Bitcoin Billionaires

by Ben Mezrich

  When we invested in BitInstant in the fall of 2012, its management made a commitment to us that they would abide by all applicable laws—including money laundering laws—and we expected nothing less. Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his arrest. We were passive investors in BitInstant and will do everything we can to help law enforcement officials. We fully support any and all governmental efforts to ensure that money laundering requirements are enforced, and look forward to clearer regulation being implemented on the purchase and sale of bitcoins.

  If the charges were accurate, then Charlie had duped them. Tyler and Cameron had done everything they could to try and make BitInstant a serious player in not just the Bitcoin world but also the financial world. They had put Charlie in front of prestigious investors, banks, and other potential partners, had made sure the company was licensed, and had tried to make Charlie into the CEO that BitInstant needed. And when that hadn’t worked, they had demanded that he straighten up—and obviously, all of it had failed.

  Tyler knew the arrest would hit the Bitcoin community hard. Charlie was one of its biggest names and one of its thought leaders, even a founding member of the Bitcoin Foundation, a nonprofit organization headed by many of the biggest names in the cyber economy, aimed at building up the reputation of Bitcoin and helping raise its profile in the world at large. He guessed that many Bitcoiners would support Charlie—some, for the wrong reasons.

  “Roger Ver has already given a statement to Forbes,” said Beth through the car window, echoing Tyler’s thoughts as he looked at his phone:

  People own their own bodies, and have the absolute right to put anything they want into it. People like the FBI, and DEA agents who want to lock people in cages for buying, selling, or using drugs are the ones committing evil, and they need to stop. I look forward to the day when they see the error of their ways, and stop committing evil acts in the name of “law enforcement.”

  Tyler felt these same beliefs had seduced Charlie into handcuffs. These two opposing statements perfectly illustrated the divide in the Bitcoin community. The libertarians and anarchists saw Bitcoin as a weapon in their war against regulated society. The entrepreneurs and VCs increasingly gravitating toward cryptocurrency wanted Bitcoin to be part of that society, a new, programmable money for the modern world.

  Beth headed back toward the office to get their statement out on the newswire. The connection to Charlie and the crimes he’d been charged with were unpleasant, but Tyler and Cameron had done nothing wrong beyond investing in the wrong company. Investing in the wrong person. They had made a mistake, but that didn’t change where they were going, or what they had to do to get there.

  “Let’s roll,” Tyler said.

  It was not an overstatement to say that they were on their way to fight for the life of Bitcoin. Without the blessing of the regulators, Bitcoin would never rise above the dark cloud of these early days, and the entire virtual currency industry might be doomed.

  “The timing of this couldn’t be worse,” Cameron muttered as the SUV pulled away from the curb.

  “I don’t know,” Tyler said. “One could argue that the timing couldn’t be better.”

  Maybe Cameron didn’t see it yet, but in Tyler’s mind—the anchor had just been thrown out of the boat.

  28

  MEN OF HARVARD

  Ninety Church Street.

  A massive federal office building, a charmless monstrosity of limestone, taking up the entire block between Church Street and West Broadway. A multiuse government facility that contained the New York State Health Department, the New York Public Service Commission, a Central Post Office, and the space where the Virtual Currency Hearings were to be held.

  The Fourth Floor Boardroom, 11:30 A.M.

  If there was ever a time for suits, this was it. Cameron sat at the long witness desk—essentially a plank of wood cluttered with notepads, laptops, and a tangled jungle of old school microphones. Tyler was to his left, and to his right were the three other witnesses who had joined them for the headlining session of the first day of testimony. Directly next to Cameron sat Fred Wilson, a seasoned venture capitalist veteran who had moved into the cyber currency space in a big way, with the countenance of someone who had seen a number of technology waves, including the first dot-com boom and bust. Next to Wilson, the up-and-comer venture capitalist Jeremy Liew, a partner at Lightspeed Venture. And at the end of the bench, Barry Silbert, the founder and CEO of the startup SecondMarket.

  Behind Cameron was a peanut gallery made up mostly of press, along with a handful of Bitcoin tourists who’d managed to find room in the crowded hall, everyone seated on a sea of folding chairs stretching all the way to the back of the room. Cameron knew there were many more people watching: the public hearing was being simulcasted to over 130 countries.

  But the audience, as big as it might have been, was not central in Cameron’s thoughts. In front of him, across the vast, utterly serious boardroom, raised high above the witnesses and audience on a dais like some sort of medieval judgment panel, sat the shooting gallery of regulators. These would be the people asking the questions—and in this place, they had real power. Cameron and his brother would be answering under oath—anything they said could be used against them—if they were found to have perjured themselves here, they could be sent to prison. Hey, right next door to Charlie.

