Digital Gold (21 page)

N
O ONE
,
THOUGH
, was feeling more heat than Ross Ulbricht, aka Dread Pirate Roberts.

Ross's site was more successful than ever. In the middle of 2013, Silk Road was approaching its
one-millionth registered account. In the first two months of the summer, Silk Road users exchanged over a million messages with each other and the
commissions collected by the site were often over $10,000 a day.

But since the spring Ross had been dealing with continuing and varied attacks unlike anything he had experienced before. A hacker had managed to take the site down for days at a time and stopped only after
Ross agreed to pay $100,000 up front and $50,000 every week thereafter—payments that ultimately amounted to $350,000.

These weren't the only unanticipated costs. When a user named FriendlyChemist threatened to release details about thousands of Silk Road customers, Ross reached out to a distributor, who he believed was a member of Hell's Angels, and asked what it would cost to do away with FriendlyChemist. This time around, there was none of the hemming and hawing that had accompanied Curtis Green's supposed death. When the assassin, redandwhite, came back with a price of $150,000, Ross politely haggled with him.

“Don't want to be a pain here, but the price seems high,” Ross wrote, pointing to the $80,000 that had been paid for the previous execution.

A few days after a price was agreed upon, redandwhite sent evidence that the deed had been done (though no evidence was later found of an actual murder). Messages quickly followed with a request for a hit on another scammer—and three of his associates—who had robbed Silk Road users. This deed was
paid for with 3,000 Bitcoins, or roughly $500,000 (but, again, no evidence was found of any actual murders).

This was not the softhearted young man of early 2012 who had trouble telling white lies. Now his diary was filled not with ruminations on his weaknesses, but instead with brief, cold lists of his problems and solutions. His entry for the day FriendlyChemist was presumably killed, read:

got word that blackmailer was excuted

created file upload script

started to fix problem with bond refunds over 3 months old

Even his family members, who had no idea what he was up to, noticed a change during this time. Ross's mom would say that her son, during this period, was “rebel Ross,” not the lovable young man she had known in recent years.

Ross's transition from an affable youngster obsessed with oneness to a minor tycoon whose diary entries reflected a willingness to kill looked, from many angles, like a predictable outcome of the community that Ross had created and the role that Ross had assumed within that community. In a world in which there are no agreed-upon authorities, it was natural that individuals might take it upon themselves to determine what is right and wrong—and to
act on those determinations on their own. It was easy to imagine that Ross, cut off from any real contact with the other members of the community, except for Internet chats, began to see people as abstractions with no real life force—like characters in a video game. In this sort of world, the idea of killing these people could lose its visceral repugnance.

As the year went on, Ross receded further from his ordinary life.
He moved out of his friend's apartment in June and went even deeper underground, renting a place a few miles away in a residential neighborhood of San Francisco that he paid for in cash. He told his new roommates that his name was Josh. On his laptop, he kept a document called “emergency” that included the steps he would take if he needed to run:

encrypt and backup important files on laptop to memory stick.

destroy laptop hard drive and hide/dispose

destroy phone and hide/dispose

hide memory stick

get new laptop

go to end of train

find place to live on craigslist for cash create new identity (name, backstory)

The New York office of the FBI was, by this point, working in cooperation with the Marco Polo task force that had been set up a year and a half earlier in Baltimore to crack down on Silk Road. The teams were making almost monthly arrests of other vendors and buyers on Silk Road, and many of these arrests were publicized. When a competing black market drug site, which had opened in the spring, shut down, Dread Pirate Roberts told his followers that he had often thought about doing the same:

Without going into details, the stress of being DPR is sometimes overwhelming. What keeps me going is the understanding that what we are doing here is more important than my insignificant little life. I believe what we are doing will have rippling effects for generations to come and could be part of a monumental shift in how human beings organize and relate to one another.

I have gone through the mental exercise of spending a lifetime in prison and of dying for this cause. I have let the fear pass through me and with clarity commit myself fully to the mission and values outlined in the Silk Road charter.

Ross, by this point, understood just how hard it was going to be to continue evading detection. He became aware, at several points in 2013, that despite his best efforts, his system did occasionally leak a real IP address, providing information, however briefly, on where his servers were located. Each time, he would delete the information and move his databases to new servers, hoping that no one had noticed the mistake.
Ross assigned Variety Jones, his old mentor, who now went by the screen name cimon, to serve as the site's counterintelligence expert against law enforcement. But as Ross guessed, there were, indeed, federal agents dedicating their days to spotting any sign of a real IP address associated with Silk Road, and they were homing in on a set of servers in Iceland that they believed were the right ones.

