Digital Gold

by Nathaniel Popper

  On the spot, the two men offered Charlie a free space to work at The Yard, an office for startups they had recently opened in Brooklyn. They also suggested they would be interested in making an investment in BitInstant. That same afternoon, Charlie visited The Yard, built out of an old industrial building in the hip neighborhood of Williamsburg. Bitcoin was quite literally moving out of the basement and into the real world.

  WHEN CHARLIE HAD begun BitInstant less than a year earlier, it was a response to a very specific and narrow problem—the difficulty of getting money into Mt. Gox’s bank accounts to buy Bitcoins. But Charlie’s conversation with the two potential investors at New York Tech Day illustrated his growing awareness that his company could also help ordinary people take advantage of a much more practical service than Bitcoin could offer the world. Thanks to his upbringing in a community of entrepreneurs, Charlie knew that in 2012 businesses still had few good ways of instantly transferring money to pay for goods and services. A normal bank payment took several days, and a wire transfer moved faster but cost $30 to $50 each time.

  Charlie’s practical bent had led him, unwittingly, to an issue that had rarely been a part of the Cypherpunk discussions but that was perhaps the most widely acknowledged problem with the existing financial system: the creakiness of the old payments system.

  In March 2012, a month before Charlie found his investors, the Federal Reserve had held a daylong conference about consumer-payment systems at which there was a lot of grousing about the fact that despite all the technological innovation going on in the world, the infrastructure for moving money around the country was still based on technology from the 1960s and 1970s. The Automated Clearing House, or ACH, which facilitated payments between bank accounts, was created in the 1970s and had not changed much since; this helped explain why bank transfers took at least a day to go through. For most Americans, the easiest and fastest way to send money to a friend or family member was still the old-fashioned paper check. This problem was not just in the United States. A week before New York Tech Day, the Canadian government announced the launch of a new digital currency effort, called Mint Chip, that it hoped would spur innovation in payments.

  The weakness of the existing system had been evident during the financial crisis when the Wall Street bank Morgan Stanley needed a $9 billion infusion from a Japanese firm. The agreement was reached on a Sunday, but the money could not be sent because the wire network was down for the weekend and the next day was Columbus Day. It turned out that even banks couldn’t send each other money on holidays. In order to get around this, the Japanese bank cut an absurd $9 billion paper check.

  With Bitcoin, transfers did not happen instantly, as was sometimes claimed. A Bitcoin transaction was official only after it had been confirmed by a miner and included on the blockchain, which generally took a minimum of ten minutes. But it took around ten minutes at any hour on any day of the week and could be done from a smartphone, which was a lot better than waiting until Tuesday.

  The potential of the Bitcoin network as a new, cheaper, and faster payment system represented an opportunity for the network that went beyond the controversial anonymity it appeared to offer, and the ideological attraction of its decentralization. Charlie wasn’t the only person who had spotted this opportunity. Two former fraternity brothers at Georgia Tech had founded a company called BitPay, which looked to harness the network as a cheaper way for merchants to accept online payments, while also giving Bitcoiners a place to actually spend their virtual currency. With BitPay, merchants could accept Bitcoin, and BitPay would immediately convert the virtual currency into dollars and deliver those dollars into the merchant’s bank account. This was attractive to merchants because BitPay charged around 1 percent for its service while credit card networks generally charged between 2 and 3 percent per transaction. What’s more, whereas credit card companies could recall money from a merchant in the case of a customer dispute, Bitcoin transactions were irreversible.

  The opportunity here was also evident to another businessman from Charlie’s Syrian Jewish community, a man named David Azar, who was the son of Charlie’s childhood dentist. When David heard about Charlie’s business from a friend, he was intrigued. David ran a chain of check-cashing shops and he had intimate experience with all the drawbacks of the existing payment networks.

