Digital Gold

by Nathaniel Popper

  Most of the weekend, though, was spent talking not about Satoshi, but instead about the incredible challenges that everyone in this group faced. The one-two punch of Charlie Shrem’s arrest and Mt. Gox’s collapse had killed much of the hope that Bitcoin would gain mainstream acceptance anytime soon.

  Dan Morehead had been running his Bitcoin operations from inside Fortress’s San Francisco offices, and there had been a vague plan for his small team to be integrated into Fortress, a publicly traded company. With all the crises, though, Pete Briger had let Dan know that Fortress was not going to be able to have a formal role. Dan was going to have to move his staff, operating under the name of his old hedge fund, Pantera Capital, out of Fortress’s offices.

  Things did seem to be going well for the old college fraternity brothers who founded Bitpay, both of whom were in Tahoe. They had signed up lots of new online merchants who were happy to find a cheaper way to process online transactions—the 1 percent that Bitpay charged versus the 2 to 3 percent charged by credit cards—without worrying about chargebacks. But it was now becoming evident that consumers had much less of a reason than merchants to use Bitcoin for online purchases. Consumers, after all, never see the 2.5 percent processing fee that merchants pay, so products aren’t cheaper when purchased with Bitcoin. And consumers generally like having the peace of mind offered by chargebacks. For the sake of Bitcoin as a whole, there were many who worried that the consumers who were buying things online through Bitpay were pushing the price of Bitcoin down; generally when online retailers accepted Bitcoins they immediately sold them off for dollars, creating a downward pressure on the overall price.

  Bobby Lee talked at Tahoe about the many unusual stresses of running a virtual-currency startup in China. After the government had forced the payment processors to cut off Bitcoin exchanges back in December, Bobby’s competitors had quickly opened bank accounts where customers could deposit funds. Bobby had chosen not to follow the same path—it seemed to violate the clear intent of the statement from the Chinese regulators in December. Bobby had grown up working for American companies, which generally tried to obey, or at least give the appearance of obeying, not just the letter but also the spirit of the rules. Bobby had internalized this cultural code. But as Bobby watched his business dwindle, and his competitors thrive, his Chinese cofounders pushed him to understand that Chinese regulators weren’t looking to enforce a strict reading of the law—they just didn’t want to have anything shoved in their face.

  “Turns out, in China, there’s no ethics—there’s no moral obligation,” Bobby would say of his discovery, with a hint of amusement and a dash of frustration. “Westerners see that as a bad thing. Chinese see that as, ‘We’re being flexible.’”

  With a sense that he was caught in a street fight and limiting himself to punching with boxing gloves, Bobby eventually bent to the Chinese way of doing business and opened up the company’s bank accounts to customer deposits shortly before coming to Tahoe.

  “If no one listens, and there is no penalty, our competitors do what’s best for them and then we’re left in the dust,” Bobby explained. “So instead we decided to embrace the local method.”

  There were, though, limits to how far Bobby would go in his hunt for business. He was outspoken about his belief that his competitors were faking their volume numbers to make it look as though they were attracting more business. He also initially declined to follow the lead of one of his increasingly successful competitors, OKCoin, which had introduced what is known as margin trading. Customers of OKCoin could essentially borrow money to make bigger bets on Bitcoin. If the price went up, customers could pay back the borrowed money, but if it went down the customers quickly lost their original money—the normal outcome in margin trading. This didn’t seem to Bobby like a good formula for a long-term business, though he was coming to reconsider all of his Western judgments.

  Despite all the challenges, Bobby was clearly having a good time, enjoying the audacity and inventiveness that were required of an entrepreneur in China. He was making plans to move his staff into bigger offices and he had announced his candidacy for one of the Bitcoin Foundation seats that Charlie Shrem and Mark Karpeles had vacated—a seat he would eventually win. In Tahoe, he was the very picture of the fun-loving, confident risk taker, sweeping the poker games. He likened his situation in China to being in a tunnel with no clear way out.

  “Everyone behind me is like, ‘Dude, Bobby it’s a dead end, you are not going to get out,’” he said. “But I’m like, ‘If I get out, the prize is so huge.”

  The weekend provided plenty of reminders of why everyone had gotten into this in the first place. After dinner on Friday night, Dan introduced a celebrated economics professor at Stanford, Susan Athey, a winner of the most prestigious award for young economists, who had recently been diving into the blockchain technology. She told the group of her discovery of Bitcoin in the spring of 2013. At the time she went to her academic colleagues and found that “none of them could wrap their head around it.” That provoked her to look more deeply, and as she did, she slowly came to understand the potentially enormous implications of the technology:

  “We all hear the store of value. Here’s a way to move money and to buy things outside the law. Maybe it’s a competitor to fiat currency. Is it a disrupter to the traditional banking sector; an enabler of e-commerce and remittances; a superior internal ledger system for multinationals? That’s not what all the reporters are asking about but that’s another possibility that we see.

  “By the time I felt like I really understood it I was really excited to share that knowledge, and discuss it with a wider audience,” she said. “You want everyone to understand it too so that they’ll really appreciate the really massiveness of this innovation.