Before the authorities got anything on those servers, though, agents on the Canadian border intercepted a package with nine forged drivers' licenses. Each license had a different name and address, but the pictures on all of them were the same wavy-haired young man. The package was addressed to a house in San Francisco.
When agents knocked on the door, they recognized the young man from the photos on the forged IDs. He quickly presented his
real driver's license, from Texas, with his real name, Ross Ulbricht. He declined to answer any other questions about where the IDs had come from, but told the agents in an offhand way that anyone could buy faked documents from a site called Silk Road.

The agents left without taking Ross with them. He had gotten lucky. While he was one of the suspects that the New York and Baltimore agents were looking at, they had not disseminated his name widely, and the border patrol officers had no idea who he was. After this close call,
Ross changed apartments, but he did not take the opportunity to cut and run. Instead, he stayed in San Francisco, watching his commissions from Silk Road pour in as the digital noose tightened around his neck.

August 2013

T
he Bitcoin Foundation had set out to help improve the network's public standing, but most of the people involved in the foundation's creation had now become unhappy examples of the technology's problems. Charlie Shrem had shut down his site and was being sued. Peter Vessenes was locked in a legal battle with his fellow founding board member, Mark Karpeles, and Peter's other ventures were going just as poorly. A company he had set up to produce Bitcoin mining machines had not yet turned out a single coin and his investors were breathing down his neck.

There was, though, one unlikely person left to carry on the original mission of providing the technology with a more friendly public face: the Seattle lawyer Patrick Murck. For most of 2012 and 2013 Patrick had worked for existing Bitcoin companies and volunteered as general counsel of the foundation. But since the beginning of the summer he had been employed by the foundation full-time and was turning himself into a respectable public spokesman.

At each point along the way, Bitcoin's survival had required the strengths of a different subset of its believers. In the summer
of 2013 it had become clear that if Bitcoin was going to reach a larger audience it would need to learn how to play nice with the existing system. As it turned out, Patrick, a pudgy young father with a warm fuzzy beard, was uniquely positioned to do just that. In contrast to Bitcoin's early salesmen, like Roger Ver, who was still trying to renounce his citizenship, Patrick was a patriot who had grown up in Washington, DC, with a mother who worked at the National Labor Relations Board. This upbringing had made him believe in the importance of fighting injustice in the world and gave him a healthy respect for the role that government could play in the process, which helped explain the volunteer work he had done for the Obama campaign in 2008.

When it came to Bitcoin, Patrick firmly believed, like many in the tech world, that Bitcoin could foment big changes. An open source financial network looked to Patrick like just what was needed to shake up the privileged elite who ran and disproportionately benefited from the existing financial system. The Bitcoin network seemed to make it at least a little bit harder for Wall Street to collect tolls at every step of every financial transaction. But Patrick did not think that for this to happen it would be necessary for Bitcoin to overthrow the existing governments and central banks. In fact, he thought there was a significant place for regulations when a third party, like Mt. Gox or BitInstant, was holding someone's virtual currency.

Patrick had quietly begun his work at the beginning of the summer, when he spoke at a conference in Washington that represented essentially the first time a Bitcoiner had sat on the same stage with lawmakers. At that point, there had been obvious tension. Patrick had ended up in a sharp exchange with a man from the Department of Justice who had compared Bitcoin users to child pornographers.

Afterward, though, Patrick struck up a friendly conversation with the woman in charge of FinCen, the branch of the Treasury Department that had put out the first rules on virtual currencies in March 2013. Patrick had been somewhat peeved that FinCen and its leader, Jennifer Shasky Calvery, had not had any conversation with the Bitcoin community before issuing those rules. At the June conference, though, Shasky Calvery made it clear that she was interested in the technology and open to a dialogue about the rules.

Over the course of the summer Patrick made almost weekly trips from Seattle to Washington to meet with Shasky Calvery and other regulators, to help them understand Bitcoin. Patrick quickly learned that staffers in the office of Senator Thomas Carper, of Delaware, were studying Bitcoin and looking at the possibility of holding a hearing. Patrick was able to put them in touch with the most presentable players in the Bitcoin world.

