The Untold Story of the Greatest Crypto Project Ever

by Paul Rosenberg

  The Untold Story of the Greatest Crypto Project Ever

  INTRODUCTION:

  I’m about to tell you the true story of the greatest of the crypto projects… a story you’ve never heard. It took place in the late 1990s and early 2000s. It was a massive experiment and one that had a serious impact on what came after. I almost wish I still had my donors list, because I’d love to see if my favorite Satoshi candidates were on it. (I was one of very few people who had the list, but I destroyed it on principle once I no longer needed it.)

  This project had more or less anything you would imagine it having and much more besides. My brief history of it runs to six installments, but many times that many could be written. I’m covering only the highlights and mainly from my own perspective. But my perspective was a useful one, especially because I oversaw the investigations that closed out the project.

  Unlike some of my other stories, this one is not fiction.

  And so, here’s my brief explanation of the project:

  We had perhaps the best financial mind of his generation, who became a cryptographer after seeing the true face of the beast. We had the second Linux developer. We had hundreds of the most serious libertarians and objectivists. We had Gorbachev’s translator. We had abandoned spies, both American and Russian. We had our own newspaper. We had our own restaurant, and a good one. We even had an honest-to-God, authentic embassy. We had a wild collection of geniuses, near-geniuses, and trying-to-look-like geniuses.

  The wildest of the bunch (a guy whose life alternated between quasi-scams and the Pentecostal Church) pumped millions of his own dollars into the project. He had run for governor in Nevada once and didn’t do too badly. Then, when things got rough for him, he got his silver out of the country by having it turned into a set of sculptures entitled, The Butchers and Bastards of History, which included, as I recall, likenesses of Mao, Stalin, Hitler, Lenin, and Bill Clinton.

  Dull, this project was not.

  And in the end we produced a fully functional, end-to-end encrypted financial system, complete with holding corps, a stock market, and futures options. It all functioned with anonymous digital bearer certificates (aka digital coins). On top of that, we had a functioning dispute resolution system that resolved a number of commercial disputes. We had PGP-encrypted webmail and a fully encrypted news/forum/messaging system designed to be decentralized.

  And all this happened by the end of 2001, a solid seven years before Bitcoin.

  From this project came the first VPNs and anonymity services, cyber law, Yodelbank, and several early Bitcoiners. Some of the people involved became I2P developers, e-gold operators, the first Seasteaders, and I’m not sure what else.

  For better or worse, this project accomplished things. It was a grand and tumultuous season of doing, rather than sitting around and pontificating, which is what most people were up to at the time.

  PART 1: Why You Never Heard About It

  Continuing from the Introduction [link]

  While what we did wasn’t entirely hidden, it was only partly public. And for reasons that will become clear as we go, no one on the inside has wanted to talk about it until now. While these people didn’t do much that was actually illegal (at least so far as I know), none of them wanted any “special attention” from the powers that be.

  Nonetheless, I think it’s time to tell the story. A new generation of crypto advocates should be able to learn from what came before them.

  The greatest crypto project, oddly enough, didn’t begin as a crypto project. Rather, it began the way that hyper-serious freedom projects generally did before the year 2000: as a new-nation project.

  New-nation projects and calling upon Ayn Rand may not make sense to crypto advocates in the 21st century, but please believe me, if you were desperate for freedom in 1970 or 1980 or even 1990, these things were almost all you had. If you wanted to do something that might actually change the world, there wasn’t much else available.

  And so, being children of the 20th century, quite a lot of people ponied up five or six thousand dollars apiece to get on board.

  Remember, this is well before Bitcoin. It was also when the Internet was in its infancy. Newly formed telecom ventures were scrambling to lay enough trans-oceanic cables to make this new computer thing work, and the trusted voices of the early 1990s – The New York Times leading the parade – were continuously slamming the Internet as a threat to civilization. (Funny how all of that fell down the Memory Hole.)

  And so, at some point in about 1994, a group of investors and hustlers put together a new project. This one was poised to actually work, because they had a close connection to the president of a major South American country. For a nice, quiet, seven-figure bribe, he was going to lease them 100 square miles of his country for 50 years. It would be a new Hong Kong… a laissez-faire paradise.

  After several meetings with the corrupt president in which assurances were received (I wasn’t involved at that time; I’m repeating what I was told by people who were), the group took out full page ads in the Economist and, as I recall, Newsweek. Here’s a copy of the ad:

  This was when the first round of fundraising began. And quite a significant number of people jumped in. At this point the core group quickly recruited contacts, including a strange cast of characters from both sides of the Cold War, which had recently ended. They formed their own trust, registered with no state, and appointed Mikhail Gorbachev’s translator – a pleasant, well-mannered man – as the trustee. (I’m not sure how they knew Gorbachev’s translator, but it was probably through one of the spies.)

