Digital Gold (15 page)

Erik watched, with a mixture of fascination and fear, as the arguments between Charlie and David quickly took on the form of a feud between angry siblings.

“David, I don't appreciate you calling me a child and speak to me in a condescending manner. I've always treated you with the utmost respect and I would think I deserve the same from you,” Charlie wrote in an e-mail to David in early November after one fight. He went on:

To this date, you still have an elementary level of Bitcoin and BitInstant. I need you to understand
why we are in business
, and what we are trying to accomplish in this world. You tell me that I need to learn everything from you, well
you still have not learned anything from us
.

You need to make a decision on how you want to act going forward, with your attitude and position towards us.

October 2012

I
n mid-October Charlie Shrem and Erik Voorhees played host to Wences Casares, a slender man with dark movie star looks, a sophisticated accent, and clothes that signaled elegance and ease. Wences had reached out to the BitInstant team out of the blue, giving little indication of his specific intentions regarding Bitcoin. As he began talking with Charlie and Erik, though, he quickly came across as very different from the previous curious programmers and entrepreneurs who had stopped by the New York offices. Wences seemed to already have a full grasp of the mechanics of Bitcoin. He talked about potential risks that only the best-informed Bitcoiners knew about and conversed knowledgeably about monetary policy in the United States and the country where he had grown up: Argentina. When he spoke, it was in a gentle but candid way, giving the impression that much of what he said was a kind of personal confession.

“Bitcoin forced me to realize I didn't understand money,” Wences liked to say.

Charlie and Erik couldn't immediately place him among the
familiar Bitcoin types. He wasn't a libertarian, raving about the transgressions of the government, and he wasn't a tech nerd, fascinated by the cryptography. When he left, after a polite conversation, Erik and Charlie still weren't sure why Wences had come.

At the time of his visit to New York, Wences was in the first year of running a startup, Lemon Digital Wallet, which provided a way for customers to keep all their credit cards and coupons in digital form on a smartphone. But this startup was only the latest in a career that had already turned him, at age forty, into one of the most successful technology entrepreneurs to ever come out of South America. In his teens, he had established Argentina's first Internet provider, and in his twenties he founded a company that became a sort of Latin American E*Trade. Backed by the storied New York investor Fred Wilson,
the company made $750 million for its investors when it was sold to Banco Santander. Wences and his wife Belle used some of his new fortune to buy a catamaran and sail around the world with their young children. When they returned, the family moved to Silicon Valley.

Wences had first learned about Bitcoin in late 2011 from a friend back in Argentina who thought it might give Wences a quicker and cheaper way to send money back home. Wences's background in financial technology gave him a natural appreciation for the concept. After quietly watching and playing with it for some time, Wences gave $100,000 of his own money to two high-level hackers he knew in eastern Europe and asked them to do their best to hack the Bitcoin protocol. He was especially curious about whether they could counterfeit Bitcoins or spend the coins held in other people's wallets—the most damaging possible flaw. At the end of the summer, the hackers asked Wences for more time and money. Wences ended up giving them $150,000 more, sent in Bitcoins. In October they concluded that the basic Bitcoin protocol was unbreakable, even if some of the big companies holding Bitcoins were not.

By the time he visited the BitInstant offices, Wences had become a Bitcoin believer, and he was intent on spreading the idea among his powerful friends in Silicon Valley, a place that had so far largely ignored Bitcoin, but that would be vital if the technology was going to move into the mainstream.

F
OR
W
ENCES
,
THE
allure of Bitcoin went deeper than just professional interest, to a time before he was wealthy and successful, during his childhood in a country that had been—and remained—locked in a seemingly intractable battle with its own currency.

There was rarely a time during Wences's youth when Argentina was not in some sort of financial crisis. In 1983, after years of staggering inflation, the government created a new peso, each one of which was worth 10,000 old pesos. That didn't work and so in 1985 the new peso was replaced by the austral, which was worth 1,000 new pesos. Seven years later, continuing inflation led the government to go back to the peso, but this time pegged to the dollar, an experiment that eventually ended with a crushing financial crisis. During most of this time, inflation ran at over 100 percent a year, meaning that the value of money in the bank fell by half each year and often much more than that.