In his meetings Patrick did not fight the obvious reality that Bitcoin was not yet doing any of the great things that he and others were talking about. But he was able to cogently explain his vision of how the blockchain technology could make it easier for poor immigrants to transfer money back home and allow people with no access to a bank account or credit card to take part in the Internet economy.

In addition to his legal mind, Patrick had a genial, unthreatening approach that made him able to get along with just about anyone. He liked having his conversations over a whiskey or beer in a bar, and his everyman sensibility tended to soften people up. The good relationship Patrick developed with Shasky Calvery, among other people, led to a private meeting in August, when Patrick and a few other people affiliated with the Bitcoin Foundation got to present Bitcoin's best face to a roomful of law enforcement agents and government officials. It was not entirely
friendly, but the attendees seemed to understand that the Bitcoin technology was useful for more than just purchasing drugs and laundering money—so this meeting was already a long way from Patrick's first encounters in Washington at the beginning of the summer.

Many Bitcoin companies were making their own efforts to get in sync with the authorities. Coinbase, the San Francisco–based company that had raised $5 million from Micky Malka's Ribbit Capital and other investors, was developing extensive measures to vet clients and ensure that the service was not used toward illegal ends. The Slovenian Bitcoin exchange, Bitstamp, which passed Mt. Gox over the summer to become the largest Bitcoin exchange in the world, now required all its customers to go through a rigorous identity verification process. The two young men who had founded the exchange were rewarded with visits to their Slovenian city, Kranj, by Dan Morehead and Pete Briger from Fortress Capital, who wanted to invest in the exchange.

T
HIS WAS ALL
a long way from the original Cypherpunk vision of a new digital money that was outside the reach of governments and banks. Satoshi Nakamoto's aim in creating the decentralized Bitcoin ledger—the blockchain—was to allow users to control their own money so that no third party, not even the government, would be able to access or monitor it. But people were still opting for the convenience of centralized services like Coinbase and Bitstamp to hold their coins.

The great benefit of this business model was that the companies, rather than their customers, dealt with the headache of storing and securing the money. When early Bitcoin users lost the private keys to their Bitcoin addresses, the coins associated with those addresses were lost forever. With a Coinbase wallet, on the
other hand, if a customer lost the password, it was like losing the password to a normal website—the company could recover it. What's more, Coinbase customers didn't have to download the somewhat complicated Bitcoin software and the whole blockchain, with its history of all Bitcoin transactions. This helped turn Coinbase into the go-to company for Americans looking to acquire Bitcoins and helped expand the audience for the technology.

There was, though, a small but vocal community of dissidents, many of them early Bitcoin users, who were eager to go back to the original vision that Satoshi had laid out. Few were as outspoken as Roger Ver, the Tokyo-based libertarian who had, in earlier years, lost money that he had entrusted to Bitcoin businesses like Bitcoinica and MyBitcoin.

Roger was still a fervent believer in the initial vision he had of Bitcoin as a game-changing technology for governments around the world, just as his favorite martial art, jujitsu, offered a relatively simple way to neutralize even the strongest opponent. Roger had recently begun comparing Bitcoin to the honey badger, the weasel-like equatorial mammal that has a reputation for being able to overpower and even castrate the most ferocious predator. During the summer of 2013, with graphic design assistance from Erik Voorhees, Roger had put up a new billboard in Silicon Valley with a picture of the indomitable animal and the caption: “Bitcoin: The honey badger of money.”

But Roger had grown increasingly firm in his belief that centralized Bitcoin businesses like Coinbase defeated the essential purpose of Bitcoin by putting the personal information of every user in the files of a single company that was vulnerable to government subpoenas. In the summer of 2013, aiming to foster an alternative, Roger channeled the energy that he had earlier put into Charlie Shrem and BitInstant into another one of the startups he had invested in back in 2012.

Blockchain.info had been created by a reclusive young man named Ben Reeves who lived in the English city of York and ran his site alone until the middle of 2013. Reeves had created what looked like a rather unspectacular product: an online wallet that, like other wallets, offered a way to access Bitcoins from any computer or smartphone without downloading the entire blockchain. But Reeves's wallet was different in a crucial way. Rather than holding its customers' Bitcoins, Blockchain.info kept only a small file for each customer with the private keys of that customer, encrypted in a way that made it impossible for the company to see the keys themselves. Because Blockchain.info held an encrypted file with the keys, they were not on the computer of the user, vulnerable to hackers. But when a customer logged into a Blockchain. info wallet, the log-in process decrypted the file so that the keys were temporarily on the customer's computer and could be used to access coins that the customer had on the blockchain. The customer's data—how much money he or she had and the transaction history—was viewable through Blockchain.info's online template. But the company itself never saw the data. Because Blockchain. info did not hold money or a transaction history for its customers, it couldn't be subpoenaed to give up customer records. Nor could the company steal its customers' coins.