  All that said – and I doubt this is any surprise – El Presidente soon enough backed out of the deal (they always backed out of the deal), leaving a moderately collusive group of new-nation advocates in a fix. They had taken in a lot of money, and they had no way to deliver what they had promised. My impression is that some of these men were scrupulously honest and others less so (there were no women I know of), but they all wanted an unruled space more than they wanted the money.

  As you might imagine, frenzied discussions took place at this point. It also happened to be a moment when many of them were scheduled to go on an investment tour of South America. And it was on that tour that everything changed.

  The key figure in this crucial turn was a man named Orlin Grabbe (GRAY-bee). Orlin was one of the financial wizards of his generation. He had grown up on a farm in Texas, spent some years with the Worldwide Church of God, and then leaped from one advanced degree and one elite university to another.

  Orlin was exceptionally bright and soon enough ended up teaching at Wharton, an elite business school. He more or less invented modern arbitrage trading, as well as making basic contributions to financial derivatives. His book International Financial Markets became the standard text on the subject.

  What happened next can’t be found on Wikipedia, but I learned it directly from Orlin and his friends. He was recruited to work for the US “intelligence community” and got a good look behind the curtain… then went running from what he saw, directly into cryptography. (Which was also, in those days, called “cryptology.”)

  The beginning of Orlin’s series, “The End of Ordinary Money” (written at various points between 1987 and 1995), read this way:

  Late one night while sharing a pharmacological product with a spook I met in the northeastern part of the United States, I mentioned I was studying cryptology.

  “Cryptology is the future,” he responded emphatically. “It’s what’s going to protect us from Big Brother.”

  Since he worked for the National Security Agency (NSA), the thoug
ht did occur to me that many would have taken the position that he and his colleagues were Big Brother. But I had learned years ago not to demonize people on the basis of an accidental profession… I additionally believed that one of our best defenses against the national security state was the perennial proclivity of clandestine organizations to piss off their own employees.

  At any rate, the spook spoke the truth: cryptology represents the future of privacy, and more. By implication cryptology also represents the future of money, and the future of banking and finance.

  As the investment tour proceeded, Orlin convinced the group that cryptography was the future and that it would give them most of what a new nation could provide, permanently and with mathematical certainty. This is not to say that he particularly trusted these men. I think he did some, and I know he didn’t others. But they committed real money to it, meaning that he’d be able to recruit the best people he could find and build the crypto systems he wanted to build.

  Soon enough the deal was agreed upon, and a base of operations was being set up in Costa Rica, which was then the haven of choice for well-behaved ex-spies and assorted interesting characters.

  And so a group of old-style libertarians, objectivists, and hustlers financed the biggest crypto project ever. It was a turning of generations. Minimally four million and perhaps seven million dollars went into it.

  PART 2: Cryptoheaven, Almost

  Continuing from Part 1 [link]

  For someone who wanted to build a new world functioning privately and honestly, protected by cryptography, our base in San Jose, Costa Rica, was almost a dream… and more than any of us dreamed, probably.

  The investment tour was in early 1996, by my best guess. And it was a couple of years before the base was really set up; physical infrastructure takes time, after all.

  My involvement began in late 1997, when I found myself stranded for a day and a half at an airport hotel in San Francisco. I was conducting seminars for the National Electrical Contractors Association in those days, and a slip-up in the scheduling left me there.

  After considering my options (it was winter and flight schedules were a mess), I decided to stay put and make use of the time. Fortuitously, I had with me a recently released book called The Sovereign Individual.

  My time at the hotel was well spent. I had been thinking about encrypted commerce for a couple of years, but reading Sovereign Individual stimulated my thoughts and helped me make some important connections. By the time I finished the book, I had pages of notes, particularly on how to resolve disputes in anonymous (actually, pseudonymous) cyberspace. I knew what I had was important, but I couldn’t see anything to do with it.

  A year and a half later, however, I ran into Orlin and a member of the inner circle (plus another of the former spooks) at the wonderful Eris Society meetings in Aspen. I quickly cleaned up a few pages of notes and emailed them to the group. They were building the system we all wanted, and I had a necessary piece they hadn’t yet considered.

  Shortly thereafter, I flew to San Jose and walked into what I can only call “cryptoheaven.”

  Armed with a set of directions in Spanish, I made my way to a rather high-end neighborhood of San Jose and then to what my cab driver told me had been the “Canadian school.” I rang the bell and met “Alex,” a defrocked CIA agent. Alex and I got along nicely and he showed me around. He and his wife (a very pleasant woman) lived there, as did a cast of characters, mostly slightly paranoid programmers… all of them sci-fi fans as well.

  There were full time housekeepers who also cooked and two large Rottweilers named Charlie and Parker. There was a garage area and lots of garden space.

  There were many rooms in the place, including a small gym. After I was shown to my bedroom and had settled in, I was taken to a back room in which I could work. It was a large, clean room, with desks running the length of two walls. Upon the desks were perhaps half a dozen new Mac desktops, all connected to a network and then to the Internet. The other two walls were nearly all window from about three feet up, making the room bright, functional, and all but ideal for my work. And I was often alone in the room for days at a time, interrupted only by Alex’s wife offering me plates of food and encouraging me to eat something.