Wences was descended from one of Argentina's aristocratic families, but his particular branch had lost everything and ended up on a rustic sheep ranch out in the emptiness of Patagonia. When his father delivered wool and the check didn't come through for a month, the value of the family income could fall sharply because of inflation, setting off yet another round of household cutbacks.

“I think I understand economics better than most people because I grew up in Argentina,” he would say. “I've seen every single monetary experiment you can imagine. This is the street smart economics. Not the complex PhD economics.”

One particular incident had seared itself into Wences's memory. In 1984, during the first major episode of hyperinflation after the Argentinian military junta lost power, Wences's mother came to get him and his two sisters from school. His mom was carrying two grocery bags filled with money—the salary she had just been given in cash. She rushed with Wences and his sisters to the grocery store and had them run through the aisles, grabbing as much food as possible before the hyperinflation caused the goods to be repriced. A man walked through the aisles all day doing nothing but repricing the items on the shelves to keep up with the rapidly changing value of the peso. When Wences and his mother got to the register, he and his sisters would run back and grab more food if they still had any money left. Holding on to money was equal to losing it.

These experiences gave Wences insights into the nature of money that most people in the world learn only from textbooks. In America, the dollar seamlessly serves the three functions of money: providing a medium of exchange, a unit for measuring the cost of goods, and an asset where value can be stored. In Argentina, on the other hand, while the peso was used as a medium of exchange—for daily purchases—no one used it as a store of value. Keeping savings in the peso was equivalent to throwing away money. So people exchanged any pesos they wanted to save for dollars, which kept their value better than the peso. Because the peso was so volatile, people usually remembered prices in dollars, which provided a more reliable unit of measure over time.

As Wences avidly pored over all the available writing about Bitcoin in the first months after discovering it, it seemed clear to him that for people in places like Argentina, Bitcoin might provide a much more efficient place to store money than the dollar. In Argentina, dollars had to be purchased through shady money changers, and were saved in closets or under the mattress. The promise of a virtual currency that could be bought and stored
online, accessed from anywhere, and secured with a private key looked like a significant improvement.

Wences began by purchasing a growing stockpile of Bitcoins from Mt. Gox in early 2012 and joined in the conversation on the forums and chat channels. When he wasn't playing with Bitcoin, he devoured several books on the history of money, most significantly
Debt: The First 5,000 Years
, a cult favorite in the Occupy Wall Street movement and in certain transgressive corners of Wall Street. The book, by anthropologist David Graeber, argued that historians and economists have wrongly assumed that money grew out of barter. In fact, Graeber argued, and Wences came to believe, barter was never common and money was actually an evolution of credit—a way of tracking what people owed to each other. People used to just keep a mental tally of what they owed each other, but money provided a way to expand the system more broadly among people who didn't know each other.

As he read, Wences felt that after twenty years of working on financial technology, he was finally coming to understand money for the first time. He saw that Bitcoin's lack of any apparent intrinsic value didn't matter when looked at against the history of money. The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money. And it was used as money because it did what all good money did: it served as a sort of physical ledger on which society could keep track of who was owed what. Each piece of gold represented a slot on the ledger of all outstanding gold, which anyone could verify by checking the mass and volume of the gold.

“We don't use gold because it's pretty—that was a stupid assumption of mine and many other people,” Wences would tell anyone who would listen during these days when he was totally immersed in the history. “No, we use it in jewelry because it's very expensive. It's not expensive because we use it in jewelry.”

“What is the value?” he would ask. “It's that it is the ledger. You put the ledger on your neck to show power and wealth. It isn't a ledger where you have to trust a bank or anyone else.”

Bitcoin, Wences came to believe, was a purer version of that sort of ledger—a commonly verifiable place where everyone could keep track of who owned what.

