening that sent the price
heading in the other direction.
The customers earlier in
January
had
complained
about the difficulty of getting
dollars out of Mt. Gox, but
now a growing number of Mt.
Gox customers reported that
they
had
requested
withdrawals of Bitcoin and
never gotten the coins. A few
days after the hearings in
New York, Mark put up a
formulaic statement on the
Mt.
Gox
website
acknowledging the problem:
“Please rest assured that this
is only affecting a limited
number
of
users
and
transactions, and that we are
working hard on resolving
this problem as soon as
possible.”
The thirty or so Mt. Gox
employees in the company’s
Tokyo offices knew little
more than Mt. Gox customers
about what was going wrong.
When Mark wasn’t working
on the café, he was in his
office, behind a locked door
on the eighth floor, far from
the second- and fourth-floor
offices where most of his
staff was located. There were
visible signs that all the stress
was wearing on Mark. He
was not yet out of his
twenties but gray hairs were
visible in his big black mane
and he was clearly gaining
weight. People in the office
heard that Mark’s Japanese
wife had taken his young son
and gone to live with family
members in Canada, but
Mark said nothing about it.
Mark rarely interacted with
his employees and maintained
the
same
grip
on
the
company’s essential accounts
that he had back in 2011
when Roger Ver came to help
after the first big crisis at the
exchange.
The
alienation
from the ordinary world,
which had helped lead Mark
to Bitcoin, also made him a
terrible person to run a
Bitcoin company.
The Mt. Gox employees
were as surprised as the
exchange’s customers when
Mark decided, on Friday,
February 7, to shut off all
withdrawals from Mt. Gox.
The panic that this caused
only got worse on Monday
when Mark provided the first
explanation of what was
going wrong. In a statement,
Mark explained that the
exchange had run up against a
flaw in the Bitcoin protocol.
The
flaw,
known
as
transaction
malleability,
allowed devious users to alter
the codes that identified
transactions in a way that
made it impossible to tell if a
transaction had gone through.
Users in the know could
request a withdrawal, change
the code, and then request the
same
withdrawal
again.
Mark, in his statement, said
this was not just a problem
for Mt. Gox, but an issue with
the Bitcoin software, which
should
have
been
fixed
earlier.
The
statement
immediately sent the price of
Bitcoin plunging on every
exchange around the world—
a flaw in the Bitcoin protocol
could jeopardize everything.
And Mark was correct that
transaction codes had been
susceptible to alteration for
some time. What he didn’t
mention was that all the other
major Bitcoin companies had
known about the issue for
years
and
had
designed
around it, generally by not
relying on the transaction
code in question. Gavin
Andresen, the chief scientist
at the foundation that Mark
had funded, quickly came out
swinging against Mark and
said that the issue was not a
bug, but a quirk, which others
had dealt with easily. Mark
came under withering attack
from nearly every developer
working
on
the
Bitcoin
software.
“MtGox tried to blame
their issues by throwing
Bitcoin under a bus and I am
glad there has been a public
rebuttal showing up their
incompetence,”
one
programmer on the developer
e-mail list wrote.
After Mark publicized the
issue, transaction malleability
did, in fact, become a point of
attack on the Bitcoin network.
Bitstamp,
the
largest
exchange, shut off Bitcoin
withdrawals one day after Mt.
Gox’s announcement. But
Bitstamp emphasized that it
had lost no money as a result
of the issue and, after putting
together a quick patch, it was
back up by the end of the
week.
Other
exchanges
remained open throughout.
Mt. Gox, on the other hand,
remained closed, creating a
growing fear that something
bigger was wrong.
WHEN
MARK
KARPELES
showed up for work on
Friday morning, his umbrella
barely protected him from the
unfriendly wet snow falling
from the sky. He was wearing
a short-sleeved shirt that
hugged his round body, and
he carried a large frothy
coffee drink. Almost all the
other exchanges around the
world had recovered from the
transaction malleability scare,
but Mt. Gox showed no signs
of allowing customers to
again
withdraw
money.
Mark’s
entrance
to
the
building was blocked by a
young man who had flown to
Tokyo from London two days
earlier to try to get some
answers. With a sign in one
hand that said, “Mt Gox
where is our money,” the
protester,
a
mustachioed
programmer named Kolin
Burges, placed himself in
Mark’s
way
and
said,
“Please, can I have a chat
with you?”
Mark first tried to dodge
him,
but
then
stopped
reluctantly when the man
said, “I came all the way from
London to try and get my
Bitcoins from you—to find
out what’s happened.”