  “It’s not just a thing, it’s a phenomenon.”

  GAVIN ANDRESEN HAD been invited to Dan Morehead’s house in Lake Tahoe, but he had elected to stay home in Amherst. He was receiving many invitations to swanky gatherings and turning essentially all of them down—though he did accept an invitation to speak to the local Rotary Club. When he had been asked to attend the prestigious Aspen Institute, a friend had urged him to go.

  “It will change your life,” the friend told him.

  “I don’t want my life to change,” he responded. “I like my life.”

  He had certainly profited from Bitcoin’s rise: he had been paid by the foundation in Bitcoins since 2012 when each Bitcoin was worth $10. His wife had pushed him to use some of the money to get his own office in downtown Amherst, and a second car for the family. But the car they chose was a modest black Nissan Leaf. And for an extravagant family vacation, he planned a trip to visit his mother in Washington State for a Women’s Auxiliary ceremony. For the first time, Gavin hadn’t worried about the prices of the hotels he was booking, and he planned a helicopter trip for his family to see Mount Hood.

  Gavin was similarly understated about Bitcoin. He still lived for the project, but like other developers he was deeply aware of the flaws that still existed. He called the software that Satoshi had created a “hairball” containing lots of different things stuck together. As he saw it, the volunteer developers were still trying to untangle it. He was particularly focused on the limited number of transactions that were being confirmed and recorded on the blockchain with each new block. On average, there were only about four hundred transactions getting confirmed every ten minutes in mid-2014. If Bitcoin wanted to compete with payment networks like Visa, which processed two thousand transactions each second, the software was going to need to change significantly.

  Among the broader community of Bitcoin programmers there was constant griping about the increasing centralization of the entire Bitcoin ecosystem. The network had been designed to encourage all of its users to participate. But now, only people with access to super-powered computer chips and cheap energy were able to take part in the mining and transaction recording process—something that a small handful of compani
es were dominating. As had happened with several previous decentralized systems, this one had naturally tended toward greater centralization because of the efficiency made possible by specialization. This looked, increasingly, like Napster giving way to iTunes. In that case, the old power brokers—the record labels—were destroyed, but they were mostly just replaced by a new set of power players.

  Gavin rarely brought it up publicly, but there was another, more frightening problem that didn’t appear to have any immediate solution. There were a growing number of examples of Bitcoin being used by criminals to demand and collect ransom, which was much easier with Bitcoin than with traditional means of payment. When criminals accepted cash for ransom they had to physically collect the money at some point, which provided some indication of their location. If ransom was sent digitally via PayPal, it didn’t require a physical handoff, but the payment could later be reversed. With Bitcoin, criminals could demand that a victim send money remotely, and once it was sent, there was no reversing it. The previous fall, a malware program known as CryptoLocker had surfaced, which had the ability to seize computers and lock the hard drive until a Bitcoin ransom was paid. The fears about ransom were a large part of the reason that many Bitcoiners had been angry at Newsweek for “outing” Dorian Nakamoto. If he had really been Satoshi, his outing would have made all of his family members unusually vulnerable to kidnapping and demands for payoffs of various sorts.

  Gavin didn’t know it, but for months, a hacker demanding ransom was targeting Hal Finney and his family, despite the fact that Finney had been rendered almost entirely unable to move or communicate by his disease. The attack came to a terrifying climax when the hacker called the police and reported that a murder was taking place at Hal’s house; this forced the local police and fire department to evacuate Hal and his family, a taxing experience that came just a few months before his death. Roger Ver had dealt with what appeared to be the same hacker, but beat him off after offering a public bounty for his capture. The best solution to this threat seemed to be wallets that were programmed to allow for reversible transactions. In the meantime, many Bitcoin developers emphasized, whenever possible, that they did not keep most of their money in Bitcoins.

  The developers, though, appeared to have a staying power that eluded many of the other early adopters of Bitcoin, in large part because of their more practical approach to the project. Jeff Garzik, the programmer in North Carolina who had gotten involved back in 2010, had been hired by Bitpay to work on the Bitcoin protocol full-time. Martti Malmi had recently quit his job in Helsinki after a new payments startup invited him to come on board, knowing about his history with Bitcoin. Adam Back, the creator of hashcash back in 1997, had recently started working with an investor on a bold new project that aimed to make it possible to take Bitcoins off the main blockchain and on to so-called sidechains, where new applications could be built.

  The small team of core developers working with Gavin was made up of people who had gotten involved back in 2010 or 2011 and managed to stay out of the spotlight almost entirely—men like Gregory Maxwell and Wladimir J. van der Laan. The person responsible for writing the majority of the updated Bitcoin core protocol was a thirty-year-old Belgian whom many Bitcoiners had never heard of, Pieter Wuille.

  It came to seem that the people who wanted Bitcoin to do the least for them were the ones who were managing to do the most for Bitcoin.