  David, an energetic entrepreneur who came across to others as something of a street fighter, invited Charlie to his office, which was just a few blocks from the BitInstant offices. In their first meeting, David boldly told Charlie that he wanted to invest money in Charlie’s company and had the money to do it. Charlie was thrilled, but explained that he was already working with two other investors from the Syrian Jewish community who were planning to put money into BitInstant. David made it clear to Charlie that he wanted to make the investment on his own and that he was not one to easily take no for an answer.

  CHAPTER 13

  May 2012

  Less than a year earlier, when Charlie Shrem had stopped by the first Bitcoin conference in New York, he had been too timid to introduce himself to anyone. Now, in the early summer of 2012, he was the toast of the Bitcoin world and was getting invitations from all directions. In late April he flew to San Francisco to appear on a panel about the future of money. In the crowd afterward, a small, svelte Russian man introduced himself and asked if Charlie would be interested in traveling to Vienna to join a small group advising the man on his own Bitcoin startup, a credit-card-thin device that could serve as a Bitcoin wallet. Once Charlie was back in New York, he discovered that the man, Alexander Kuzmin, was a minor Russian tycoon who was directing a fortune he’d made from Siberian oil to anarchist causes. Kuzmin also invited Erik Voorhees, Roger Ver, and Gavin Andresen to come to Vienna and sent along Bitcoins to pay for their travel expenses.

  While Charlie and Erik prepared for the trip, they were also being pursued by the two investors who wanted to give $1 million to BitInstant. This was surprisingly hard for Charlie because of his instinctual aversion to telling people things they didn’t want to hear. Instead, he strung them both along. When the first investors had to cancel their plans to join Charlie in Vienna, the second, David Azar, quickly booked a ticket. In Vienna, when the Russian mogul wasn’t pampering the Bitcoiners at his airy two-story penthouse, David treated the BitInstant team to a good time. The men visited a sex club that had a hefty entry charge and an additional fee for each intimate act with the women. After paying the admission fee for the others, David turned around and went back to his room. David also quietly offered Charlie several thousand dollars on the side if Charlie chose David’s investment.

  When Charlie and Erik returned to New York they decided to go with David. This required a surreptitious exit from the working space that had been given to them by the first potential investors. While Charlie broke the bad news, Erik hurriedly moved all their computers into Charlie’s BMW so they would be ready to leave in a hurry when Charlie left his meeting with the disappointed men who had put their hopes in him. Charlie got yelled at but, as he and Erik sped away laughing, it felt like just another exhilarating incident in their intoxicating ascent.

  Eric was becoming a figure in the Bitcoin world in his own right, thanks in no small part to a gambling site, SatoshiDice, which he had started up in late April. The game of odds was based on the same hash functions and math underlying Bitcoin, and the outcome of each bet was visible on the blockchain. Players gambled by sending small payments to specific Bitcoin addresses, and winning bets immediately paid out. If this had been done using traditional payment networks, the transaction fees would have made it prohibitively expensive, but with Bitcoin the payments could go in and out free. The game itself had been invented by someone else, but Erik bought the concept for 45 Bitcoins, gave it a user-friendly website, and got it up and running. By July it had already become wildly popular and he began making plans to sell stock in the company on a Bitcoin stock exchange set up by a man in Romania.

  Erik made
his commitment to Charlie and BitInstant more firm when he moved to New York full-time in July and convinced a friend from Colorado, Ira Miller, who had been working with him on Bitcoin projects, to move with him. The BitInstant crew worked briefly out of Erik and Ira’s new apartment in Brooklyn, but they soon rented their own office in Manhattan just feet from the storied Flatiron Building. Charlie had his own office with windows looking onto the street. In the main room, he installed a big screen that displayed the live price of Bitcoin.

  To Erik’s delight, Charlie was beginning to be won over by the more ideological arguments for Bitcoin. During the summer, they met Roger in New Hampshire for PorcFest, a festival in the woods held by the Free State Project. They were amazed to find that many of the vendors already accepted Bitcoin, allowing them to make it through the weekend using almost no dollars. They had made the theme song for BitInstant—“It’s Yo’ Money Why Wait?”—and Erik would occasionally blast it from the back of his Subaru Impreza.

