August 2013
The Bitcoin Foundation had set out to help improve the network’s public standing, but most of the people involved in the foundation’s creation had now become unhappy examples of the technology’s problems. Charlie Shrem had shut down his site and was being sued. Peter Vessenes was locked in a legal battle with his fellow founding board member, Mark Karpeles, and Peter’s other ventures were going just as poorly. A company he had set up to produce Bitcoin mining machines had not yet turned out a single coin and his investors were breathing down his neck.
There was, though, one unlikely person left to carry on the original mission of providing the technology with a more friendly public face: the Seattle lawyer Patrick Murck. For most of 2012 and 2013 Patrick had worked for existing Bitcoin companies and volunteered as general counsel of the foundation. But since the beginning of the summer he had been employed by the foundation full-time and was turning himself into a respectable public spokesman.
At each point along the way, Bitcoin’s survival had required the strengths of a different subset of its believers. In the summer of 2013 it had become clear that if Bitcoin was going to reach a larger audience it would need to learn how to play nice with the existing system. As it turned out, Patrick, a pudgy young father with a warm fuzzy beard, was uniquely positioned to do just that. In contrast to Bitcoin’s early salesmen, like Roger Ver, who was still trying to renounce his citizenship, Patrick was a patriot who had grown up in Washington, DC, with a mother who worked at the National Labor Relations Board. This upbringing had made him believe in the importance of fighting injustice in the world and gave him a healthy respect for the role that government could play in the process, which helped explain the volunteer work he had done for the Obama campaign in 2008.
When it came to Bitcoin, Patrick firmly believed, like many in the tech world, that Bitcoin could foment big changes. An open source financial network looked to Patrick like just what was needed to shake up the privileged elite who ran and disproportionately benefited from the existing financial system. The Bitcoin network seemed to make it at least a little bit harder for Wall Street to collect tolls at every step of every financial transaction. But Patrick did not think that for this to happen it would be necessary for Bitcoin to overthrow the existing governments and central banks. In fact, he thought there was a significant place for regulations when a third party, like Mt. Gox or BitInstant, was holding someone’s virtual currency.
Patrick had quietly begun his work at the beginning of the summer, when he spoke at a conference in Washington that represented essentially the first time a Bitcoiner had sat on the same stage with lawmakers. At that point, there had been obvious tension. Patrick had ended up in a sharp exchange with a man from the Department of Justice who had compared Bitcoin users to child pornographers.
Afterward, though, Patrick struck up a friendly conversation with the woman in charge of FinCen, the branch of the Treasury Department that had put out the first rules on virtual currencies in March 2013. Patrick had been somewhat peeved that FinCen and its leader, Jennifer Shasky Calvery, had not had any conversation with the Bitcoin community before issuing those rules. At the June conference, though, Shasky Calvery made it clear that she was interested in the technology and open to a dialogue about the rules.
Over the course of the summer Patrick made almost weekly trips from Seattle to Washington to meet with Shasky Calvery and other regulators, to help them understand Bitcoin. Patrick quickly learned that staffers in the office of Senator Thomas Carper, of Delaware, were studying Bitcoin and looking at the possibility of holding a hearing. Patrick was able to put them in touch with the most presentable players in the Bitcoin world.
In his meetings Patrick did not fight the obvious reality that Bitcoin was not yet doing any of the great things that he and others were talking about. But he was able to cogently explain his vision of how the blockchain technology could make it easier for poor immigrants to transfer money back home and allow people with no access to a bank account or credit card to take part in the Internet economy.
In addition to his legal mind, Patrick had a genial, unthreatening approach that made him able to get along with just about anyone. He liked having his conversations over a whiskey or beer in a bar, and his everyman sensibility tended to soften people up. The good relationship Patrick developed with Shasky Calvery, among other people, led to a private meeting in August, when Patrick and a few other people affiliated with the Bitcoin Foundation got to present Bitcoin’s best face to a roomful of law enforcement agents and government officials. It was not entirely friendly, but the attendees seemed to understand that the Bitcoin technology was useful for more than just purchasing drugs and laundering money—so this meeting was already a long way from Patrick’s first encounters in Washington at the beginning of the summer.
