Digital Gold

by Nathaniel Popper

  Collins and Patrick shared a similar genial sensibility and a dry sense of humor, and they fell into an easy relationship. Patrick made sure Collins had all his questions answered by the most presentable people in the Bitcoin world, including representatives of all the companies that had won funding from venture capitalists earlier in the year. For the hearing, Patrick’s goal was to present the most mainstream image of Bitcoin possible. He volunteered to testify himself, alongside a few other relative newcomers to the Bitcoin world who Patrick knew would say the sorts of things that would make lawmakers happy.

  The night before the hearing, Patrick had trouble sleeping and kept rising to make tweaks to his prepared remarks. Patrick also worried about the first part of the hearing, which was a panel of government officials whom he had not been able to prep. Over the summer, Patrick had spoken with all the agencies represented on the panel, but he didn’t know if the lower-ranking officials had conveyed his message to their bosses at the Department of Justice and the Secret Service.

  When Patrick got to the hearing room and took his seat in the audience for the panel of government officials, he was exhausted and jittery. There were, though, already good headlines trickling out. In response to a questionnaire from Senator Carper’s committee, the chairman of the Federal Reserve, Ben Bernanke, had written down his take on Bitcoin and was surprisingly positive, praising its “long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.”

  First up to testify was the head of Financial Crimes Enforcement Network, or FinCen, Jennifer Shasky Calvery, who had helped set up the August meeting. Patrick had developed a good relationship with Shasky Calvery, but she was even more positive than Patrick expected, using his frequent line that cash dollars were actually the most commonly used currency for drug deals and money laundering. The head of the Department of Justice’s criminal division went next and emphasized that Bitcoin was not as hard to track as many people seemed to believe and had many legitimate uses. Finally, the head of criminal investigations at the Secret Service said that his agency was not overly worried about its ability to deal with crimes involving virtual currencies.

  In response to questions from Senator Carper, the panelists pointed to all the activity in China and noted that if the United States came down too hard on Bitcoin, or pushed it out of the country, the innovation would be likely to move overseas to places like China where it would be harder to control. By the time the first panel was over, the Washington Post already had a headline that read “THIS SENATE HEARING IS A BITCOIN LOVEFEST.”

  When Patrick and the other Bitcoiners got their chance to testify, Patrick was still nervous enough that he forgot to turn on his microphone. But he had a simple message for himself that he repeated over and over: “I’ve already won, just don’t fuck it up. Just read the script.”

  He didn’t fuck it up, and neither did the men sitting next to him. The hearing was streamed live over the Internet and Bitcoiners watching it around the world responded by buying coins and then more coins, pushing the price up as the hearing went on. When Senator Carper brought the gavel down, the price on Mt. Gox stood above $700, $150 higher than where it had been that morning.

  Patrick wanted to crawl into bed but first he had to make it through a series of press interviews, including one with a Chinese journalist from CCTV.

  THE NEXT MORNING, Bobby Lee arose in Shanghai to discover that BTC China customers had responded with more vigor than even the customers trading dollars on Mt. Gox and Bitstamp, sending the price above 7,000 yuan. In other words, since the previous morning, the Bitcoin price in yuan had gone up more than it had in the first five years of the virtual currency’s existence.

  Bobby raced to his office, where there was already a journalist from the Xinhua News Agency waiting for an interview. Everyone wanted to know what Bitcoin was and how long this surge could continue.

  After the interview, Bobby grabbed Ling Kang, a slight man who had become Bobby’s all-around fix-it guy since he came on two months earlier, handling all relations with the government thanks to his incredible connections, or guanxi as the Chinese put it. Once they were in the glass-walled conference room behind Bobby’s desk, they gave each other dazed looks. They both agreed that the speculative frenzy, which had once been exciting, was now a potential problem. Unlike officials in the United States, Chinese officials had given no encouraging signs about Bitcoin. Also, compared with those in the United States, officials in China tended to act much more swiftly and decisively when they didn’t like something. Bobby and his deputy couldn’t help recalling how the speculation in Q coins had been shut down. Communist officials now had no shortage of indications that Bitcoin was the new Q coin. A story the previous week in Xinhua had said that even “Chinese mothers” were plowing their money into the virtual currency.

  They began talking about what they might do to rein in the excess, including reintroducing trading fees so that buying and selling coins would no longer be free. But other Chinese exchanges had also removed trading commissions and were nipping at BTC China’s heels. If Bobby imposed fees, customers would simply flee to the other exchanges. What’s more, Bobby and Ling didn’t want to give any sign of panicking.

  Before they could make any moves, more encouraging news came out of Washington—the last thing Bobby needed. A day after the hearing chaired by Senator Carper, the Senate Banking Committee had its own hearing on virtual currencies, which covered much of the same territory and drew much less attention. At the end, though, Senator Chuck Schumer, a member of the banking committee, entered the hearing room. This was the man who, back in 2011, had called for a crackdown on Silk Road and implied that Bitcoins were a part of the problem. Now, he wanted to let it be known that he had been misunderstood.

