Digital Gold (29 page)

But inside almost all these banks, there were people who loved the concept of a decentralized financial system like Bitcoin. JPMorgan maintained a so-called Bitcoin Working Group, with about two dozen members from across the bank and around the world, which was led by the bank's head of strategy and which was looking at how the ideas behind Bitcoin might be harnessed by the financial industry.

This JPMorgan group began secretly working with the other major banks in the country, all of which are part of an organization known as The Clearing House, on a bold experimental effort to create a new blockchain that would be jointly run by the computers of the largest banks and serve as the backbone for a new, instant payment system that might replace Visa, MasterCard, and wire transfers. Such a blockchain would not need to rely on the
anonymous miners powering the Bitcoin blockchain. But it could ensure there would no longer be a single point of failure in the payment network. If Visa's systems came under attack, all the stores using Visa were screwed. But if one bank maintaining a blockchain came under attack, all the other banks could keep the blockchain going.

For many technology experts at banks, the most valuable potential use of the blockchain was not small payments but very large ones, which are responsible for the vast majority of the money moving between banks each day. In the stock trading business, for example, the lengthy settlement and clearing process means that the money and shares are all but frozen for three days. Given the sums involved, even the few days that the money is in transit carry significant costs and risks. As a result, various banks began looking at ways they could use the blockchain technology to make these sorts of large transfers quickly and securely. For many banks, the biggest stumbling block was the inherent unreliability of the Bitcoin blockchain, which is, of course, powered by thousands of unvetted computers around the world, all of which could stop supporting the blockchain at any moment. This increased the desire to find a way to create blockchains independent of Bitcoin. The Federal Reserve had its own internal teams looking at how to harness the blockchain technology and potentially even Bitcoin itself.

Many in the existing Bitcoin community scoffed at the idea that the blockchain concept could be separated from the currency. As they viewed it, the currency, and the mining of the currency, was what gave users the incentive to join and power the blockchain. Given that a blockchain could be taken over and subverted if an attacker controlled more than 50 percent of the computing power on the network, a blockchain was only as secure as the amount of computing power hooked into the network. A blockchain run by a few dozen banks would be much easier to overwhelm than
the Bitcoin network, which now commanded more raw computing power than all the major supercomputers combined.

Bitcoin mining, which had once been a thing that Martti Malmi and Gavin Andresen could participate in with just their laptops, was indeed well on the road to becoming an industrial enterprise. One of the big players was 21e6, the secretive project founded by Balaji Srinivasan and funded, in part, by Andreessen Horowitz. Balaji had been among the first to see that as the chips became more high powered, the factor determining who would profit from Bitcoin mining would be the energy costs involved in powering and cooling the chips. A chip that was fast but ate up energy and got hot—requiring cooling—could end up costing more in electricity bills than it earned in Bitcoins. To cut down on power costs, Balaji's team had designed a system that kept the chips immersed in mineral oil, which absorbed the heat and eliminated cooling costs. The data centers running 21e6 machines were now the single biggest source of mining power in the United States. And 21e6 was already working on its next generation of chips, with code names like Yoda and Gandalf.

In China some entrepreneurial young men with access to cheap hardware straight from the factories realized that their country provided its own advantage for cutting down on power costs: corruption. One mining operation near Beijing set up right next to a coal power plant, where it got its power practically free thanks to the relationship between the power company and the owner of the mining computers. Another so-called mining farm was set up in Inner Mongolia where cheap power was plentiful. Mining was particularly popular in China because it provided a way for Chinese citizens to acquire Bitcoins without going through the increasingly restricted Bitcoin exchanges.

