Pay the Devil in Bitcoin

by Adelstein, Jake

  In the 2008 paper, Nakamoto wrote the following explanation. It’s dense and technical but outlines the core components of bitcoin.

  [Internet commerce reliant on financial institutions] works well enough for most transactions, [but] it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility of small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non-reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

  [Bitcoin] is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.4

  One of Nakamoto’s most interesting claims was that the currency did not require a third-party manager. Bitcoin, as explained in his paper, relies on a community of users to verify all transactions and generate the coins by using a shared computer network. So, instead of a bank, the currency uses a peer-to-peer (P2P) system. This means the work is multiplied by all the members of the network who perform the necessary tasks that a bank usually does.

  Bitcoin uses its massive P2P network to verify transactions with the blockchain. The files within the chain, which detail every transaction, are called “blocks.” The blockchain does not contain the names of buyers and sellers, only their bitcoin addresses, which are random sets of numbers and letters. One individual will usually “own” many bitcoin addresses. This helps keep bitcoin users’ transactions private. In theory, and let’s emphasize in theory, it also helps bitcoin users buy or sell whatever they want without fear of being identified.5 That’s why it became the currency of choice for people buying child pornography, drugs, weapons, and other illicit items and services online. This isn’t something covered in Nakamoto’s paper.

  There are rumors that Nakamoto currently owns as much as 1.5 million BTC. That’s a gargantuan amount, considering the system was designed so that no more than 21 million BTC could ever be generated. Bitcoins are created, or “mined,” by verifying transactions. In this way, it helps to think of bitcoin mining as a way for bank tellers to get a percentage of the take for the number of transactions they successfully complete and a sort of bonus for making sure the bank is not defrauded. Except that anyone, not just tellers, can mine.

  The whole idea of mining might seem abstruse. Think of it as a way of stimulating a very high level of computer networking. Mining needs to be difficult in order to make the blockchain secure. No single individual should be strong enough to mine many blocks in a row. Because of the significant cost, an equivalent reward is set up, which also ensures a fair distribution of coins to those really involved in bitcoin. In its early days, mining spurred a speculative trade and competition to make a lot of money, especially as the price of bitcoin rose.6

  Nakamoto not only came up with the idea for bitcoin but also was involved in developing the currency during its first few years. He was active on public bitcoin forums and corresponded with a number of developers who were dedicated to improving the software.

  One such programmer was Gavin Andresen, who is now the chief scientist at the Bitcoin Foundation, a nonprofit corporation established in 2012 to standardize and advocate the use of the digital currency. Andresen was passionate about bitcoin and created the bitcoin faucet: a site that gave five free bitcoins to anyone who registered, in the belief that distributing the currency would help popularize it. Early on, he e-mailed Nakamoto to recommend a number of improvements to the system. Nakamoto trusted him, and they began to work together on the open-source program.

  It took a number of years for bitcoin to go from theory to reality. The first real-world transaction occurred in May 2010, when Laszlo Hanyecz, a programmer living in Florida, bought two pizzas for 10,000 BTC. Hanyecz sent the coins to a fellow enthusiast in England, who ordered the pizzas for him from Papa John’s using a credit card. In hindsight, these may have been the most expensive pizzas in the world.

  The bitcoin market really began in July 2011, after Mark Karpelès, a French expat living in Tokyo, took what was originally an online exchange for the card game Magic: The Gathering and turned it into what would become, for a few years, the largest and best-known bitcoin exchange in the world.

  Bitcoins began to trade publicly with a thousand coins having a value of less than a dollar. By November, the bitcoin market value had passed $1 million. In December, at Nakamoto’s request, Andresen’s e-mail was posted on the official website, bitcoin.org, which was created on August 18, 2008.7 Nakamoto was a prolific writer for a period of about two years, and The Book of Satoshi: The Collected Writings of Bitcoin Creator Satoshi Nakamoto includes a collection of his papers and e-mails for those who want the bitcoin equivalent of the New Testament’s Q source.