“We can’t do anything
right
now,”
Mark
said,
looking both disdainful and
scared. He started again
toward the door when Kolin
asked the key question: “Do
you still have everyone’s
Bitcoins?”
“Can you let me get
inside please,” Mark said as
he tried to pass Kolin, who
was bobbing and weaving to
get in his way. “I’m going to
call
the
police,”
Mark
threatened,
before
Kolin
finally let him pass.
Upstairs in the Mt. Gox
offices, the staff didn’t know
any more than Kolin did
about what was going on.
They were still operating the
exchange, allowing people to
buy and sell Bitcoins with
whatever dollars were still in
their Mt. Gox accounts and
taking in new deposits from
daring customers. The price
of a Bitcoin on the exchange
fell lower and lower as people
doubted they would ever be
able to get the coins out. On
Friday, the price stood at
$300, half what it was on
Bitstamp.
Some
people,
including Roger Ver, were
convinced that Mt. Gox’s
problems were temporary and
jumped at the chance to buy
coins on the cheap.
Mark would later say that
during this time he was
spending his daylight hours at
the office and his nights at his
apartment, alone with his cat
Tibanne, furiously working
his way through hundreds of
pieces of paper containing the
private keys to Mt. Gox’s
Bitcoin wallets. He had
driven around in his car and
collected the papers from the
three locations in Tokyo
where he had stored them (he
had kept the keys on paper so
they would not be vulnerable
to hackers). Once he was
back in his apartment with the
QR
codes—essentially
complex bar codes—he began
scanning in the private keys
one at a time, with his
computer’s
webcam.
A
combination of fear and
sickness slowly overtook him
as each one of the wallets he
scanned in showed up on his
computer screen as empty.
It would be hard for
others
to
verify
Mark’s
narration of what happened
during those days because he
kept such tight control over
all the exchange’s accounts.
And as time went on, fewer
and fewer people believed
anything Mark said. But even
if he was telling the truth, it
was not what he told his
employees and customers
when he came in to work on
Monday morning, ten days
after Mt. Gox shut off
withdrawals. In a public
statement on the Mt. Gox site
on Monday, he said, “We
have now implemented a
solution that should enable
withdrawals and mitigate any
issues caused by transaction
malleability.”
On the narrow Tokyo
street outside the office,
Kolin Burges maintained his
one-man protest. There were
still few Japanese people
using Bitcoin, but Kolin did
attract
a
few
foreign
supporters who showed up as
the week went on without any
sign of a resolution to the
problem. Mark had two
security guards advise the
staff on how to deal with
intimidating
encounters.
Mark himself started taking
taxis to work and leased
space in an office tower with
better security. On Friday,
Tokyo police showed up to
remove the protesters.
A few hours after the
police left, the Winklevoss
twins landed in London for a
weekend
appearance
at
Oxford
University.
When
they turned on their phones in
the plane, they found a
worrisome
from
Mark’s deputy, Gonzague,
with whom they had dealt in
the past.
“I would like to talk to
you urgently regarding the
situation with MtGox,” he
wrote. “Would you mind
signing this NDA and call me
ASAP on my mobile phone.”
Cameron
Winklevoss
replied that a nondisclosure
agreement could be tricky,
but he was happy to talk.
After being out in London all
day,
Cameron
finally
managed to connect with
Gonzague by Skype when he
got back to his hotel Friday
night.
Gonzague got right to the
point and explained the
staggering extent of the
problem:
some
650,000
Bitcoins—essentially all the
company’s customer holdings
—were gone, along with
100,000 coins that belonged
to the exchange.
Cameron was stunned.
Doing the most basic math in
his head, he knew that
Gonzague was talking about
hundreds of millions of
dollars worth of Bitcoins.
“How is that possible?”
was all Cameron could ask.
Gonzague
said
that
someone had been stealing
from the company’s online,
or hot, wallet by changing the
transaction identifiers. When
the hot wallet was empty,
Mark had unwittingly refilled
it with coins from the cold,
offline wallets. Gonzague
told Cameron that Mark had
continued doing this over and
over again, until all the
offline wallets were empty.
The whole thing had been
going on for months, or even
years, and Mark apparently
never realized it until now.
The explanation struck
Cameron as implausible, but
it didn’t seem worthwhile to
argue
now.
The
bigger
question was what was going
to happen next.
Gonzague sounded oddly
upbeat. He explained that
Mark had “burned himself”
and was agreeing to step
aside, making it possible to
move
the
business
to
Singapore and reincorporate
under new owners, with the
twins
being
obvious
candidates. Gonzague thought
it would be possible to do this
without telling anyone what
had
happened.
