February 2012
After running away from the United States government to pursue his antigovernment vision, Roger Ver had chosen to live in a place that was uniquely unreceptive to his brand of antiauthoritarian politics. Japan was a country that was still deeply wedded to traditional hierarchies with an educational system that taught its citizens from a young age to obey authority. This was evident in the country’s rigid business traditions—the bowing and exchanging of cards—and in the spiky-haired punks in Tokyo, who waited patiently for walk signals, even when there were no cars in sight.
Roger had picked Japan, not because it would allow him to be around other like-minded people, but because he liked the orderliness of Japanese culture—and the women. He had met his longtime Japanese girlfriend at a gathering in California and even she had almost no interest in politics. As Roger discovered, the deferential culture made Japanese people uniquely skeptical about a project like Bitcoin that aimed to challenge government currencies. Japan was the only place Roger had encountered where people’s response, when he described Bitcoin, was to call it scary—rather than interesting or silly. This was due, Roger believed, to the way in which the virtual currency broke from the government’s mandates about how money should work. One of the only people with whom Roger had gotten any traction in Japan was a local pornography tycoon.
Luckily for Bitcoin, Roger’s job and wealth allowed him to wander far beyond Japan. In early 2011, he commenced his effort to renounce his United States citizenship so that he would not have to pay another dollar of taxes to support a government he considered immoral. Japan, with its sense of tradition and history, made it almost impossible for foreigners to gain citizenship, so Roger made plans to travel to Guatemala to start the process of applying for citizenship there. He was also traveling constantly for his work with Memory Dealers—looking for cheap hardware—and everywhere he went he would talk about his new passion. While visiting the Chinese manufacturing hub of Shenzhen, he held the first-ever Bitcoin Meetup in China and paid for the group meal himself. Whenever he ended up in a taxi, he would set up his driver with a smartphone wallet and try to pay his fare in Bitcoin. When Roger began looking for an engagement ring, he promised the online diamond merchant BlueNile that he would buy a $50,000 diamond if the company began publicly accepting Bitcoin (BlueNile ultimately demurred). He continued using his own company, Memory Dealers, to promote Bitcoin by offering discounts to people who paid with Bitcoin, and by selling the popular “physical Bitcoins,” known as Casascius coins, manufactured by a man in Utah. Bitcoins, of course, have no physical quality—they are nothing more than an entry on a digital ledger. But the creator of the Casascius coins printed the private key for an unspent Bitcoin on the inside of a hologram, attached to a specially manufactured coin with the Bitcoin emblem. A person could spend the Bitcoin by peeling off the hologram and using the private key. These Casascius coins would later become the most widely used image of Bitcoins when news organizations needed a picture of something to accompany stories about the virtual currency.
When Roger got into conversations about Bitcoin, he had a few stock lines he would deliver, always with the same crisp elocution and conviction—almost as if he were in a reverie.
“I’m pretty confident that Bitcoin is the most important invention since the Internet itself. The world is changing because of Bitcoin right in front of our eyes and it’s such an exciting time to be a part of this,” he liked to say. “I’ve been spending just about every waking moment focusing on Bitcoin.”
Roger had always been a good salesman in part because of his ability to communicate his own conviction, but also because he had an intuitive sense for what people wanted and knew how to meet them at their level, without demanding agreement with his beliefs. His pitch for Bitcoin to the antigovernment activists emphasized the ability to buy drugs with Bitcoin, even though Roger himself was an abstainer who had never smoked a cigarette. When other Bitcoiners said that Roger’s talk of drugs and dodging taxes could tarnish Bitcoin’s reputation, he replied that he always adjusted his arguments to his audience.
“If I was going on the Oprah Winfrey show, I should certainly use a different list of talking points,” he explained on the Bitcoin forum.
Roger, then, had the rare resources and abilities to help sell Bitcoin beyond the small fringe communities where it had so far been cloistered. And he was dedicating his life to doing just that. In addition to the personal pitches and purchases, he was eagerly supporting any companies he could find that might help expand Bitcoin’s appeal beyond libertarians and heroin addicts. He gave $100,000 to Jesse Powell, his old friend who had come to Tokyo to help out with Mt. Gox. Jesse had been so struck by Mark Karpeles’s weaknesses that he decided to start his own exchange. But Roger’s most significant investment early on would prove to be the one he made in a young New Yorker named Charlie Shrem. Roger had first seen Charlie talking about his company, BitInstant, on Bruce Wagner’s The Bitcoin Show. A small, cherubic twenty-two-year-old, with a Brillo Pad of curly hair and a slight Brooklyn accent, Charlie pitched BitInstant as the easy way to get money into and out of Bitcoin without wiring funds internationally to Mt. Gox’s bank account in Japan.
Roger quickly reached out to Charlie by Skype, and asked how much money he needed. Charlie offered him 10 percent of the company for $100,000. Roger sent over a wire payment for $120,000.
THE YOUNG MAN Roger had invested in was, outwardly, an unlikely candidate to become the entrepreneurial leader in a futuristic global movement like Bitcoin. He had grown up in the Midwood section of Brooklyn, in a Syrian Jewish community where all the kids went to the same religious schools. From early on, Charlie had struggled with social acceptance. He had been born cross-eyed and, after surgery to fix the problem, had to wear thick glasses. He was almost always the shortest one in his classes. As with so many other techies, Charlie’s real-world struggles led him to cultivate an active life online, where he knew many of his friends by their screen names.
