Digital Gold (30 page)

“You don't get the new technology from the mainstream,” he said. “My prediction is actually that the libertarians are going to turn on Bitcoin. I think that's about two years out.”

SXSW underscored how thoroughly Silicon Valley was winning the battle to shape and define the Bitcoin technology. The gathering also served as a stark reminder of how Silicon Valley had, more broadly, emerged as the big winner after the financial crisis. With Wall Street in retreat, these were the new billionaire power brokers, flying around the country in private jets. On Saturday night Ehrsam was invited to an exclusive party hosted by Andreessen Horowitz. At the party, which was attended by celebrities like Ashton Kutscher, Ehrsam talked about Bitcoin with Ben Horowitz and the rapper, Nas, whom Horowitz had brought on as an investor in Coinbase. The big names like Horowitz at SXSW reiterated what world-changing new technologies, such as Bitcoin, the tech industry was helping to bring to the world. In an onstage conversation between Nas and Horowitz, Horowitz called Bitcoin “the internet of money,” with the potential to help billions
of people. Andreessen Horowitz had recently closed a $1.5 billion fund, and the partners said privately that they wanted to spend as much as $200 million of that on Bitcoin and blockchain startups, if they could find deserving ones.

But the week in Austin couldn't help fueling suspicion that perhaps, as in the old way of doing things, the economic benefits of all the new technology were, at least so far, accruing to only a small elite, while the 99 percent that Occupy Wall Street had worried about were left reading about it at home on Reddit and Twitter. Bitcoin itself faced the same concerns. Years earlier, Bitcoin had promised that it would spread its benefits to all its users, but by 2014 large chunks of the Bitcoin economy were owned by a few people who had been wealthy enough before Bitcoin came along to invest in this new system. Most of the new coins being released each day were collected by a few large mining syndicates. If this was the new world, it didn't seem all that different from the old one—at least not yet.

March 21, 2014

M
any of the early adopters who had managed to stick around and make something of themselves flew out for the second occurrence of Bitcoin Pacifica at Dan Morehead's vacation home on Lake Tahoe, where a large staff catered to the crowd's every desire, allowing Morehead to play the relaxed host in his elegant black loafers and a pinkish red shirt that set off his perfect tan.

Among the guests was Jed McCaleb, the founder of Mt. Gox, who had recently been helping Morehead's firm look for new Bitcoin investments. Jed spent a lot of time at Morehead's house talking to Jesse Powell, someone he had first met at the 2011 Bitcoin conference in New York. Jesse, who was sporting sweatpants and athletic socks, was still working on the exchange that he had begun building after traveling to Tokyo in 2011 and seeing what a mess Mt. Gox was. Three of the young men who ran the successor to Mt. Gox, Bitstamp, had flown in from Slovenia and were buzzing about the matching Teslas they had recently purchased with some of the profits from their business.

Roger Ver couldn't make it to Tahoe. He had recently renounced his American citizenship and become a citizen of Saint Kitts-Nevis, which offers passports to people who buy at least $450,000 of real estate on the island. Roger had applied for a visa to come to Morehead's event, but the American government had denied the request. Roger's old friend Erik Voorhees was in Tahoe, up from Panama where he was spending his time dealing with the Securities and Exchange Commission investigation of the shares he had sold in SatoshiDice. Erik had come to be viewed as one of the few people who managed to remain ideologically engaged without letting ideology totally overwhelm their business instincts. The company that Erik founded after leaving Charlie Shrem's BitInstant, Coinapult, was aiming to make it easier to send Bitcoin by e-mail and text message. But the conflict between ideology and commerce had, in fact, become too much for Erik to bear. The investigation by the Securities and Exchange Commission had forced him to sell some of his Bitcoin holdings to pay for a lawyer. He worried that if he continued to speak out politically his company would become a target of government officials. Rather than drawing back from the politics, he had decided to leave his company and move with his fiancée back to Colorado.

“The way I felt I could contribute best is by being a very outspoken advocate for what Bitcoin stands for,” he said.

For many of the attendees, though, the biggest celebrity at the gathering was a reclusive man who was essentially unknown to the outside world. Nick Szabo had been deeply involved with the Cypherpunks back in the early days and in 1998 had invented bit gold, one of the most commonly cited forerunners of Bitcoin. More recently he had become, for many Bitcoin insiders, the most likely candidate for Satoshi Nakamoto.

Nick was nearly as mysterious as Satoshi himself. He kept a blog where he occasionally wrote learned essays on topics like
online security, monetary history, and property law. But there was no public record of where he worked and lived, and some people questioned whether he was a real person.
Nick's writing, though, would put him on anyone's short list for Satoshi. Back in the 1990s, he wrote more than just about any other Cypherpunk about the promise of digital money, culminating in his proposal for bit gold. Just a few months before Bitcoin was released, in April 2008, Nick had posted on his blog an item in which he talked about creating a trial model of bit gold and asked if anyone wanted to help him “code one up.” In August of that year, at the same time that Satoshi was privately e-mailing Adam Back about Bitcoin for the first time, Nick offered on his blog to sell some old collectible private banknotes, to help deal with “personal cash flow needs.” At about the same time, he wrote a burst of blog posts about the history of money, smart contracts, and bit gold, and said that if he could make bit gold work it would be the “first online currency based on highly distributed trust and unforgeable costliness rather than trust in a single entity and traditional accounting controls.”

