Digital Gold (28 page)

The growing bubble of uncertainty over how this would all play out finally burst on Monday night when a popular Bitcoin blogger, known as the Two Bit Idiot, posted a leaked copy of the Crisis Strategy Draft. As it began to circulate and the Bitcoin masses tried to determine if it was legitimate, there was a sense of suspended motion on the forums and message boards, with everyone waiting for the bottom to fall out. The companies putting together the joint statement—Coinbase, Blockchain.info, BTC China, Bitstamp, and Jesse Powell's exchange, Kraken—were caught off guard by the leak and rushed to complete their statement, which ultimately came out a few hours after the leak. The companies urged Bitcoin owners to understand that the losses were the result of irresponsibility and bad behavior, not of a deeper flaw:

“This tragic violation of the trust of users of Mt. Gox was the result of one company's actions and does not reflect the resilience or value of Bitcoin and the digital currency industry.”

The price did begin dropping on Bitstamp and other exchanges. But the free fall unexpectedly slowed within a few hours, before the price hit the low it had reached back in December when the Chinese exchanges turned off deposits. Many people seemed willing to believe the idea that there was nothing wrong with Bitcoin; there was talk that the disappearance of the most disastrous company ever to touch Bitcoin could end up being a good thing for the technology. If nothing else, people had invested enough time
and money that they couldn't stomach selling out of a trough. By Wednesday morning, the price was back up where it had been when the Mt. Gox news came out.

Still, under the apparently calm surface, there was immense and largely unseen damage. As the enormous figures from Mt. Gox suggested, tens of thousands of people had kept their money with the exchange despite all the warnings, and those holdings, estimated at over $400 million the week before, had now disappeared in a mysterious puff of smoke. Roger had a Japanese friend, whom he had convinced to buy Bitcoins and who had left $12 million worth of coins with the exchange. The older man in Argentina who had purchased large numbers of coins from Wences Casares, back in 2012, had also kept them with Mt. Gox. The man had been using Bitcoin to keep his retirement savings out of the unreliable peso—but now it was Bitcoin that failed him. The man wrote in an e-mail to one of Wences's friends in Argentina that his life had been turned upside down by the event:

I'll tell you that the collapse of Mt. Gox, where I had put absolutely all of my savings, left me more than demoralized. Not only because of the money, which was a lot, but because it destroyed the hopes I had created for using it as my wife and I got older. Each time this comes up it really hurts my health.

The same week as the collapse,
lawyers in Chicago and Denver filed a lawsuit seeking class-action status to represent all the victims, and federal prosecutors were sending out subpoenas to aid in the criminal investigation they launched.

Even many of the victims blamed Mt. Gox rather than Bitcoin. Nothing had gone wrong with the Bitcoin protocol. In fact, Mt. Gox had long been held up as an example of the dangers
that arose when Bitcoin users relied on central institutions, rather than the system of private keys and personal wallets that Satoshi had designed.

And yet, Bitcoin's standing as a universal money, answerable to no government—and beyond the reach of any one government—had opened the way for companies like Mt. Gox, companies that took advantage of the fact that in the Bitcoin industry, each person could make up his own rules. This wasn't a problem with the protocol but it was an issue with one of the central ideas that had motivated Bitcoin: the supposed benefit of releasing money from all the outdated rules and regulations that governed the existing financial system. Mt. Gox was, of course, not the first example of the dangers that arise in a system in which no one is responsible for providing oversight.
An academic study in 2013 had found that 45 percent of the Bitcoin exchanges that had taken money had gone under, several taking the money of their customers with them. One of the most trenchant critics of Bitcoin, the
Financial Times
writer Izabella Kaminska, put it well in the days after the collapse:

The only way to stabilise the system is to rid it of the “cheating incentive”—that being the incentive that encourages the “prisoner” to take the high-risk selfish strategy. Most of the time that depends on establishing a system of enforced protocols or regulations that penalise rulebreakers above and beyond the potential benefit of cheating.

Some of the recent converts to Bitcoin were not opposed to some sort of government oversight for this fledgling market. Ben Lawsky in New York used the incident to push ahead faster with his BitLicense. But it was somewhat unclear whether there would be anything left to license.