  And it didn’t stop there. Directly across the street from what we called the “programmer house” (instead of the “Canadian school”) was an excellent restaurant called City Club. It was there that I met Orlin and had dinner with him a time or two. City Club served other customers, but it was more or less “our restaurant,” complete with Ethernet ports every four or five feet across the front of the bar. (This was 1999; there wasn’t a lot of Wi-Fi in those days.) And it was a fair bet that one of the people working on their laptop at the bar was someone who wrote something you’d read and appreciated.

  Can you see why “cryptoheaven” wasn’t a bad description of this place? And don’t forget that San Jose is a very pleasant place to live: naturally beautiful with modern conveniences. And it definitely fit the programmer lifestyle, as there were not only decent pizza joints to order from, but even McDonald’s delivered. And for those who were interested, there were bars, a casino, and everything that went along with a casino.

  About a mile down the road from the programmer house was the “consulado”… the consulate. This place was an authentic embassy. It was a large house surrounded by a high wall, with a large metal gate in front, complete with full time guards. You couldn’t see the house from the street.

  What it was, really, was the Nicaraguan embassy. But the Nicaraguans were having hard times through those years and couldn’t afford to maintain the place (nor, especially, I think, an ambassador), and so our guys rented it from them. That gave us a physically protected space. For US government agents to raid the consulado, they’d be committing an act of war against the sovereign state of Nicaragua!

  The fear in those days was that the US would send thugs to shut us down. And it wasn’t a crazy fear. Phil Zimmerman had barely avoided prison for releasing PGP just a few years prior, and we were building some fairly advanced cryptographic applications. Crypto advocates were on edge about such things then, and so all the servers that mattered were kept in the consulado. All the most crucial work was done there as well.

  PART 3: The Work Gets… Complicated

  Continuing from Part 2 [link]

  I am convinced that the reason Bitcoin survived isn’t that it withstood the attacks of its enemies, but because it withstood the foolishness of its friends.

  Our project survived long enough to reach its goals only because of people who held to their principles, defended them against foolishness, and above all, worked hard to keep things moving forward.

  Once Orlin’s team was established in the rear wing of the consulado, they worked quietly. But the guy who was continually pumping his money into the project, “Rex,” was in a hurry for results. That’s generally understandable of course, but Rex was also an inveterate huckster with a tendency to over-promise and then demand product from the developers… NOW!

  Writing crypto applications from scratch, however, is neither simple nor fast. And so heads butted… and kept butting for a long time.

  Rather heroically at times, a man I’ll call “Bob” stood between the two groups (Rex and his coterie, Orlin and his developers) and kept them apart. I think we all owe a lot to Bob. Rex complained and Orlin (no shrinking violet, he) treated Rex like a buffoon. Bob kept everyone separated. Piece by piece things proceeded.

  And of course there was much, much more to this. Years ago I ran across a memorable line[1] that went something like this: Once beyond the borders of the accepted, all sorts of strange flora and fauna pop up. How true that proved to be.

  All sorts of strange characters found their way to this thing. Some were plainly brilliant and some were brilliant but with a pet doctrine they expected the project to adopt. We had some who were still trying to make “special economic zones” work. There were people overly intereste
d in drugs, the aforementioned spies (who always tend to make things a little crazy), people who were a bit paranoid, and so on at considerable length.

  One of the first people I met was an Olympic pentathlon champion, there to provide security. A couple of the spies – a Russian and an American – got into a fight at the consulado one time. (They were both pretty old and ended up rolling around on the floor until they could be separated… or so I was told.)

  My personal nemesis was a writer who pushed endlessly to place the project beneath a constitution and turn it into a state, even if it was “cyber” state. He wrote at great length on law, harping on the old line that one “could not be judge of his own cause.” It took a lot of time and effort to convince all the participants that this was a very bad idea, but it was done well enough to stop the threat. And ultimately the guy shot himself in the foot by advocating some very strange ideas about women… almost that they should be excluded from justice and had to be represented by their husbands.

  My fights with the constitution guy (and many others) took place on our messaging system, and in our newspapers[2], a partial archive of which remains here.

  The big problem, however, was that Rex wanted fast results that he could use to generate more donations. (Founderships, they were called.) After a while, he could no longer be restrained and started hiring his own programmers, who were ordered to get things done fast.

  Rex’s programmers were decent guys; I think I liked them all. But they faced an impossible task[3]. You simply can’t turn out fast products and keep them cryptographically secure. That’s barely doable these days, and it was a heck of a lot harder in 2000. And so, compromises were made.

  The first of our products was called “Mailvault,” which became available before Rex started hiring his own programmers. It was a webmail system that incorporated PGP encryption. It was, in other words, PGP webmail, something that Hushmail replicated, at least after a fashion.