But a surprising confidence lurked beneath Charlie’s anxious exterior. As the oldest child and only son in a family with four sisters, he was treated like a prince by his mother. He had discovered that while other kids could be difficult to win over, grown-ups were generally an easier audience. He was the one kid at his synagogue who would go up and shake the rabbi’s hand after services and his energy and good spirit generally appealed to adults. As he grew up, he found his personality lent itself naturally to business, which was highly valued in his community and in his family; his parents ran their own jewelry businesses. When he was a freshman at Brooklyn College, he and a few friends had founded an online deals site, somewhat like Groupon. He blossomed into a confident salesman when pitching his ideas.
Charlie had initially learned about Bitcoin through an article about Silk Road. He had gone on the forums and found another user who was thinking about launching a deceptively simple startup: a company that would make it easier to get dollars into and out of Mt. Gox. The man, Gareth Nelson, lived in Wales and had already programmed a prototype. Charlie confidently pitched what he could bring to the project, telling Gareth that he knew people at PayPal—“very high-up”—and would call to get their support. In reality, though, the first people Charlie got help from were his parents. Still living in the basement of his childhood home in Brooklyn, Charlie asked his mother if she would be willing to give him a seed investment. Charlie’s mom, who ran the jewelry company Bangles by Kelly, rarely said no to her only son and didn’t disappoint him this time, transferring $10,000 to him.
Charlie was a departure from the idealists who had been driving Bitcoin development so far. His first-ever post on the Bitcoin forum was not about the power of decentralization but an offer to sell JetBlue airline vouchers for Bitcoins. Over the next months he would offer magazine subscriptions, “Fuzzy Toe Socks,” and throwing knives.
It turned out that Charlie’s willingness to throw things at the wall, to see if they would stick, was not a bad thing at this point. The idealists who had been driving the Bitcoin world often got caught up in what they wanted the world to look like, rather than figuring out how to provide the world with something it would want. The business model being pursued by Charlie and Gareth was designed with the very practical aim of making it easier for customers to get Bitcoins than it was to get them from Mt. Gox, which required wiring money overseas and placing orders on the exchange. Just as Charles Schwab dealt with the New York Stock Exchange so that its customers didn’t have to do so, BitInstant handled all the dealings with Mt. Gox, making the process of acquiring Bitcoins faster and easier.
Charlie’s swagger led him to generate ideas, and act on them, in a way that was still unusual in this young industry. But his confidence also came with a recklessness that would become a liability. On the Bitcoin forum, Charlie advertised his love of marijuana and offered Silk Road users help and advice. Less publicly, he began working with a Florida man who helped Silk Road users get Bitcoins to buy drugs. Charlie was smart enough to include a section on the BitInstant site about the company’s intolerance for anybody using Bitcoin illegally and he chose not to advertise his own company on Silk Road. But when a Florida man, who went by the screen name BTC King, approached Charlie about privately exchanging large amounts of money for Silk Road customers, Charlie devised a way to do it without attracting notice. When Charlie’s programming partner in Wales questioned Charlie about the deals with the man, Charlie argued that they wouldn’t be a problem.
“He has not broken any rules and silk road itself is not illegal,” Charlie wrote to Gareth. Besides, he said: “We make good profit from him.”
WHEN ROGER VER invested in BitInstant, he could tell that Charlie was a raw talent and offered himself as the company’s marketing director to help steer Charlie’s idea. He then connected Charlie with Erik Voorhees. Erik, who was still living in New Hampshire, was more ideological than Charlie, but he was also more careful and grounded, and Roger thought they would complement each other. The month Erik joined BitInstant, the company processed $530,000 in transactions, up from $250,000 just two months earlier.
As they began working together, Roger and Erik jokingly gave Charlie the nickname “Statist” for his more traditional politics and respect for government. But that didn’t stop BitInstant from becoming a popular service among all the ideologically motivated people whom Roger and Erik were winning over, who were looking for the easiest way to get their hands on Bitcoin.
In February Erik appeared at Liberty Forum—one of the Free State Project’s two major annual events—to speak about Bitcoin’s appeal to anyone opposed to the American government. The room was packed and Erik was mobbed afterward by interested people wanting to get involved. The price reflected that interest. After bottoming out in late November at around $2, by February the price of a single Bitcoin was stabilizing around $5. It didn’t hurt that Bitcoin made its first serious foray into popular culture in January 2012 when an entire episode of The Good Wife was based on a plot about Bitcoin.
In April Erik traveled from New Hampshire down to New York to meet Charlie in person for the first time and to make a presentation at the first-ever New York Tech Day, an event designed to connect startups and investors. Charlie and Erik spent the morning setting up their booth at the storied Park Avenue Armory with slick BitInstant banners and branded key chains.
Soon after the doors opened, two older gentlemen with the casual whiff of money approached Charlie. He launched into his elevator pitch for Bitcoin, leaving out anything about central banks, and focusing on the ability to transfer money around the world free. The two men had never heard of Bitcoin, but one had worked in the import-export business and knew how expensive it could be to move money across international borders. What’s more, they liked Charlie’s irrepressible energy, which was immediately evident, and recognized from his last name, Shrem, that he was a member of the tight-knit Syrian Jewish community that they belonged to.
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.