  In the center of the dais, of course, was Superintendent Lawsky, embraced by a row of flags—the flag of the United States, of New York State, and god only knew what else. Lawsky was in his early forties. He possessed a visage that harkened back to a different era when civil service was dominated by Kennedys and intelligent, piercing dark eyes. Next to him sat an assortment of fellow departmental personnel, but it was obvious that Lawsky would be running the show. Almost as soon as the room came to order, muffling the clatter of keyboards, scraping chair legs, and running audio equipment, Lawsky introduced the session, made short work of the swearing in, and then dove into the matter at hand.

  Lawsky quickly turned to the reason he had gathered the brightest stars in the new economy to his boardroom:

  “The goal is to put forward a proposed regulatory framework for virtual currency firms operating in the state of New York. We’d be the first state in the nation. And clearly when it comes to virtual currencies, let’s admit it, regulators are in new and somewhat uncharted waters.”

  So far so good. Cameron had hoped that these hearings would strike a collaborative tone, and he was encouraged that Lawsky understood what he didn’t understand. But Lawsky quickly moved on to address the eight-hundred-pound gorilla in the room that Cameron had known was coming.

  “The legal action that we saw yesterday underscores how critically important it is, that we put in place guardrails for this industry to help root out money laundering and other misconduct.”

  The boy genius, who could have been sitting here right in this room, sandwiched between the twins, extolling the virtues of Bitcoin, was instead sitting in his mother’s basement under house arrest.

  “I mean frankly,” Lawsky continued, “if we want innovation to happen, and we also want to root out money laundering, and we try to get that balance right—we also want to give businesses certainty.”

  Perhaps Tyler was right—the timing of Charlie’s fall had put a spotlight on the very need for the hearings themselves, the need for the government to start stepping in, not just to protect Bitcoin customers or the general public, but also to protect people like Charlie from themselves.

  From the very first question Lawsky asked of the panel of witnesses, it was clear he felt the same way.

  “The arrest we saw yesterday put a bit of a cloud hanging over the industry right now,” he began, “and my question for each of you is—how do you react to yesterday: is it that any technology can have bad people who are going to allegedly use it in bad ways? Drug dealers use cell phones, it doesn’t mean we condemn the cel
l phone. Terrorists use computers. Although, there are arguments that virtual currency is more susceptible—what we don’t want is a world where Bitcoin is a haven for those committing illicit activities.”

  Lawsky had taken the words right out of Cameron’s thoughts. Technology did not prescribe to an ideology, it was agnostic. Just because it was co-opted by bad actors, or people like Ver with a certain belief system, didn’t mean it was itself a bad actor or had a clear ideological cast. Bitcoin was a technology; technologies were neither good nor bad.

  Barry Silbert took the question first, giving a succinct answer:

  “If those accused are convicted, it seems like the system is working. Bad guys are going to do bad things and they will use whatever technology is available to them.”

  Liew, next to him, agreed and elaborated, in a light Aussie accent:

  “I’d echo—it’s the existing framework of regulation and law enforcement working well.”

  But then he made a point that put Charlie’s arrest in perspective—and placed it on a timeline of the Bitcoin industry that coincided with Cameron and his brother’s experiences.

  “I also point out,” Liew said, “that we’ve seen over time a change in the character of the people involved in Bitcoin. When it first started out, it was an academic novelty—over time it attracted different people for different reasons. Decentralized, open-sourced—that attracted a first set of people.… A lot of those people were libertarians and radical.… The second character that attracted a second wave was anonymity—people who thought they could conceal their behavior behind Bitcoin. In the last year and a half a set of people were attracted to two other aspects—first, it’s freeish, dramatically reducing transaction costs. And it’s programmable. This changed the nature of the Bitcoin population.”

  And, Liew added, this was a very good thing for those, like him, who wanted to invest in the new economy.

  “The market of radical libertarians is not very big. The market of criminals is not very big. But offering free transaction costs—you have a market of everyone in the world.”

  It was a VC’s answer to the question. The big money wasn’t interested in backing something dirty or illegal—not for moral reasons, but because those things weren’t good for business. It was what the twins had been saying all along.

  Wilson, in his answer to Lawsky’s question, broke it down even more, describing what he called the Five Phases of Bitcoin.

  “First, development of the open source community … a geeky, nerdy, crypto-libertarian thing, 2009 to 2010. Second—a vice phase. Silk Road, drug trafficking. Gun running. 2010 to 2011. Third phase, speculation, trading—we are getting to the end of that now—2013, 2014. Next phase is the transactional phase—real merchants accepting bitcoin. And the final phase is the phase of programmable money—when money can move via a programmable infrastructure.”

  Programmable money. The phrase sounded space age, sci-fi, to Cameron, but he knew it was truly the next step in the nearly instant economy that Bitcoin allowed; basically, it referred to programmed transactions between banks or individuals that could be self-validating and perfectly efficient; smart contracts that could be set in place to occur automatically, without any middlemen or oversight. For instance, self-driving cars and autonomous agents of the future would exchange value back and forth, perhaps while changing lanes in real time, paying for faster rates of travel—but they wouldn’t be doing it via wires, ACH, or credits cards, which were too slow and costly; they would have to use crypto. Machines couldn’t open accounts at Wells Fargo, but they could plug into protocols exchanging bitcoin. At their heart, cryptocurrencies were built for machines—which made them the perfect currencies for the future.