Surpassing all these other mining operations, though, was a company created by a reclusive Ukrainian programmer, Val
Nebesny, who had designed several generations of ASIC chips after reportedly teaching himself chip architecture from a textbook. Initially, Val Nebesny and his business partner Val Vavilov had packaged the chips in computers that they sold to other Bitcoiners, under the brand name Bitfury. But over time the two Vals kept more and more of the computers for themselves and put them in data centers spread around the world, in places that offered cheap energy, including the Republic of Georgia and Iceland. These operations were literally minting money. Val Nebesny was so valuable that Bitfury did not disclose where he lived, though he was rumored to have moved from Ukraine to Spain. And Bitfury was so good that it soon threatened to represent more than 50 percent of the total mining power in the world; this would give it commanding power over the functioning of the network. The company managed to assuage concerns, somewhat, only when it promised never to go above 40 percent of the mining power online at any time. Bitfury, of course, had an interest in doing this because if people lost faith in the network, the Bitcoins being mined by the company would become worthless.

T
HE TWO
V
ALS
running Bitfury were rare as outsiders who were succeeding in the new, more sophisticated, and heavily scrutinized Bitcoin world. The Vals were certainly not entirely alone. Roger Ver, who had recently managed to renounce his United States citizenship, after years of trying, owned Blockchain.info, which was doing better than ever. The number of wallets hosted by the company had passed 1 million in January and in March was approaching 1.5 million. It became increasingly clear that Blockchain.info's careful structure—holding only encrypted files for its customers—allowed it to totally avoid the regulations coming down on other Bitcoin companies. Roger was constantly getting entreaties from venture capitalists who wanted to pay millions for some of his 80
percent stake in the company. Newcomers to the Bitcoin world were trying to emulate the Blockchain.info model and create technology that could allow Bitcoin to work as originally intended and escape regulations.

But most of the outsiders who had been pioneers in the early days of Bitcoin had not been able to transition to the new world. Charlie Shrem was sitting at home, under house arrest, while Mark Karpeles was dealing with prosecutors who were looking to punish him for the role he played in the ruin of Mt. Gox.

The early Bitcoin aficionados had certainly not gone away or lost heart. The online forums were still as lively as ever. But whereas these people had mixed and mingled with the big investors at the Bitcoin conference in 2013, they were now part of an isolated community that was cut off from the more sophisticated investors and programmers. This was not dissimilar to other protest movements that had sprung up after the financial crisis. Occupy Wall Street, which initially drew lots of attention—and raised issues that became a part of the national debate—ultimately splintered into many groups and disappeared from the public spotlight.

The marginalization facing the early Bitcoin community was on display at a conference for the more ideologically minded Bitcoin community in early March 2014, held by the Texas Bitcoin Association at a Formula One racetrack on the outskirts of Austin, Texas. Austin was a fitting place for the event because this was where Ross Ulbricht had grown up and founded Silk Road, the truest experiment in many of the early ideals.

Ross was now in jail in Brooklyn, awaiting trial, and his parents had moved to New York to be closer to him. But his mother, Lyn, returned to Austin for the conference. Now raising funds for Ross's legal defense, she explained that the Bitcoins Ross had when he was arrested had all been confiscated and the family was using its savings to pay for his expensive lawyers.

At the conference, she looked shrunken, but she was treated like an honored guest and she delivered greetings from Ross, who called her frequently from prison in Brooklyn, where he said he was doing well, practicing yoga, and serving as a tutor for other inmates as he awaited trial. The market that Ross had created was generally viewed, in this crowd, as a moral good that had allowed people to make their own choices about how they wanted to live, without government intrusion. Rather than doing any sort of evil, Silk Road had made the world a safer place by allowing people to buy their drugs from the safety of their home.

The accusations that Ross had solicited assassins to murder people were more divisive. In legal papers, prosecutors in Maryland charged Ross with hiring the Silk Road user nob (actually an undercover agent) to murder Curtis Green. Prosecutors in New York accused Ross of hiring the Silk Road user redandwhite to kill several Silk Road scammers. But there was no evidence in either case that anyone ended up dead (in the redandwhite case, Canadian police could not turn up anyone matching the names of the people Ross allegedly tried to have killed). What's more, in the indictment moving toward trial, these accusations of murder for hire were not included as formal charges. Ross's mother said it was terribly unfair for prosecutors to pin these accusations on Ross if they were not willing to charge him. But even if Ross had done the things the agents claimed, there were plenty of conference attendees willing to argue that he had made the right decision.