March 6, 2014

I
t was early in the morning, but a scrum of reporters had already gathered outside an unassuming three-bedroom house in Temple City, one of the many featureless towns that sprawled along the inland freeways heading east from Los Angeles, serving as magnets for upwardly bound Asian immigrants.

The reporters were chasing a story that would provide the Bitcoin world with a break from all the hard questions it had been facing. That morning,
Newsweek
had posted its first issue under new owners. On the cover was a dramatic mask, against a black background with the title “
BITCOIN
'
S FACE
:
THE MYSTERY MAN BEHIND THE CRYPTO
-
CURRENCY
.”

Satoshi Nakamoto's identity had been a recurring fascination for journalists, but all the previous searches had ended with inconclusive results. Given Satoshi's skill in using anonymizing software, many assumed that Satoshi would never be found until he, she, or they decided to come forward.

The
Newsweek
reporter, Leah McGrath Goodman, had seemingly cracked the nut in the most unexpected way. The man she
found was named Dorian Nakamoto, but the papers recording his immigration from Japan to the United States in 1959, at age ten, showed that his name, at birth, had been Satoshi. This Satoshi Nakamoto had gotten a degree in physics from California State Polytechnic University and had worked on classified engineering projects before his retirement. He lived with his mother and liked model trains, but his oldest daughter told Goodman that her father was a libertarian; his brother said Dorian loved his privacy. Dorian Nakamoto generally refused to speak with Goodman during the course of her reporting. But when she briefly confronted Nakamoto in front of his house to ask him about Bitcoin, he seemed to confirm the circumstantial evidence.

“I am no longer involved in that and I cannot discuss it,” Goodman reported that Nakamoto told her. “It's been turned over to other people. They are in charge of it now. I no longer have any connection.”

It was a completely unexpected outcome to the hunt for Satoshi—so unexpected that it almost seemed to make sense. A master of encryption would have used the most misleading disguise of all, hiding in plain sight with a number in the phone book. When some of the early Bitcoin developers who had corresponded with Satoshi talked with journalists that morning, they acknowledged that the story seemed to fit together.

“It's probably the best theory yet,” Mike Hearn, the Google programmer in Switzerland, told one reporter.

When Nakamoto refused to come out of the house for much of the morning—despite being at home—it only seemed to confirm that he wasn't going to refute the story. For Hearn and many other Bitcoiners this was a terribly sad outcome. Satoshi had valued his privacy above all else and now that had been violated.
Newsweek
had even posted photos of the car in his driveway, with the license plates visible. It was particularly worrying because previous
research had suggested that during the first year Satoshi had stockpiled Bitcoins that would now be worth nearly $1 billion, holdings that would make Nakamoto a target of any enterprising criminal. The death threats from fans of Satoshi started flowing into Goodman's inbox.

Eventually Nakamoto emerged from his house, and before he could shut the door, a crowd of reporters on his front porch clamored to ask him questions.

“Why did you create Bitcoin, sir?” one reporter shouted.

“OK, no questions right now,” Nakamoto said, with a Japanese accent.

Nakamoto didn't want to talk; he wanted someone to take him to lunch. When someone else stuck a recorder in his face, he said: “Wait a minute, I want free lunch first. I'm going to go with this guy,” pointing at a Japanese reporter for the Associated Press.

As he battled his way out onto the sidewalk, Nakamoto tried to shield his sleepy-looking eyes, behind big square glasses, from the sun. His floppy hair and loose-fitting pants and jacket suggested that he might not have spent much time outside. Looking for the reporter who had promised him lunch and clearly confused, he finally answered the question everyone was asking: “I'm not in Bitcoin—I don't know anything about it.”