  “The vice phase is in the rearview mirror,” he added. “The majority of Bitcoin is not vice.”

  It was finally the twins’ turn to answer. Even though the question was asked to the entire panel, it might as well have been directed to them and only them; everyone in the room knew that they had been the ones to invest in Charlie, and everyone in the room, on the live stream across the world, was waiting to see what they said.

  Tyler leaned over to be closer to the microphone in front of him. As the more serious, analytical of the twins, they had decided he would speak first. Cameron could feel the entire room glued to Tyler, the whole world watching as Tyler opened his mouth and began to speak.

  “I think yesterday was a speed bump.”

  Those few words, Charlie’s own words from after the disastrous meeting with the Fintech venture capitalist, captured the essence of what Charlie had become. If Charlie was listening to the hearings, wherever he was, probably with a government-issued bracelet around his ankle—he would no doubt be sobered by the cold reality of Tyler’s answer. Cameron couldn’t have agreed more. They believed that Charlie, by his actions, had betrayed their trust. The Winklevoss twins had been betrayed before—and it wasn’t something they were built to take lightly.

  “Like with the closure of Silk Road,” Tyler continued. “And the subsequent price increase of ten times, it indicates that the demand for Bitcoin is far from just illegitimate activity.”

  Later in the hearing Cameron described the early days of Bitcoin in his own words.

  “When we first saw Bitcoin about a year and a half ago, I don’t think anyone would deny that it was a bit of a Wild Wild West, because there was no regulation, there was no framework to evaluate the assets, to evaluate companies, determine who was compliant, who was not. And a Wild West attracts cowboys.”

  Like Tyler, he had now relegated Charlie to the past—a relic of that Wild West, a tragic figure from Bitcoin’s frontier history.

  “I don’t think anybody here would disagree with the fact that a sheriff would be a good thing,” Cameron said.

  People like Roger Ver may have given up on the system a long time ago, but the twins had not. To some people, they probably were the system, but that wasn’t the full story. They had their own reasons to be disappointed in courts, judges, lawyers, Harvard presidents, Harvard classmates, mediators, men in suits, men like Superintendent Lawsky; they had been let down by them all. But they were resilient, you had to give them that.

  They had been taught by their parents to never stop fighting. It didn’t matter how many times life knocked you down, all that mattered was that you got back up. Anyone who had lost a sibling knew something about resilience. Despite their appearance, despite what people thought of their privileged background—time and again, they had been knocked down. Life hadn’t always been easy; but they still believed in the general fairness of people. They had experienced other lessons in the wider world: they knew it wasn’t the event that was the defining moment, it was how you handled the aftermath.

  From an early age, Cameron could remember his father—who he knew was out there listening to them—reading him and Tyler a speech given by Teddy Roosevelt—himself a member of the Porcellian final club and a true Man of Harvard:

  It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

  Cameron looked around the room, at the regulators on their high dais, the Bitcoiners on the witness stand, and everyone else, watching from the gallery.

  And then he looked at his brother.

  Who at the best knows in the end the triumph of high achievement.

  Who at the worst, if he fails, at least fails while
daring greatly.…

  “Bitcoin is freedom,” Tyler was saying to the assembled. “It’s very American.”

  At that moment, Cameron thought that maybe, just maybe, some of the regulators realized that the world that the twins were fighting for was the same world that they were fighting for too.

  29

  JUDGMENT DAY

  It was a strange sensation, being surrounded by people and yet knowing you were completely alone.

  Charlie guessed it was what it felt like to die of some gruesome disease, in a bed in a hospital with your family and friends next to you, helpless to do anything but watch as you took your final breaths.

  He knew he was being macabre, but it was hard not to be dramatic in such a place: it was obviously built for drama. A dusty, aging, wood-adorned courtroom in the bowels of a New York judicial building. Charlie could only imagine how many degenerates—murderers, arsonists, rapists, bankers—had been sitting exactly where he was sitting, on an uncomfortable chair next to his lawyer in the defendant’s galley. Over to his right, about five yards away, he could see the prosecuting team. Serrin Turner, the assistant U.S. Attorney who had been the front man on the case since before Charlie had agreed to settle, and Turner’s various assistants. Fitting, since Turner had also led the prosecution against Silk Road that had sent Ross Ulbricht to prison for life. Next to them, Preet Bharara himself, the U.S. Attorney for the Southern District, the famous prosecutor who had taken down too many white-collar criminals and Wall Street bankers to count. And somewhere behind them, the IRS agent who had first arrested Charlie at JFK, Gary Alford, there to witness the results of all his hard work.

  And directly ahead, on the bench, was Judge Rakoff, a kindly-looking man in glasses.