Despite his fervor, Wences initially had trouble drumming up much interest among his Silicon Valley friends beyond a few fellow South Americans, who had grown up in places with similarly screwed-up currencies. Mostly he just got skeptical looks. For those who had heard of it, the first question was usually about whether it was anything more than a token for online drug dealers. Some remembered David Chaum's DigiCash back in the 1990s, but anyone familiar with that experiment knew that it had gone under. The bigger question was why something like this was necessary in the first place. Credit cards and $20 bills did everything that most of Wences's friends needed when it came to spending money. Why should they trust a digital code that had nothing backing it but the computers of some libertarian nerds?

After months of trying, Wences finally made a breakthrough with one of his best friends, and the one whose opinion in this area mattered most: David Marcus, who had recently become the president of PayPal. Like Wences, Marcus was a foreigner in the Valley. He had grown up in France and Switzerland, and had the same slender stature, unassuming presence, and seemingly effortless sophistication as Wences. But after spending a decade on payment startups, Marcus was used to hearing grand claims about technologies that would revolutionize the way money moved around the Internet. He also had experienced the overbearing regulatory scrutiny that falls on any company that wants to deal with money.

But in the fall of 2012 Marcus had a conversion moment when
the Argentinian government ordered his company, PayPal, to cut
off direct payments between Argentinians, a new prong in the government's effort to slow the movement of pesos into other currencies. With Wences's arguments ringing in his head, Marcus watched as the policy went into effect and the price of Bitcoin rose, suggesting to Marcus that Argentinians were seeking out Bitcoin as a way around the government's restrictions. He quietly set up an account with Mt. Gox and began buying coins. In doing so, Marcus became one of the first of many important converts that Wences would win to the Bitcoin cause.

W
ENCES RAN HIS
digital-wallet company with an old friend in Argentina, Federico Murrone, or Fede. Unlike Wences, who had an aristocratic lineage, Fede came from a working-class family and looked like a tough biker. The two had connected as teenagers on Wences's first startup, creating Argentina's first Internet provider, and they had been close friends ever since, with Fede providing the programming smarts for Wences's ideas, always from Argentina, where Fede stayed to be close to his family.

Wences traveled to Buenos Aires every few months to check in with Fede and his team of Argentinian coders. Each time Wences visited in 2012, the reminders of what it was like to live in a country with broken money strengthened his belief in the potential for Bitcoin.

Like other smart visitors to the country, Wences went to a black market money changer whenever he needed pesos to spend. Credit cards and ATMs were available, but they provided pesos at the official government exchange rate, which was about
35 percent lower than the rate available on the street in 2012. The government wanted to make changing money into dollars unattractive, with its official exchange rate, because it was afraid that its citizens would sell off all their pesos for dollars, driving the exchange rate down even
further and devastating the economy. The government had recently started fining economists who challenged its official exchange rate. As 2012 went on, the situation grew progressively worse, and this is what had led the government to crack down on PayPal.

The inflation rate wasn't the only problem with the local financial system. As in many developing countries, it was incredibly hard to open a bank account and even harder to get a credit card. Despite having grown up in Argentina, Wences had never had an Argentinian bank account. People were left to pay their bills in cash at the drugstore, so they had to carry around wads of 100-peso bills. This too, seemed like something that Bitcoin, with its secure digital wallet, could help address.

At the Lemon offices in Buenos Aires, Wences and Fede were supposed to be working on their new startup, but they would end up spending hours playing with Bitcoin and talking about how they might harness its potential. In late 2012 the two men organized
the first-ever Bitcoin Meetup in Argentina at a favorite whiskey bar. It was sparsely attended, other than by the friends that Wences and Fede had already sold on the technology. The small crowd was not surprising given how hard it was to get Bitcoins in Argentina. It was incredibly expensive and difficult to transfer money from an Argentinian bank to Mt. Gox or another foreign Bitcoin exchange. And no Argentinian bank would work with a domestic Bitcoin company.

But there was a budding conversation about Bitcoin on an Argentinian website dedicated to protecting online freedom. When Wences was in Argentina, he would offer to sell some of his Bitcoins after work at a bar near the Lemon offices. Each time, a different crew of people would show up, but one older gentleman kept coming back, buying a little more each time. He had a silent, sullen countenance and didn't seem technologically sophisticated.
After the man made a particularly large purchase one day, Wences gently asked him if he understood the risks involved with Bitcoin.