This was, as many reporters quickly pointed out, far from definitive proof that
Newsweek
had gotten the wrong guy. It is what many people assumed Satoshi would say if asked about his involvement in Bitcoin. Before the reporters could get more out of Nakamoto, he disappeared into the AP reporter's Toyota Prius and drove off toward a sushi restaurant. The other reporters jumped into their own cars and followed behind, rushing into Mako Sushi after Nakamoto. As the reporters barraged him with more questions, he and the AP reporter left before ordering and returned to the car. What came next immediately entered the list of great
Los Angeles car chases, this one narrated in real time on Twitter by
Los Angeles Times
editor Joe Bel Bruno:

There is a huge chase going on behind #Nakamoto. Tons of media. All heading west on the 10 freeway

We think #Nakamoto might be heading toward downtown LA. Great American #Bitcoin Chase

Traffic!!! Oh no #Nakamoto!

We are two cars behind #Nakamoto, and it looks like the @AP reporter is doing all the talking. #Bitcoin

Hang on folks. . . . . There might be some resolution here with #Nakamoto in downtown LA. #Bitcoinchase surrealer and surrealer

So the Great #Bitcoinchase seems to have found a destination at the @AP bureau.

But the #Nakamoto story isn't over. Hordes of media here waiting for him.

The reporters who had been part of the chase quickly parked and raced into the AP building. A few managed to squeeze onto the elevator with Nakamoto and the AP reporter. The reporters once again asked Nakamoto if he was the creator of Bitcoin and he once again denied it before disappearing into the AP offices.

With the reporters stationed outside the AP office waiting for Nakamoto's next move, the focus turned back to Goodman's article, which was now being looked at with a more skeptical eye.
Commentators on Reddit and Twitter pointed out that Goodman's evidence was almost entirely circumstantial, other than the quote she got from him in his driveway. As Gavin Andresen wrote on Reddit, in an angry open letter to Goodman, what she reported Nakamoto saying could
“simply be an old man saying ANYTHING to get you to go away and leave him alone.”

Several people were also combing through examples of Dorian Nakamoto's writing that had been found online. While the Bitcoin creator's early writing had been crisp and even elegant, Dorian Nakamoto's reviews on Amazon and his letters to a model-train magazine suggested a man with a mediocre handle on the English language.
In an Amazon review of Danish butter cookies, he wrote:

it has lots of buttery taste

the shipment went well. i've had a nice comment from my kids. it's a perfect xmas and i would say, for other occasions.

As the afternoon went on, a growing number of people concluded that Goodman's article was aggressive journalism gone terribly wrong.
The AP's story and video from its interview with Dorian Nakamoto did nothing to improve Goodman's case. Dorian clearly and explicitly denied that he had anything to do with Bitcoin. He seemed to have little familiarity with the technology, calling it “Bitcom” at several points, and implying it was a company at another point. The final piece of bad news for Goodman came that night, on the P2P Foundation website, where the creator of Bitcoin had posted a few items about Bitcoin back in 2009. In the first post since 2009—and the first communication from Satoshi in any form since 2011—the user Satoshi Nakamoto wrote five words: “I am not Dorian Nakamoto.”

None of this evidence, in fact, proved that Dorian was not Nakamoto. If Dorian was Satoshi, he could have gone home from the
AP office, logged into his P2P account, and made the post. And if Satoshi was as smart as some people believed, he would have known exactly what to say to convince people he wasn't Satoshi (he would have also had to be a very good actor). But in either case, the events of the day underscored just how committed Satoshi still was to remaining anonymous. The reexamination of the evidence also pointed back to the hoard of Bitcoins that Satoshi had mined during the first year of the network's existence, when his computers kept the system running.
An Argentinian security expert, Sergio Lerner, had done a thorough study tracing the patterns of Satoshi's mining during that time and concluded that he had captured well over a million Bitcoins, worth nearly $1 billion now. More impressive than that, though, was the security expert's conclusion, from a careful analysis of the blockchain, that Satoshi had never spent a single one of the Bitcoins he had created. His work in creating the system really did seem to be a selfless act.

In addition to what the day had revealed about Satoshi Nakamoto, the incident suggested that the identity of Satoshi Nakamoto really didn't matter much. For a few hours on the morning of March 6, the world had believed that the creator of Bitcoin was an aging libertarian and model-train enthusiast living with his mother. The price of Bitcoin didn't move much in either direction. The Bitcoin protocol was now maintained by Gavin Andresen and a team of developers and the code spoke for itself. Even if Satoshi had returned, it seemed he wouldn't have much to do.