  However, Nakamoto was becoming markedly less active online by the end of 2010. His last e-mail before fading into the shadows for a few years was in 2011, and it was sent to a software developer. On the subject of bitcoin, he said, “I’ve moved on to other things. It’s in good hands with Gavin [Andresen] and everyone.”

  It didn’t matter who he was at that point or whether he was no longer actively involved. Bitcoin, like Frankenstein’s monster, had taken on a life of its own.8 On January 11, 2011, one bitcoin was worth thirty cents on the Mt. Gox exchange.

  Technology reporters started to pay attention to the cryptocurrency as well. On February 10 the same year, a forum post on the tech website Slashdot had the headline “Online-Only Currency BitCoin Reaches Dollar Parity.”9

  Yes, one bitcoin was now worth a dollar.

  Laszlo Hanyecz’s pizzas were now worth $10,000—although presumably he’d eaten them by then. A Slashdot forum user known as “IamTheRealMike” wrote in the forum:

  The BitCoin peer to peer currency briefly reached exchange parity with the US dollar today after a spike in demand for the coins pushed prices slightly above 1 USD:1 BTC. BitCoin was launched in early 2009, so in only two years this open source currency has gone from having no value at all to one with not only an open market of competing exchanges, but the ability to buy real goods and services like web hosting, gadgets, organic beauty products and even alpaca socks.10

  Things were heating up. April 2011, Forbes profiled bitcoin in an article titled “Crypto Currency.”11 That June, WikiLeaks, which had been banished from the financial world by US banks, began accepting bitcoins as donations. By March 2013, the bitcoin market cap was over $1 billion. The value of bitcoin surged and surged as the financial crisis in Cyprus made people wary of banks. On April 1, 2013, bitcoin was worth a hundred dollars a coin. On April 9, the value doubled.

  Despite mounting problems, security issues, and troubles galore at Mt. Gox—by this time the principal exchange—bitcoin continued to rise in price. It passed $1,000 and briefly held the same value as gold, trading at $1,240 per coin, thus earning the currency the moniker of “digital gold.” Bitcoin was big business. Governments were trying to decide how to regulate it. Bitcoin ATMs were appearing. Nakamoto’s invention was on the verge of being the next big thing.

  However, the party wouldn’t last forever. A
fter weeks of speculation that the exchange was in trouble, when Mt. Gox went blank on February 25, 2014, and filed for bankruptcy protection three days later, followed by a mythic press conference, the alchemy of fear turned this digital gold into virtual lead.

  The perceived collapse of bitcoin that resulted, and the shocking realization that its principal exchange had lost nearly half a billion dollars, now made everyone curious about the currency and its creator.

  A few weeks after Mt. Gox collapsed, Newsweek published a cover story titled “The Face behind Bitcoin” that claimed they had tracked down the legendary founder and confronted him at his modest home in a suburb of Los Angeles.12 When the journalist behind the story, Leah McGrath Goodman, spoke in the driveway with somebody named Dorian Satoshi Nakamoto, the man told her he was “no longer involved in that and [couldn’t] discuss it.” And maybe that was enough proof for her.

  After the story was published, the media swarmed down to Dorian’s place, but the sixty-four-year-old denied his involvement. He had simply been misunderstood by the reporter and didn’t even have a working Internet connection in the house.

  On March 9, he gave an exclusive interview to the Yomiuri Shimbun, Japan’s largest newspaper. In it, he flatly denied being the creator of bitcoin; he said, “I had never even heard of bitcoin until a few weeks ago.”13

  Confronted by the American reporter, he had thought she was asking him about classified work he had previously done for the US military, which he wasn’t entitled to discuss.