  WENCES CASARES WASN’T looking for Bitcoin to change his life, but he was still imagining that Bitcoin would change the world. His passion for the project had continued to win over important new supporters. Max Levchin, the cofounder of PayPal, and one of the skeptics back at the Allen & Co. conference in Arizona in 2013, had been brought around by Wences at the 2014 version of the conference and was now coming on board as an investor in Xapo. Wences also knew from his friend David Marcus that PayPal was moving toward integrating Bitcoin into all of its online products, making the virtual currency available to a much broader audience.

  But the day-to-day work of moving his own Bitcoin company forward was going much more slowly than Wences had expected, largely because of the continued skepticism in the traditional financial world. In April, Wences announced that Xapo would be releasing the first Bitcoin debit card with MasterCard, but almost as soon as the announcement went out, MasterCard called and told Wences that the project had not been approved at the highest levels and was now being killed—a public relations snafu for Xapo. Wences himself was constantly flying around to appease the latest bank to decide that it was going to close down the accounts of Xapo or some other Bitcoin company that Wences was helping out.

  In the midst of all this, in June, Wences took one of his periodic trips to visit Xapo’s operations in Buenos Aires and the old friend who oversaw it all, Fede.

  As on every trip home, Wences had to confront the frustrations of Argentina’s broken financial system. This time around, he wanted to buy a car so that he could travel to and from a property he’d recently purchased in Patagonia. As with most big-ticket items in Argentina, the seller would accept only cash. Because Wences still didn’t have an Argentinian bank account, he had to go to a specialized money changer who had a bank account in the United States and could accept a transfer of dollars from Wences’s American bank account and pay out to Wences in wads of cash. This served as yet another reminder of why he was working on Bitcoin.

  The scale of Wences’s ambitions was evident inside the Xapo offices, which were packed with young programmers. One was working on a Hindi-language site, which would make Bitcoin available to people in India, widely seen as one of the biggest potential markets given the Indians’ levels of computer literacy and the amount of remittances that were sent from Indians abroad. Another programmer was building an application that would allow people anywhere in the world to find people near them looking to buy or sell Bitcoins. At this point Xapo was still primarily used by big institutional investors who wanted the best possible security for their millions of dollars of coins. But the Xapo team was trying to make the service more accessible to smaller holders, and many people were eager for secure storage after the collapse of Mt. Gox.

  On one of the first mornings Wences was in Buenos Aires, the team of programmers had a videoconference with the Xapo staff in Palo Alto. The team in California had just moved to much larger offices above a bank. These staffers now had a whole floor to themselves, with windows wrapping around the entire office. The Americans, who generally dealt with the business side of the operation, rather than programming, ran through all the new agreements they were working on. They were talking with AIG about insuring all the coins in the vault against losses, and with three different banks about taking deposits from customers.

  “We’re in a really good position in comparison to a lot of people in the industry in respect to banking relationships. Most people are just hoping to get one,” one of the employees in California said.

  They also were working with a debit card issuer in Gibraltar after the problem with MasterCard earlier in the spring, and were hopeful that they would be able to distribute the cards worldwide.

  After lunch, Fede got the keys for the Buenos Aires staff’s new, larger office, which was two flights down and occupied an entire floor, with big conference rooms and a Ping-Pong table. While the staff gleefully ran around the empty offices like schoolchildren, Wences sat down in the glass-enclosed conference room. He looked exhausted. He explained that he had expected some kind of respite once he sold off Lemon in the winter. But before he’d been able to come up for air, he was back under, trying to get Xapo running, and dealing with the unending series of crises that seemed to be an endemic issue for Bitcoin companies.

  The problems, though, seemed to Wences only like more evidence of why Bitcoin was necessary. In the current system, financial institutions were given the power to determine what sorts of businesses could live and die. His vision for what Bitcoin could do had remained steady. While others were talking about micro-payments an
d smart contracts, he was still fixated on the idea of a digital gold that people anywhere in the world could hold without requiring any permission from anyone. This was still the kid who had grown up in Argentina, watching his family look for a place that was more secure and reliable than the peso to store their savings.

  It might have just been the exhaustion, but Wences was sourly dismissive of all the talk about Bitcoin’s potential as a new payment system. He was an investor in Bitpay but he said that fewer than one hundred thousand individuals had actually purchased anything using Bitpay.

  “There is no payment volume,” he scoffed. “It’s a sideshow.”

  The real story, he said, was the steady viral growth that had already taken Bitcoin, by Wences’s count, from a few people on that first day back in January 2009 to six million users.

  “People buying half a Bitcoin, storing it, treasuring it, and talking about it—and getting more than one person in,” he said. “That’s all Bitcoin has been about for four years—and that’s all we need to get to where we want it to be.”

  He did believe it would eventually be the best payment network the world had ever seen. But that would happen only when a billion people owned some Bitcoin. He made the familiar comparison to the Internet in 1993. Back then, he had crowed to his mother when he got one of the first ten million or so e-mail accounts, which allowed him to exchange messages with a professor in North Carolina. His mother had derided it as a curiosity: how would it help her communicate with anyone she knew? But Wences believed back then that the ability to freely send information to anyone, anywhere in the world, would eventually matter. And he ended up being right. Now he believed that the ability to send money to anyone, anywhere in the world, free would eventually matter.