When Satoshi's white paper came out publicly three months later, it cited two other obvious forerunners of Bitcoin—b-money and hashcash—but did not cite Nick's work. During this period, Nick maintained what many people later came to think was a rather suspicious silence, despite the fact that this was a project that he'd been involved in for over a decade.
Most bizarrely, Nick altered the dates on his 2008 postings about bit gold to make it appear as though they had been published after Bitcoin was released, rather than before.

Not long before the Tahoe gathering, a blogger who went by the name Skye Grey had posted two persuasive essays comparing Nick's online writing with that of Satoshi, and concluded that the similarities in style and word choice were unlikely to be a coincidence. Both Nick and Satoshi, Skye Grey wrote, made “repeated
use of ‘of course' without isolating commas, contrary to convention” and
“repeated use of ‘timestamp' as a verb,” among other such tics. Then there were smaller eyebrow-raising details, like Satoshi Nakamoto's initials being a transposition of Nick Szabo's.

Nick had made a brief statement, by e-mail, to deny that he was Satoshi, but that didn't quiet the speculation. At Morehead's gathering, people spoke in hushed tones about things they'd overheard Nick saying. Nick showed up at Morehead's private gathering because a few months earlier he had quietly joined a cryptocurrency startup that was operating in stealth mode. The startup, Vaurum, was based a few blocks from Wences's office in Palo Alto and focused on the task of matching up big holders of Bitcoin wanting to buy and sell. Nick, though, had joined Vaurum to do more sophisticated work on so-called smart contracts, which would allow people to record their ownership of a house or car into the blockchain, and transfer that ownership with the use of a private key, something Nick had been thinking about for over a decade. This was the kind of thing that Satoshi was writing about at the beginning, but Satoshi had believed that these more advanced uses of the blockchain would take off only after Bitcoin caught on as a currency.

At Morehead's house, it was obvious that Nick was a guy who lived a life of the mind. His large frame was covered haphazardly with old jeans and a flannel shirt. His beat-up black sneakers looked as if they'd been purchased back in the days of DigiCash. His hair was an unkempt ring around his scalp, not unlike a monk's tonsure just after a long nap.

In Tahoe, Szabo didn't seek out conversation and didn't make much eye contact when engaged. He had a seemingly perpetual smirk on his sleepy, bearded face. Most of the other attendees watched him from a distance, waiting for him to open up. During the cocktail hour before dinner, on Friday night, when the topic of Satoshi came
up in the small group where he was standing, he took the opportunity to sound off on all the mischaracterizations of him, including the frequent descriptions of him as a law professor at George Washington University—and the notion that he created Bitcoin.

“Well, I will say this, in the hope of setting the record straight,” he said with an acid note in his voice. “I'm not Satoshi, and I'm not a college professor. In fact I never was a college professor. How the media got a hold of that, I don't know.”

“Even I thought you were a college professor,” a New York trader, standing next to Nick, said with a laugh.

Nick did use a George Washington e-mail address, but he explained that this was because he had gone to law school at the university in mid-career, “just for the reality check of what I'd been thinking about.” He had paid the tuition thanks to some stock options he had from his earlier days as a security programmer. He had returned to school in part because he had become convinced that the singular focus on markets, among libertarians and cryptoanarchists, was naive. Szabo believed that society had multiple “protocols” beneath markets, such as the legal system, which determined how markets worked. All of this, though, had just been a hobby for Nick, until very recently.

“The cryptocurrency economy is actually big enough that I can actually make a living out of it,” Nick said with a bit of a chortle.

As he walked over to the big living room, for dinner, Nick explained that he traced the germ of all this back to his childhood in Washington State and his father, who came to the United States after fighting in the 1956 Hungarian revolution, which the Soviets crushed.

“We're fairly rebellious sorts,” he said of his family. “To really have the freedom to be creative you have to think outside the box.”

This was about as personal as Nick got in discussing his motivations. He was a person who liked thinking about the world—not
himself—and this is one of the most useful characteristics for someone trying to create great things.

At dinner, everyone was too polite to speculate about Nick, but the
Newsweek
story of a few weeks earlier naturally kicked off conversations at the different tables about Bitcoin's origins.

“Is there no doubt in any of your minds that maybe this was a product of the NSA?” asked the New York trader who had been talking with Nick before dinner.

Erik Voorhees scoffed and said that the government would have been unlikely to come up with something so brilliant. But the trader cited his own work experience at the NSA, and said Erik was underestimating the level of intelligence the NSA attracts. Erik, always willing to listen and learn, said that if it was the NSA, “it is the best thing the government has ever done.”

Erik's pet theory was that Satoshi was actually a small circle of programmers at some major tech firm, who had been assigned by their company to come up with a new form of online money. When the project had come back and was deemed too dangerous by the higher-ups the creators decided to put it out anonymously—they “felt really strongly that this was something important they discovered and went rogue with it,” Erik explained, even while noting, with a laugh, that he had no actual evidence to back up his hypothesis.

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.