  There were in fact many inconsistencies in the theory that Dorian was Nakamoto, though Newsweek seemed to overlook them. For instance, bitcoin analysts are certain the real Nakamoto had mined a fortune for himself of up to a million bitcoin or more; in today’s currency that would be valued at upward of a billion dollars. After the Newsweek story was published, new details emerged about Dorian, including that the bank had foreclosed his home and, due to various medical problems, he was openly in need of money.

  Early on, the bitcoin community had speculated that Nakamoto was not actually Japanese, due to the fact that he never used the Japanese language. As it happens, he wrote well in English and used British spelling. Dorian’s strongest language by far was his first: Japanese.

  Dorian also mentioned something that a lot of other people were thinking: “The designer of bitcoin would never use his real name.” After all, Nakamoto had gone to some lengths to anonymize all his personal information online.

  The name itself, “Satoshi Nakamoto,” is problematic. In the original 2008 paper that launched the virtual currency, there were no kanji representing Nakamoto’s name. Kanji is a system of Japanese writing that uses Chinese characters to phonetically represent words, including names. Because of the limited number of vowels in Japanese, the language is riddled with homonyms. It is often extremely difficult to distinguish individuals or subjects without knowing the kanji characters. For example, the word hashi in Japanese could be represented as 箸 (chopsticks), 橋 (bridge), 端 (the tip), 嘴 (the beak of a bird), or 波子 (a train station in Shimane Prefecture).

  In identifying an individual, the correct kanji are essential. This is why when the FBI asks Japan’s National Police Agency for the names of yakuza gang members (Japan’s mafia), they always request the kanji version of the person’s name and their date of birth to avoid any mistake.

  The first appearance of the kanji for Satoshi Nakamoto was in 2011, in a translation of the original essay posted on the bitcoin.co.jp website, which is part of the loosely connected federation of bitcoin enthusiasts. The kanji characters shown there are 中本 (Nakamoto) 哲史 (Satoshi). In traditional Japanese style, the family name is listed first.

  There are hundreds of ways of representing Nakamoto Satoshi in kanji. Experts calculate that there are over thirty-eight thousand Nakamotos (中本) in Japan. However, when we were looking at the mystery of Nakamoto in March 2014, after the Newsweek article, in a twenty-year database search of over one hundred and fifty local newspapers and magazines in which the name 中本哲 appeared, there were only fourteen hits and only two individuals with that exact name (unrelated to articles about bitcoin). One was a thirteen-year-old middle school student. The other was a teacher and baseball coach in his forties.

  We contacted all those associated with bitcoin.co.jp to figure out why someone chose to use those specific kanji. The translation of the essay was finished on October 11, 2011, at 6:03 p.m., according to metadata embedded in the file. It isn’t clear whether Nakamoto was consulted about the correct kanji use for the phonetic notation of his name. It is also not clear whether Momoko X, the translator of the essay, simply selected the kanji on her own. It is not even clear that the translator was not Satoshi. It appears that the characters were just randomly created. Mark Karpelès, the former CEO of Mt. Gox, claims to have asked Momoko, his employee at the time, to translate the paper.

  This is probably true.

  One thing you learn if you’ve written for Japanese publications for more than twenty years is that the standard practice for representing Japanese-named individuals when the kanji are unknown is to use katakana. Katakana is a simpler set of characters used mostly for nonnative Japanese words. Indeed, in the Yomiuri Shimbun article, the kanji for Dorian Satoshi Nakamoto don’t actually appear. Instead, he is introduced in katakana as ドリアン・サトシ・ナカモト.

  On March 7, 2014, the real Nakamoto posted the following through his long-dormant account at the P2P Foundation (the foundation for peer-to-peer alternatives): “I am not Dorian Nakamoto.”

  Of course, this could possibly have been done by Dorian himself, if he is the cyber genius behind bitcoin.

  Prior to this message, Nakamoto’s last post on the forum had been a reply to another member on February 18, 2009. Then, for five years, he remained silent.