Many Bitcoin companies were making their own efforts to get in sync with the authorities. Coinbase, the San Francisco–based company that had raised $5 million from Micky Malka’s Ribbit Capital and other investors, was developing extensive measures to vet clients and ensure that the service was not used toward illegal ends. The Slovenian Bitcoin exchange, Bitstamp, which passed Mt. Gox over the summer to become the largest Bitcoin exchange in the world, now required all its customers to go through a rigorous identity verification process. The two young men who had founded the exchange were rewarded with visits to their Slovenian city, Kranj, by Dan Morehead and Pete Briger from Fortress Capital, who wanted to invest in the exchange.
THIS WAS ALL a long way from the original Cypherpunk vision of a new digital money that was outside the reach of governments and banks. Satoshi Nakamoto’s aim in creating the decentralized Bitcoin ledger—the blockchain—was to allow users to control their own money so that no third party, not even the government, would be able to access or monitor it. But people were still opting for the convenience of centralized services like Coinbase and Bitstamp to hold their coins.
The great benefit of this business model was that the companies, rather than their customers, dealt with the headache of storing and securing the money. When early Bitcoin users lost the private keys to their Bitcoin addresses, the coins associated with those addresses were lost forever. With a Coinbase wallet, on the other hand, if a customer lost the password, it was like losing the password to a normal website—the company could recover it. What’s more, Coinbase customers didn’t have to download the somewhat complicated Bitcoin software and the whole blockchain, with its history of all Bitcoin transactions. This helped turn Coinbase into the go-to company for Americans looking to acquire Bitcoins and helped expand the audience for the technology.
There was, though, a small but vocal community of dissidents, many of them early Bitcoin users, who were eager to go back to the original vision that Satoshi had laid out. Few were as outspoken as Roger Ver, the Tokyo-based libertarian who had, in earlier years, lost money that he had entrusted to Bitcoin businesses like Bitcoinica and MyBitcoin.
Roger was still a fervent believer in the initial vision he had of Bitcoin as a game-changing technology for governments around the world, just as his favorite martial art, jujitsu, offered a relatively simple way to neutralize even the strongest opponent. Roger had recently begun comparing Bitcoin to the honey badger, the weasel-like equatorial mammal that has a reputation for being able to overpower and even castrate the most ferocious predator. During the summer of 2013, with graphic design assistance from Erik Voorhees, Roger had put up a new billboard in Silicon Valley with a picture of the indomitable animal and the caption: “Bitcoin: The honey badger of money.”
But Roger had grown increasingly firm in his belief that centralized Bitcoin businesses like Coinbase defeated the essential purpose of Bitcoin by putting the personal information of every user in the files of a single company that was vulnerable to government subpoenas. In the summer of 2013, aiming to foster an alternative, Roger channeled the energy that he had earlier put into Charlie Shrem and BitInstant into another one of the startups he had invested in back in 2012.
Blockchain.info had been created by a reclusive young man named Ben Reeves who lived in the English city of York and ran his site alone until the middle of 2013. Reeves had created what looked like a rather unspectacular product: an online wallet that, like other wallets, offered a way to access Bitcoins from any computer or smartphone without downloading the entire blockchain. But Reeves’s wallet was different in a crucial way. Rather than holding its customers’ Bitcoins, Blockchain.info kept only a small file for each customer with the private keys of that customer, encrypted in a way that made it impossible for the company to see the keys themselves. Because Blockchain.info held an encrypted file with the keys, they were not on the computer of the user, vulnerable to hackers. But when a customer logged into a Blockchain. info wallet, the log-in process decrypted the file so that the keys were temporarily on the customer’s computer and could be used to access coins that the customer had on the blockchain. The customer’s data—how much money he or she had and the transaction history—was viewable through Blockchain.info’s online template. But the company itself never saw the data. Because Blockchain. info did not hold money or a transaction history for its customers, it couldn’t be subpoenaed to give up customer records. Nor could the company steal its customers’ coins.
The site had attracted lots of interest from people who opened 350,000 free Blockchain.info wallets by the middle of 2013. But the business model was not a recipe for big profits. Because blockchain.info didn’t hold customer funds it was hard to deduct fees for its services. It also didn’t allow its customers to buy Bitcoin online—a lucrative business that would have put the company in charge of customers’ money. Blockchain.info users had to acquire their coins elsewhere and send them to their Blockchain.info wallet.