  “I do not want to shut down or stamp out Bitcoin,” Schumer said. “The potential for a new payment platform and the rise of alternative currencies could have profound and exciting implications for the way we conduct financial transactions.”

  THE UNMISTAKABLE IRONY of these wild days was that a technology that had been designed, in no small part, to circumvent government power was now becoming largely driven by and dependent on the attitudes of government officials.

  This was no accident. Patrick Murck and the new Silicon Valley advocates for Bitcoin had been arguing for months that the technology was not, as Satoshi Nakamoto had initially intended, a network that allowed participants to make anonymous transactions outside the reach of the government. At the Senate hearings, the Bitcoin panelists all emphasized that the virtual currency was actually a terrible way to break the law. With the full record of transactions on the blockchain, the Bitcoin advocates said, it was often possible to identify the people involved in transactions, or at least more possible than it was with transactions involving cash.

  But the advocates for the original vision of Bitcoin were not folding their tents and going away. Not long after Ross’s arrest, Silk Road 2.0 showed up on the dark web, offering the same services in essentially the same format that Ross had used. The arrests of moderators and administrators from Silk Road 1.0 kept coming, but this wasn’t serving as a deterrent. Beyond merely resurrecting the old Silk Road, some developers began trying to devise a truly decentralized online market, which would not have to rely on the sort of centralized escrow service that Ross Ulbricht and his staff had provided and that had ultimately proved to be the site’s worst weakness.

  Meanwhile, on the Bitcoin forums and Reddit the libertarians and anarchists were more passionate than ever in their defense of the original spirit of Bitcoin and in their criticism of the accommodationists at the Bitcoin Foundation and elsewhere.

  Roger had evolved into the spiritual leader of this wing of the Bitcoin community. He had been one of the only people who had chosen not to respond to the inquiries from the Senate committee. In early December Roger used some of his Bitcoin holdings, which had gone up in value thousands of times, to make a $1 milli
on donation to the Electronic Frontier Foundation, an organization that had been started by a former Cypherpunk to defend online privacy, among other things. Roger had also continued to be outspoken in his advocacy of a Bitcoin network that didn’t require users to hand over lots of personal information. At Blockchain.info, he supported the development of Shared Coin, a service that mixed up coins from different transactions so that it was impossible to tell which ones came from which addresses. Roger spent most of November in England with the founder of Blockchain.info and his newly hired CEO, looking at ways to expand the company. The number of Blockchain.info wallets had grown to almost 700,000 from 350,000 just a few months earlier. When Roger needed a break from the work, he would visit the local jujitsu dojo with his custom-made kit, or uniform, featuring a big gold Bitcoin emblem on the back.

  There were several other programmers and entrepreneurs pushing in a similar direction. Tinkering with the Bitcoin protocol, programmers had created whole new cryptocurrencies, like Anoncoin and Darkcoin, which were explicitly designed to preserve the anonymity of their users. Within Bitcoin, the most ambitious projects aimed to build services that allowed for the exchange of dollars and euros for Bitcoins without going through a central service like Coinbase or Bitstamp. Everyone now saw that any company that handled traditional currencies would inevitably be subject to traditional regulations.

  Events in the broader world validated many of the fears that had originally driven the Cypherpunks and Satoshi to imagine a revolutionary new currency. Government documents leaked by Edward Snowden showed, over the course of 2013, that the National Security Agency had indeed been secretly monitoring the electronic communications of a wide swath of American citizens. But the relatively apathetic public response to the tales of NSA surveillance suggested that most Americans didn’t actually care much if the government was collecting information about them. What did it matter to the ordinary citizen if he or she wasn’t doing anything wrong?

  Within the growing Bitcoin community, there was a similar sense that most users weren’t all that concerned about the total privacy of their transactions. Perhaps more important, with the price of Bitcoin now hovering near $1,000, there was a growing swell of voices talking about the virtues of Bitcoin that had nothing to do with whether a government could or could not track users.

  On December 1 the first-ever research on Bitcoin from a Wall Street firm was released; this report called it a “potentially game-changing disruption” to the payments industry. Gil Luria, a research analyst at the trading firm Wedbush, wrote about the technology with the kind of excitement normally found at Bitcoin meetups.

  “We see the intrinsic value of Bitcoin as the conduit in a new global crowd-funded open-source payment network,” Luria wrote.

  By Luria’s analysis, Bitcoin had tapped only 1 percent of its potential market and the price of each coin could easily go up to ten or even a hundred times its current level, to some $100,000 a coin.

  The same points got more attention when they were made four days later in a research report from Bank of America Merrill Lynch, the first of the major banks to chime in. Bank of America’s chief foreign exchange strategist, David Woo, expressed more notes of skepticism than Luria, pointing to the dangers of Bitcoin’s volatility and association with the underworld. But Woo’s fourteen-page report noted that in addition to the possibility of a new payment network, Bitcoin could “emerge as a serious competitor” to money-transfer businesses like Western Union.

  Woo’s price forecast for Bitcoin was not as optimistic as Luria’s, but he argued that the services Bitcoin offered could be worth, in total, as much as $15 billion, or $1,300 per coin.