The site had attracted lots of interest from people who
opened 350,000 free Blockchain.info wallets by the middle of 2013. But the business model was not a recipe for big profits. Because blockchain.info didn't hold customer funds it was hard to deduct fees for its services. It also didn't allow its customers to buy Bitcoin online—a lucrative business that would have put the company in charge of customers' money. Blockchain.info users had to acquire their coins elsewhere and send them to their Blockchain.info wallet.

This was a business opportunity uniquely suited to Roger Ver, who had never been concerned, primarily, with making money from his Bitcoin investments. He wanted to see Bitcoin live up to its revolutionary potential. As a result, when Reeves offered to turn a loan that Roger had made to Blockchain.info into a majority stake in the company (so that Reeves could avoid a tax headache), Roger jumped at the opportunity.

In London for a conference that summer, Roger paid for Reeves to come down so they could meet in person for the first time. Reeves showed up, but Roger had trouble getting more than a few words out of the shy young man. After Roger went out to speak at the conference, he came back to his hotel room and found that Reeves had abruptly left and gone home to York.

This didn't discourage Roger. He thought Reeves's code spoke for itself and he began looking for a chief executive for the company, a person who could deal with the outside world so that Reeves didn't have to. When Erik Voorhees put Roger in touch with an old college fraternity brother, Nic Cary, Roger flew Nic to Tokyo. On their first night, they went to Roger's favorite establishment, the Robot Restaurant, where women in blinking bikinis rode around on large robotic animals. Roger and Nic spent the next few days immersed in deep conversations—some of them during drives around Tokyo in Roger's Lamborghini—about how to expand Blockchain.info's offering of a wallet that could be used free by anyone, anywhere in the world, outside the reach of regulators. Nic explained his vision for making the website more user friendly and expanding the number of languages.

Roger promptly hired Nic to move to York and work with Reeves in a three-story house that Roger rented for what he hoped would soon be a much larger team. As Roger began to build out
the company he determined that this would be a real Bitcoin company, with no bank accounts and all salaries paid in Bitcoins.

T
O MANY REGULATORS
and investors, the only plausible reason that someone would want an untraceable Bitcoin wallet, like Blockchain.info, was to enable online drug purchases or other nefarious activity. Why else would you want to keep your records from government officials?

But one place where Blockchain.info, and Bitcoin more broadly, was gaining popularity in the summer of 2013 put a slightly different slant on the potential uses for Bitcoin services that couldn't easily be monitored by the government.

At a Bitcoin Meetup in July 2013, two hundred or so people packed into one of the historic old buildings that fill downtown Buenos Aires, the capital of Argentina. At a time when Bitcoin's popularity was faltering in the United States, the turnout in Argentina was many times greater than the thirty or so people who had attended the most recent meetups in New York and Silicon Valley. Many of the attendees in Buenos Aires had come looking for an easy way to buy Bitcoins and those who purchased coins from other attendees, generally with cash, were usually set up with a Blockchain.info wallet to receive their coins.

This was a long way from the first Bitcoin meetup in Argentina, which had been organized by Wences Casares back in 2012 and had attracted only a handful of people. Since then, Wences had given the credentials for the meetup group to one of his old friends who lived in Buenos Aires. Each of the meetups that his friend, Diego, organized had attracted more people, with a big jump in July. The increasing interest was not hard to understand in the Argentinian context. Over the first half of 2013, the Argentinian peso had been plummeting in value against other currencies.
While the government tried to deny the rampant inflation, grocery prices surged and everyone tried to dump pesos. The government's increasingly desperate attempts to keep money in the country—by imposing a tax on foreign credit card transactions, for instance—only made the problem worse. Keeping savings in pesos was equivalent to throwing the money away, but the government made it hard to get money out of the peso through official channels. This made a currency like Bitcoin and a wallet like Blockchain.info, which the government could not access, very attractive.