If
the
exchange
could
get
an
infusion of coins the business
could make up the missing
money over time, from fees.
If this wasn’t done, Gonzague
said ominously, it could set
Bitcoin back years.
It didn’t seem like a
terribly attractive business
proposition to Cameron, but
he wanted to hear more—if
only to understand how bad
this was all going to be for his
Bitcoin holdings. He asked
Gonzague to send him some
sort of concrete plan for what
they had in mind.
The next day Gonzague
sent the twins a twelve-page
document, labeled “Crisis
Strategy Draft.” It had been
put together for Mark and
Gonzague by a small public
relations firm run by some
Americans living it Tokyo. It
was clearly a draft document,
with
typos
and
inconsistencies, but it pulled
no punches about what had
happened:
The reality is that
MtGox can go
bankrupt at any
moment, and certainly
deserves to as a
company. However,
with Bitcoin/crypto
just recently gaining
acceptance in the
public eye, the likely
damage in public
perception to this
class of technology
could put it back 5~10
years, and cause
governments to react
swiftly and harshly.
At the risk of
appearing hyperbolic,
this could be the end
of Bitcoin, at least for
most of the public.
After reading through the
document, and its four-part
plan for closing Mt. Gox
temporarily and reopening it
under new owners, the twins
still couldn’t figure out what
was being asked of them,
other than putting a lot of
money
into
a
failing
company.
“I understand the larger
points you raise, but it is
unclear to me what the exact
plan of action here is,”
Cameron wrote back.
The twins were not the
only people to whom Mark
and Gonzague were looking
for a lifeline. They also sent
the Crisis Strategy Draft to
Barry Silbert in New York,
who
had
his
Bitcoin
Investment Trust up and
running
with
tens
of
thousands
of
Bitcoins.
Essentially everyone told the
Mt. Gox team the same thing:
there was nothing to do but
admit the losses and declare
bankruptcy. When Roger Ver
met the Mt. Gox team at the
Tokyo American Club on
Monday morning, he told
them that no one in the world
had enough Bitcoins to bail
them out, except perhaps
Satoshi Nakamoto. Mark and
Gonzague didn’t believe it,
and wanted to keep the
information in a small circle
of people to give them more
time to find a savior. After
Mark refused to admit the
problem in a call with
members of the Bitcoin
Foundation, Roger angrily
called some of the foundation
members himself and let
them
know
what
was
happening.
Once the word spread
among
the
top
Bitcoin
companies on Monday, they
all
began
preparing
for
something
that
had
the
potential to take down the
whole Bitcoin experiment. In
a shared Google document,
they worked on a joint
statement that gave their best
argument for why people
should
not
lose
hope.
Ordinary Bitcoin users got
some
indication
that
something was wrong when
Mt. Gox’s Twitter account
suddenly
disappeared
on
Monday. But Gonzague and
Mark continued to hold out
hope that someone would
come in and bail them out.
When Cameron wrote on
Monday to ask what was
going on, Mark said he was
planning to begin talking with
a
bankruptcy
judge
on
Tuesday. But, he emphasized,
“Our current goal is to try to
save MtGox before filing for
bankruptcy—in which case
filing wouldn’t be required
anymore.”
The growing bubble of
uncertainty over how this
would all play out finally
burst on Monday night when
a popular Bitcoin blogger,
known as the Two Bit Idiot,
posted a leaked copy of the
Crisis Strategy Draft. As it
began to circulate and the
Bitcoin
masses
tried
to
determine if it was legitimate,
there
was
a
sense
of
suspended motion on the
forums and message boards,
with everyone waiting for the
bottom to fall out. The
companies putting together
the
joint
statement—
Coinbase,
Blockchain.info,
BTC China, Bitstamp, and
Jesse
Powell’s
exchange,
Kraken—were
caught
off
guard by the leak and rushed
to complete their statement,
which ultimately came out a
few hours after the leak. The
companies
urged
Bitcoin
owners to understand that the
losses were the result of
irresponsibility
and
bad
behavior, not of a deeper
flaw:
“This tragic violation of
the trust of users of Mt. Gox
was
the
result
of
one
company’s actions and does
not reflect the resilience or
value of Bitcoin and the
digital currency industry.”
The
price
did
begin
dropping on Bitstamp and
other exchanges. But the free
fall
unexpectedly
slowed
within a few hours, before the
price hit the low it had
reached back in December
when the Chinese exchanges
turned off deposits. Many
people seemed willing to
believe the idea that there was
nothing wrong with Bitcoin;
there was talk that the
disappearance of the most
disastrous company ever to
touch Bitcoin could end up
being a good thing for the
technology. If nothing else,
people had invested enough
time and money that they
couldn’t stomach selling out
of a trough. By Wednesday
morning, the price was back
up where it had been when
the Mt. Gox news came out.