  IT WAS, THOUGH, becoming increasingly clear that Bitcoin was on a trajectory that was going to be hard to sustain as the authorities became more aware of it.

  Silk Road was still driving a significant portion of the real transactions on the Bitcoin network, including many of the people buying coins from BitInstant and Mt. Gox. When a friend asked Charlie about Silk Road, Charlie explained that “it funds a decent percentage of the overall Bitcoin economy.”

  The consequences of this had become hard to avoid when a remarkably well-informed report entitled “Bitcoin Virtual Currency,” prepared by the FBI, had leaked in May. From the first line, it was evident that the FBI did not generally view Bitcoin in a positive light; the report described the network as a “venue for individuals to generate, transfer, launder, and steal illicit funds with some anonymity.” The report also said that the agency “assesses with medium confidence that law enforcement can identify, or discover more information about malicious actors.”

  Charlie kept working with the BTC King, who helped Silk Road customers acquire coins. But Charlie was increasingly trying to follow the relevant rules when it came to gathering information about customers who made transfers above prescribed minimum amounts. He also registered with the Treasury Department agency responsible for regulating money transmitters, the Financial Crimes Enforcement Network, or FinCen.

  The issue of Bitcoin’s reputation had been a steady topic of conversation when Charlie, Gavin, and the others had been in Vienna. At a café Charlie had chatted with Gavin about some sort of foundation that could serve as a neutral voice to bring the technology into the mainstream and create some distance from Silk Road.

  When Gavin returned from Vienna he had connected Charlie with Peter Vessenes, a Seattle entrepreneur who was trying to break into the Bitcoin space. Peter did not have much of a business plan, but he had some practical business experience and had already managed to land some funding for his startup, CoinLab. He was also very eager to help Bitcoin break into the mainstream.

  In a series of increasingly excited e-mails, Charlie and Peter both emphasized the need for a foundation that could separate itself from the virtual currency’s controversial past. Charlie told Peter that those involved had to be people “without tarnishes and have spotless reputations within Bitcoin. Anyone involved with even an inkling of mistrust ruins our whole legitimacy.”

  Roger was included in the planning of the foundation, and promised to donate 5,000 Bitcoins to support it. But it was decided early on that Roger would not take a seat on the board because of the prison term he had served. Peter pushed to be given a leadership role because of his past entrepreneurial experience. When Charlie and Roger suggested that others—such as Jed McCaleb and Jesse Powell—be included, Peter quickly shut down the idea, saying it would be better to restrict the planning to a small circle of people.

  The man who would serve as the glue in bringing this all together was Patrick Murck, an unassuming Seattle lawyer whom both Charlie and Peter had independently found. Patrick had not come to Bitcoin with the same intentionality as so many members of the early community. He had spent his first years out of law school working at a firm in Washington, DC, where he had grown up as the child of a federal employee.

  Recently, though, not long after his son was born, Patrick’s mother-in-law was diagnosed with cancer, and he and his wife had sold everything and moved to Seattle to help care for her. His wife had given up her own job at the National Wildlife Federation. Patrick had begun to get his professional life back on track in Seattle by getting a job at an advertising startup that focused on digital games and tokens; there he began to learn about the law surrounding digital money. When that job didn’t work out, Patrick found that he was one of the only people with any legal expertise in anything close to virtual currencies and he started consulting for Bitcoin startups like BitInstant.

  Patrick was indicative of the increasingly practical turn that Bitcoin was taking. He was not a libertarian—he had, in fact, volunteered for the Obama campaign in 2008. His work with Bitcoin had started as a job and evolved into a passion, rather than the other way around.

  In a first group meeting, by phone, the men all agreed that the foundation would steer clear of the politics that had been associated with the technology and would, instead, focus on standardizing the technology and providing a neutral meeting ground for the community. They held out, as their model, the foundation connected to the open source Linux operating system. Occupy Wall Street this was not.