  The notion that Bitcoin could provide a new payment network was not terribly new. This is what Charlie Shrem had been talking about back in 2012, and BitPay was already using the network to charge lower transaction fees than the credit card networks. But the idea took on a different weight when it came from employees at banks that had the potential to adopt and popularize the technology.

  The clearest indication of how quickly this was moving came not from the public research reports, but instead from an e-mail that Pete Briger, the chairman of Fortress Investment Group, got from a top executive at Wells Fargo, the nation’s largest bank by certain measures.

  Briger had, in the summer, floated the idea of Fortress partnering with Wells Fargo on a mainstream Bitcoin exchange. Then, the bank had declined to pursue the opportunity and Briger had pulled back on his big ambition to get Fortress into the virtual currency space. Now, though, Wells Fargo was back and wanted to reopen the conversation. The men began planning a meeting at Fortress’s New York headquarters. Wells Fargo would never do anything that conflicted with its government regulators, but it now seemed possible to do Bitcoin work with the blessing of those regulators.

  WHILE BITCOIN WAS winning mainstream approval in the United States, it was moving in the opposite direction in China. On December 5, just after Bobby Lee had boarded a plane in Shanghai for his first business trip to the United States since Bitcoin had exploded in China, he got a call from a reporter at Bloomberg News, who explained that sources were telling him that China’s central bank, the People’s Bank of China, was about to release virtual-currency regulations.

  This was news to Bobby. The deputy governor of the People’s Bank had said back in November, in unscripted comments, that Bitcoin was unlikely to get legitimacy, but that people were nonetheless free to participate in the market. That had led many people to assume that the central bank would take a hands-off approach. This had helped the frantic speculation on Bitcoin to continue, with the price above 7,000 yuan on the day Bobby was flying to San Francisco.

  But as a longtime observer of markets, Bobby knew this frenzy was unlikely to end with anything other than a dramatic crash and, when it did crash, it was not going to help Bitcoin’s long-term popularity or status with the Chinese government. Bobby had been warning people that the price was unlikely to keep rising, but he wasn’t averse to some help from the central bank.

  “We’re happy to see the government start regulating the Bitcoin exchanges,” Bobby told the reporter before quickly signing off.

  Bobby spent the flight in an optimistic mood, imagining that the uncertain state in which he’d been operating would soon be cleared up. But when the plane landed and he turned on his phone, he had over a dozen messages waiting for him. In one of them, his head of government relations, Ling Kang, said, “Whatever you do, call me first.”

  On the long walk to customs, Bobby got Ling on the phone and told him he had heard about the regulations before taking off.

  “No, no,” Ling said in the Mandarin they used in conversation, with an audible note of fear in his voice. “Bobby, this is the real deal.”

  The document that had been released while Bobby was in the air was indeed from the People’s Bank, but it was also signed by four other major ministries, and it created deep uncertainty for the future of Bitcoin in China, Ling said.

  The good news was that the agencies had declared that Bitcoin was not in itself illegal and could be considered a kind of digital asset that people should be allowed to buy and sell. The document also said that virtual-currency exchanges needed to register with the Ministry of Information; this suggested that the exchanges weren’t going to be shut down.

  The bad news, Ling explained, was that the government had ruled that Bitcoin was not a currency, but was, instead, a digital commodity.

  The Chinese government had stepped right into the middle of the ongoing debate about how to define Bitcoin and had actually found itself in agreement with Wences Casares and many other advocates for Bitcoin, who believed that in 2013 the files on the blockchain were more similar to commodities, like gold, than to currencies, like dollars and euros, because Bitcoins were not yet widely or easily used as a medium of exchange or as units for accounting. Beyond those qualities, the Chinese government had also said that Bitcoin lacked the most important characteristic
of a currency: government backing.

  The Chinese government’s categorization of Bitcoin as a digital commodity didn’t, on its face, seem terrible to Bobby. Within China, almost no one was using Bitcoin to buy and sell things—it was still just a speculative investment. The problem, though, was that because it was not considered money, the government had declared that banks and payment processors could not deal with Bitcoin, either directly or indirectly.

  Bobby grilled Ling on what this meant. Would Tencent, the payment processor, have to stop transferring yuan to BTC China for customers if Tencent itself wasn’t touching Bitcoins? If so, that could be deadly.

  As was often the case with Chinese government statements, the specifics were left unclear, giving party officials flexibility to deal with the situation as it progressed. Ling wasn’t hopeful about where this would lead. The statement made it clear that government officials were not happy with the degree of speculation they had seen.

  But Bobby was an American-educated optimist and Tencent hadn’t shut BTC China down yet. What’s more, there was obvious room in the statement for them to continue doing business.

  The market seemed to agree with Bobby. In the hour immediately after the Chinese government statement had come out, the price of Bitcoin had entered a free fall, dropping 25 percent to 5,200 yuan. But soon thereafter the price began recovering, and it was already back to around 6,400 by the time Bobby was through customs.

  That afternoon Bobby gave a talk at his alma mater, Stanford, and explained that he was “cautiously optimistic” about the new rules. But that day’s statement was not the final word from the government.