“What if the scammer was going to expose every Silk Road customer?” one young man asked at one of the conference happy hours. “He was doing no one any good. Ross did something to protect all of those thousands of customers.”

Aside from Lyn Ulbricht's appearance, the most memorable part of the conference was Charlie Shrem's virtual appearance. He couldn't travel to Texas, of course, but the organizers got him on
Skype and projected a live feed of Charlie, from his basement bedroom with his guitars behind him. Charlie was wearing a brown “
BOUGHT WITH BITCOINS
” T-shirt that he'd worn two months earlier when he met Nic Cary for drinks, before his arrest.

Charlie was in the midst of trying to negotiate a settlement with the government to lessen the time he'd have to serve—eventually, as a result of these talks, Charlie would plead guilty to one count of aiding and abetting an unlicensed money-transmitting business and accept a one-year prison sentence. In the meantime, his lawyer had told him to avoid making any public statements that might hurt the talks. But his loquaciousness and desire for attention were irrepressible. This kid, who had once been called Statist for his mainstream politics, now gave a fiery talk that was a play on a well-traveled speech delivered by the founder of the Pirate Party several years earlier.

Friends, citizens, Bitcoiners, there is nothing new under the sun.

My name is Charlie Shrem, and I speak to you from under house arrest.

During the last few weeks, we've seen several examples of legal outbursts. We've seen the police abusing the measures available to them. We've seen the actions of the financial services industry. We've seen high-profile politicians mobilizing in order to protect the financial and banking industry.

All of this is scandalous without parallel. That is why I stand here today.

When it ended, some twenty minutes later, there was a smattering of applause and shouts. Charlie complained that his connection was making it hard for him to hear the crowd's response. But the people who got up to ask him questions told him he was a hero.

“We all love you. You are still a huge part of this community,” said the shaggy-bearded founder of a Bitcoin charity. “What kind of beer should we send to you? Because you said you were looking for six packs.”

“I love Blue Moon, but anything exotic is good,” Charlie said.

“All right, cool. Stay strong Charlie!” the man shouted with a raised fist.

A
LMOST NONE OF
the more recent, moneyed arrivals at Bitcoin showed up for the conference at the race track. But many of them did fly to Austin just as the conference was ending, to attend another conference, SXSW, the storied public gathering where Silicon Valley mingled with celebrities. On the first day of SXSW, in a marquee session with Google chairman Eric Schmidt, Google's “director of ideas,” Jared Cohen, responded to a question about Bitcoin with his conclusion:
“I think it's very obvious to all of us that cryptocurrencies are inevitable.”

Fred Ehrsam, the former Goldman Sachs trader who had joined the Bitcoin company Coinbase a year earlier, was given the honor of his own SXSW session—not a shared panel with other entrepreneurs—and it was put in one of the largest rooms in the convention center, which quickly filled up. In the question-and-answer session that followed Ehrsam's talk, Lyn Ulbricht was the first one in line at the microphone. She said something about using Bitcoin for charity, but she was clearly there to make a plug for Ross's legal defense fund, which she told Ehrsam was hosted on Coinbase. Whereas Lyn had been a star at the Bitcoin conference, here she was an unhappy reminder of a side of Bitcoin that Ehrsam and others wanted to put behind them. Fred responded politely and fumbled to find something to say about the value of Bitcoin for
charitable donations broadly. But Fred was not shy about his belief in the transformative impact that Bitcoin would ultimately make as it became “the prevalent transaction medium on the internet.”

Fred's biggest backer, Marc Andreessen, was increasingly vocal about his belief that the Silk Roads of the world were quickly giving way to more Coinbases. Andreessen frequently noted that in the early days of the Internet, when he was creating the first web browser, the new technology had lacked the infrastructure that would have made it appealing to a mainstream audience, and so it was relegated to fringe groups that were willing to experiment with new technology. In time, though, “the fringe characters tend to get alienated and then tend to move on to the next fringe technology.”