This was a business opportunity uniquely suited to Roger Ver, who had never been concerned, primarily, with making money from his Bitcoin investments. He wanted to see Bitcoin live up to its revolutionary potential. As a result, when Reeves offered to turn a loan that Roger had made to Blockchain.info into a majority stake in the company (so that Reeves could avoid a tax headache), Roger jumped at the opportunity.
In London for a conference that summer, Roger paid for Reeves to come down so they could meet in person for the first time. Reeves showed up, but Roger had trouble getting more than a few words out of the shy young man. After Roger went out to speak at the conference, he came back to his hotel room and found that Reeves had abruptly left and gone home to York.
This didn’t discourage Roger. He thought Reeves’s code spoke for itself and he began looking for a chief executive for the company, a person who could deal with the outside world so that Reeves didn’t have to. When Erik Voorhees put Roger in touch with an old college fraternity brother, Nic Cary, Roger flew Nic to Tokyo. On their first night, they went to Roger’s favorite establishment, the Robot Restaurant, where women in blinking bikinis rode around on large robotic animals. Roger and Nic spent the next few days immersed in deep conversations—some of them during drives around Tokyo in Roger’s Lamborghini—about how to expand Blockchain.info’s offering of a wallet that could be used free by anyone, anywhere in the world, outside the reach of regulators. Nic explained his vision for making the website more user friendly and expanding the number of languages.
Roger promptly hired Nic to move to York and work with Reeves in a three-story house that Roger rented for what he hoped would soon be a much larger team. As Roger began to build out the company he determined that this would be a real Bitcoin company, with no bank accounts and all salaries paid in Bitcoins.
TO MANY REGULATORS and investors, the only plausible reason that someone would want an untraceable Bitcoin wallet, like Blockchain.info, was to enable online drug purchases or other nefarious activity. Why else would you want to keep your records from government officials?
But one place where Blockchain.info, and Bitcoin more broadly, was gaining popularity in the summer of 2013 put a slightly different slant on the potential uses for Bitcoin services that couldn’t easily be monitored by the government.
At a Bitcoin Meetup in July 2013, two hundred or so people packed into one of the historic old buildings that fill downtown Buenos Aires, the capital of Argentina. At a time when Bitcoin’s popularity was faltering in the United States, the turnout in Argentina was many times greater than the thirty or so people who had attended the most recent meetups in New York and Silicon Valley. Many of the attendees in Buenos Aires had come looking for an easy way to buy Bitcoins and those who purchased coins from other attendees, generally with cash, were usually set up with a Blockchain.info wallet to receive their coins.
This was a long way from the first Bitcoin meetup in Argentina, which had been organized by Wences Casares back in 2012 and had attracted only a handful of people. Since then, Wences had given the credentials for the meetup group to one of his old friends who lived in Buenos Aires. Each of the meetups that his friend, Diego, organized had attracted more people, with a big jump in July. The increasing interest was not hard to understand in the Argentinian context. Over the first half of 2013, the Argentinian peso had been plummeting in value against other currencies. While the government tried to deny the rampant inflation, grocery prices surged and everyone tried to dump pesos. The government’s increasingly desperate attempts to keep money in the country—by imposing a tax on foreign credit card transactions, for instance—only made the problem worse. Keeping savings in pesos was equivalent to throwing the money away, but the government made it hard to get money out of the peso through official channels. This made a currency like Bitcoin and a wallet like Blockchain.info, which the government could not access, very attractive.
In late June, one of the nation’s largest newspapers, La Nación, had put a story about dinero digital at the top of the front page of the Sunday issue. La Nación was associated with the ruling left-wing party, and the article didn’t talk much about the country’s financial problems. But the people quoted in the article made it clear why they were interested.
“You don’t have to be battling all of the government’s problems, you aren’t going to buy bread with it, but it’ll save you if you have a stash of stable currency that tends to appreciate in value,” twenty-two-year-old Emmanuel Ortiz told the newspaper.
Bitcoin, with its famous volatility, did fall in value against the peso in May and June 2013, when the problems at Mt. Gox created widespread pessimism. But by the end of the summer, Bitcoin had risen in value against the peso every other month of the year, and in September it was up 860 percent against the dollar since the beginning of the year while the peso was down some 25 percent against the dollar.
The excitement was building in Argentina despite 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.