F
OR THE FUTURE
of Satoshi's creation, the more important event on March 6 was one that few people knew took place. Just hours after the
Newsweek
headline started making its way around the Internet, four men took the stage at an auditorium in the New York headquarters of the Wall Street giant Goldman Sachs.

This was a private conference for some of the bank's most powerful hedge fund clients. In addition to appearances from former New York City mayor Michael Bloomberg, the former head of the Bank of England, and the former president of the World Bank, Goldman had put together a four-person panel to educate its clients on virtual currencies. The panel was led by the cohead of technology at Goldman, a tall, bald physics PhD named Paul Walker. He opened the fireside chat by describing the two things about Bitcoin that everyone seemed to be able to agree on: “It's something on the internet that seems to be worth money, and it seems to have been invented by a mysterious person.” But, Walker said, in a joking reference to the morning's story from
Newsweek
, “the last part may no longer be true.”

Sitting next to Walker were Barry Silbert and Chris Larsen. Larsen was the man Jed McCaleb had brought on to run his new cryptocurrency startup, Ripple. Most men in the room were wearing ties, but in true Silicon Valley style, Larsen and Silbert were not. The fourth member of the panel was the former head of the Financial Crimes Enforcement Network, or FinCen, James Freis.

Barry asked how many people in the room were skeptical about virtual currencies, and a good majority of them put their hands up. Barry noted how different this gathering was from the elite circles on the West Coast, where at recent events he'd attended a minority of the participants had expressed skepticism. Barry said it reminded him of the early days of the Internet when everyone in the tech industry was leaving good jobs to try to cash in on the new idea.

“It's either going to change everything, or nothing,” Silbert said.

To appeal to all the financial minds in the room, Larsen said that all the early problems surrounding Bitcoin had obscured the fact that the technology underlying it made something possible that had never been possible before.

“The world now knows how to confirm financial transactions without a central operator,” he said.

It was, though, Walker, the high-ranking Goldman executive, who provided the most encouraging comments about the technology. He said the conceptual advances made by Bitcoin weren't just clever; they were useful in ways that could influence the future financial system. He had obviously been spending a lot of time studying this and was clearly impressed by what he saw. He suggested that Goldman was not planning to buy or sell Bitcoins, but he indicated that the bank was taking a hard look at how the blockchain might be used to change basic things about how banks do business. It currently took the bank three or so days to settle stock trades. What if that could happen instantly and be recorded on a blockchain for everyone to see?

Barry Silbert and Chris Larsen were beaming. Few things could help a financial cause more than getting the imprimatur of the firm known as “the smartest on Wall Street,” a bank renowned for always seeing what was coming around the next corner and making the right bets. Walker wasn't making any official announcements, but everyone could see the Goldman executive was into this.

Walker reflected an increasingly widespread fascination in financial circles with the blockchain concept underlying the Bitcoin technology. Many bankers had begun to understand what Gavin Andresen had seen back in 2010 when he first became entranced by the idea of a financial network with no single point of failure. For banks that were terrified of cyber attacks, the idea of a payment network that could keep running even if one player, or one set of servers, got taken out was incredibly attractive. More broadly, the banks were waking up to several increasingly viable efforts to decentralize finance and take business that had belonged to the big banks. Crowdfunding companies like Kickstarter, and
peer-to-peer lending services like Lending Club, were trying to directly connect borrowers and savers, so that a bank was not necessary. The blockchain seemed to present a decentralized alternative to an even more basic part of the banking industry's business—payments.

The banks were notably not becoming any more friendly toward working with Bitcoin the currency. JPMorgan's operating committee, led by Jamie Dimon, decided in the spring of 2014 that it would not work with any Bitcoin companies. At events in California with tech moguls, Dimon spoke derisively about Bitcoin and the ambitions of Silicon Valley to take over Wall Street's business. Dimon said that JPMorgan and the other banks weren't going to go down without a fight. At one point, JPMorgan threatened to stop providing services even to other banks that had Bitcoin companies as customers—like the European bank working with Bitstamp. Other American banks went so far as to close down the accounts of individuals who transferred money to Bitcoin exchanges.