  The return of Nakamoto to the P2P Foundation forum raised a new mystery. Nakamoto first publicly posted the bitcoin software and an accompanying essay on February 11, 2009, at 10:27 p.m. There is a link to the essay, but when you download this seminal paper, stored as a pdf, the metadata indicates it was created on March 25, 2009, at 2:33:15 a.m.

  Why does the paper posted there now have a misleading date? Did the original paper contain something compromising or incorrect and it was switched for a newer version?

  Where is the original essay, if it exists? Was there something in the metadata that revealed Nakamoto’s real identity?

  Rashomon, anyone?14 The classic Kurosawa film has become a cliché for a multiply confusing event. But in this case it actually sums up this tangled narrative perfectly. The film presents several contradictory accounts of the murder of a samurai in a forest thicket. The accounts include those of a prisoner, a woodcutter, a mendicant Buddhist priest, and even the ghost of the dead man himself, who questions whether the objective truth is to be found at all. Just so with Satoshi Nakamoto, whose identity seems increasingly lost in a cyber thicket that no one can penetrate.

  CHAPTER TWO

  MEET MAGICALTUX

  Satoshi Nakamoto may have been the creator of bitcoin, but for several years the most important person in the bitcoin world was a Frenchman living in Japan.

  The sudden shutdown of Mt. Gox in February 2014 drew a lot of attention to its CEO, Mark Karpelès, a.k.a. “MagicalTux.” His online identity was inspired by the Linux penguin mascot named Tux, and Karpelès used it on Twitter and in various other chat forums from an early stage.

  So, who is he really?

  Even those close to him don’t quite seem to get him.

  “Mark Karpelès is like a more stoic version of the Cheshire Cat. There was always a strange disconnect when speaking with him. It made me wonder how this guy could be the Emperor of the Bitcoin Universe for even a day,” says a former accountant for Mt. Gox.

  Born on June 1, 1985, Mark Marie Robert Karpelès is an entrepreneur; possibly a criminal mastermind (unlikely); depending on your point of view, either a shameless geek or an arrogant prodi
gy; and sometimes a gentle idealist. When he tells you the story of his life, it’s hard to figure out whether he has been very lucky or very unlucky up to now.

  His hair is dark, his skin almost too pale. When we first met him, he was rather pudgy. He claims to have gained weight between 2011 and 2014 because of the constant stress he was undergoing. Almost from the get-go, his virtual castle, Mt. Gox, had been the object of numerous hacking attacks.

  Karpelès was born in Dijon, the capital of the department of Côte-d’Or, in the region of Burgundy. Dijon, incidentally, has been the mustard capital of the world since the thirteenth century. In 1866, Maurice Grey, a mustard maker with a special recipe involving white wine, went into partnership with Auguste Poupon, his financial patron, to establish Grey Poupon—for Americans, probably more famous than Dijon. It is certainly more famous than Mark Karpelès.

  Karpelès’s mother and grandmother, his only family, called him Robert—Mark Marie Robert, officially—because his grandmother was also named Mark. Yes, that’s confusing, and it was confusing to Karpelès. “Robert” in Latin means “red bear,” and “Karpelès” in French means “castle in the sun.” Later, when he tried to think of a Japanese name for himself, advice from Japanese friends made him decide on Youjou Kumakichi. Youjou refers to castles or fortresses, and Kumakichi to an anthropomorphic red bear character in a manga series who is sexually perverse and always getting arrested. Perhaps his friends were pulling his leg when they suggested the name. Or maybe Karpelès himself has an ironic, even prophetic, sense of humor.

  About his father, almost nothing is known. Karpelès’s birth certificate says as much. “Father: unknown.”

  “I have trouble remembering many of the things that happened to me in my life,” he told us in French and accented English when we were interviewing him. “But at the start, even my birth was a huge pain, apparently. There were problems—I spent the first month of my life in the pediatric ward of the Clinique de Chenôve in Dijon. I was there because of a left kidney deficiency and a gastric complication.”