Still, under the apparently
calm surface, there was
immense and largely unseen
damage. As the enormous
figures
from
Mt.
Gox
suggested, tens of thousands
of people had kept their
money with the exchange
despite all the warnings, and
those holdings, estimated at
over $400 million the week
before, had now disappeared
in a mysterious puff of
smoke. Roger had a Japanese
friend,
whom
he
had
convinced to buy Bitcoins
and who had left $12 million
worth of coins with the
exchange. The older man in
Argentina who had purchased
large numbers of coins from
Wences Casares, back in
2012, had also kept them with
Mt. Gox. The man had been
using Bitcoin to keep his
retirement savings out of the
unreliable peso—but now it
was Bitcoin that failed him.
The man wrote in an e-mail
to one of Wences’s friends in
Argentina that his life had
been turned upside down by
the event:
I’ll tell you that the
collapse of Mt. Gox,
where I had put
absolutely all of my
savings, left me more
than demoralized. Not
only because of the
money, which was a
lot, but because it
destroyed the hopes I
had created for using
it as my wife and I got
older. Each time this
comes up it really
hurts my health.
The same week as the
collapse, lawyers in Chicago
and Denver filed a lawsuit
seeking class-action status to
represent all the victims, and
federal
prosecutors
were
sending out subpoenas to aid
in the criminal investigation
they launched.
Even many of the victims
blamed Mt. Gox rather than
Bitcoin. Nothing had gone
wrong
with
the
Bitcoin
protocol. In fact, Mt. Gox had
long been held up as an
example of the dangers that
arose when Bitcoin users
relied on central institutions,
rather than the system of
private keys and personal
wallets that Satoshi had
designed.
And
yet,
Bitcoin’s
standing
as
a
universal
money, answerable to no
government—and beyond the
reach of any one government
—had opened the way for
companies like Mt. Gox,
companies
that
took
advantage of the fact that in
the Bitcoin industry, each
person could make up his
own rules. This wasn’t a
problem with the protocol but
it was an issue with one of the
central
ideas
that
had
motivated
Bitcoin:
the
supposed benefit of releasing
money from all the outdated
rules and regulations that
governed
the
existing
financial system. Mt. Gox
was, of course, not the first
example of the dangers that
arise in a system in which no
one
is
responsible
for
providing
oversight.
An
academic study in 2013 had
found that 45 percent of the
Bitcoin exchanges that had
taken money had gone under,
several taking the money of
their customers with them.
One of the most trenchant
critics
of
Bitcoin,
the
Financial
Times
writer
Izabella Kaminska, put it well
in the days after the collapse:
The only way to
stabilise the system is
to rid it of the
“cheating
incentive”—that being
the incentive that
encourages the
“prisoner” to take the
high-risk selfish
strategy. Most of the
time that depends on
establishing a system
of enforced protocols
or regulations that
penalise rulebreakers
above and beyond the
potential benefit of
cheating.
Some
of
the
recent
converts to Bitcoin were not
opposed to some sort of
government oversight for this
fledgling
market.
Ben
Lawsky in New York used
the incident to push ahead
faster with his BitLicense.
But it was somewhat unclear
whether there would be
anything left to license.
CHAPTER 30
March 6, 2014
It was early in the morning,
but a scrum of reporters had
already gathered outside an
unassuming
three-bedroom
house in Temple City, one of
the many featureless towns
that sprawled along the inland
freeways heading east from
Los Angeles, serving as
magnets for upwardly bound
Asian immigrants.
The
reporters
were
chasing a story that would
provide the Bitcoin world
with a break from all the hard
questions it had been facing.
That morning, Newsweek had
posted its first issue under
new owners. On the cover
was a dramatic mask, against
a black background with the
title “BITCOIN’S FACE: THE
MYSTERY MAN BEHIND THE
CRYPTO-CURRENCY.”
Satoshi
Nakamoto’s
identity had been a recurring
fascination for journalists, but
all the previous searches had
ended
with
inconclusive
results. Given Satoshi’s skill
in
using
anonymizing
software, many assumed that
Satoshi would never be found
until he, she, or they decided
to come forward.
The Newsweek reporter,
Leah McGrath Goodman, had
seemingly cracked the nut in
the most unexpected way.
The man she found was
named Dorian Nakamoto, but
the papers recording his
immigration from Japan to
the United States in 1959, at
age ten, showed that his
name, at birth, had been
Satoshi.