  All the men on the call were aware that one of the biggest complications that faced them was Mt. Gox. The exchange had continued to be the largest venue for buying and selling Bitcoins. Mark Karpeles had brought on new staff, many of them fellow French expatriates, and found the company larger offices just a few blocks from Roger Ver’s apartment (so close, in fact, that Mark’s staff initially used Roger’s wifi network). But Mark’s social skills had not grown with his company. Despite having a Japanese wife and now a young son, he rarely talked about them with others and seemed much more interested in his cat Tibanne, about whom he posted loving items on Twitter and YouTube. At work, Mark kept all the important responsibilities in his own hands and as a result the business moved only as quickly as Mark did. The exchange was constantly facing complaints about long wait times and poor management. When Roger lent Mark money, he had trouble getting paid back, and when he needed a transaction to go through, he would sometimes have to visit the Mt. Gox offices.

  Peter Vessenes, in Seattle, was hoping to raise money from investors to either purchase Mt. Gox or take over some of its management. Peter had written to Mark and told him: “My gut, and it’s just a gut feeling, is that Gox could use more finance and global business experience to grow in the way you guys want it to.”

  At the same time Peter was planning a first in-person meeting for the group behind the Bitcoin Foundation, he also made a trip to Tokyo to sell Mark on the idea of teaming up. Personally, the men were like oil and water. Peter was the genial American businessman who liked to ease into business conversations by talking about family and personal life, while Mark rarely discussed anything beyond work, and hardly even that. By the end of the visit, though, the men had begun planning for Peter’s company to take over Mt. Gox’s American customers. Peter did not invite Mark to a first meeting of the group behind the foundation, but he did secure a promise from Mark to donate 5,000 Bitcoins to the organization. He also got Mark to hand over the domain name BitcoinFoundation.org, which Mark had acquired a year earlier.

  Almost as soon as Peter was back from Tokyo, Roger, Gavin, and Charlie flew to Seattle for a meeting to formalize the Bitcoin Foundation. During the two days of meetings, Gavin made it clear that he had no interest in doing anything other than working on the Bitcoin code. Charlie, meanwhile, was eager to take charge of the foundation’s annual conference, which he said could raise $200,000 or more. Patrick Murck, the lawyer, took on much of the hard work of bringing the foundation into existence.

  To
underscore the decentralized principle of Bitcoin, the group agreed that the bylaws for the foundation would be posted on GitHub, the open source software site, where people could comment and suggest additions or changes. But in a rather undemocratic step, the men in Seattle decided to anoint themselves, and Mark Karpeles, the initial members of the Bitcoin Foundation board. Peter had the clever idea of including, as a founding member, Satoshi Nakamoto, or whoever could prove ownership of Satoshi’s public key: DE4E FCA3 E1AB 9E41 CE96 CECB 18C0 9E86 5EC9 48A1.

  A rare tense moment during the gathering came when Roger dressed Charlie down for constantly opening up his laptop to deal with small tasks at BitInstant—transferring money or dealing with customer e-mails. For Roger, this brought back bad memories of Mark’s inability to delegate responsibility to others. Roger, with evident frustration, told Charlie to hire more people to take care of things for him.

  “You are the CEO,” Roger said. “You shouldn’t be responding to customer service requests.”

  The eager-to-please Charlie put his laptop away, but he had trouble keeping it closed.

  At the end of the day, the group retreated to the palatial waterfront home of another cofounder of Peter’s new virtual currency company—a former Microsoft executive—who lived on a beautiful, exclusive peninsula near Seattle. When the wealthy neighbors wandered over, Roger immediately got them all set up with Bitcoin wallets on their phones. Watching Roger evangelize with his usual gusto about “the most important invention in history since the Internet,” Charlie said to the others, with a laugh: “Look at Bitcoin Jesus.” It was a nickname that would stick.