This
Satoshi
Nakamoto
had
gotten
a
degree
in
physics
from
California State Polytechnic
University and had worked
on
classified
engineering
projects before his retirement.
He lived with his mother and
liked model trains, but his
oldest
daughter
told
Goodman that her father was
a libertarian; his brother said
Dorian loved his privacy.
Dorian Nakamoto generally
refused
to
speak
with
Goodman during the course
of her reporting. But when
she
briefly
confronted
Nakamoto in front of his
house to ask him about
Bitcoin, he seemed to confirm
the circumstantial evidence.
“I am no longer involved
in that and I cannot discuss
it,” Goodman reported that
Nakamoto told her. “It’s been
turned over to other people.
They are in charge of it now.
I
no
longer
have
any
connection.”
It
was
a
completely
unexpected outcome to the
hunt
for
Satoshi—so
unexpected that it almost
seemed to make sense. A
master of encryption would
have
used
the
most
misleading disguise of all,
hiding in plain sight with a
number in the phone book.
When some of the early
Bitcoin developers who had
corresponded with Satoshi
talked with journalists that
morning, they acknowledged
that the story seemed to fit
together.
“It’s probably the best
theory yet,” Mike Hearn, the
programmer
in
Switzerland,
told
one
reporter.
When Nakamoto refused
to come out of the house for
much of the morning—
despite being at home—it
only seemed to confirm that
he wasn’t going to refute the
story. For Hearn and many
other Bitcoiners this was a
terribly sad outcome. Satoshi
had valued his privacy above
all else and now that had been
violated. Newsweek had even
posted photos of the car in his
driveway, with the license
plates
visible.
It
was
particularly worrying because
previous
research
had
suggested that during the first
year Satoshi had stockpiled
Bitcoins that would now be
worth nearly $1 billion,
holdings that would make
Nakamoto a target of any
enterprising criminal. The
death threats from fans of
Satoshi started flowing into
Goodman’s inbox.
Eventually
Nakamoto
emerged from his house, and
before he could shut the door,
a crowd of reporters on his
front porch clamored to ask
him questions.
“Why did you create
Bitcoin, sir?” one reporter
shouted.
“OK, no questions right
now,” Nakamoto said, with a
Japanese accent.
Nakamoto didn’t want to
talk; he wanted someone to
take him to lunch. When
someone else stuck a recorder
in his face, he said: “Wait a
minute, I want free lunch
first. I’m going to go with this
guy,” pointing at a Japanese
reporter for the Associated
Press.
As he battled his way out
onto the sidewalk, Nakamoto
tried to shield his sleepy-
looking eyes, behind big
square glasses, from the sun.
His floppy hair and loose-
fitting
pants
and
jacket
suggested that he might not
have
spent
much
time
outside. Looking for the
reporter who had promised
him
lunch
and
clearly
confused, he finally answered
the question everyone was
asking: “I’m not in Bitcoin—
I don’t know anything about
it.”
This
was,
as
many
reporters quickly pointed out,
far from definitive proof that
Newsweek had gotten the
wrong guy. It is what many
people
assumed
Satoshi
would say if asked about his
involvement
in
Bitcoin.
Before the reporters could get
more out of Nakamoto, he
disappeared into the AP
reporter’s Toyota Prius and
drove off toward a sushi
restaurant.
The
other
reporters jumped into their
own
cars
and
followed
behind, rushing into Mako
Sushi after Nakamoto. As the
reporters barraged him with
more questions, he and the
AP
reporter
left
before
ordering and returned to the
car.
What
came
next
immediately entered the list
of great Los Angeles car
chases, this one narrated in
real time on Twitter by Los
Angeles Times editor Joe Bel Bruno:
There is a huge chase going on
behind #Nakamoto. Tons of
media. All heading west on the
10 freeway
We think #Nakamoto might be
heading toward downtown LA.
Great American #Bitcoin Chase
Traffic!!! Oh no #Nakamoto!
We are two cars behind
#Nakamoto, and it looks like the
@AP reporter is doing all the
talking. #Bitcoin
Hang on folks. . . . . There might
be some resolution here with
#Nakamoto in downtown LA.
#Bitcoinchase surrealer and
surrealer
So the Great #Bitcoinchase
seems to have found a
destination at the @AP bureau.
But the #Nakamoto story isn’t
over. Hordes of media here
waiting for him.
The reporters who had
been part of the chase quickly
parked and raced into the AP
building. A few managed to
squeeze onto the elevator
with Nakamoto and the AP
reporter. The reporters once
again asked Nakamoto if he
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