Digital Gold (22 page)

In late June, one of the nation's largest newspapers,
La Nación
, had put a story about
dinero digital
at the top of the front page of the Sunday issue.
La Nación
was associated with the ruling left-wing party, and the article didn't talk much about the country's financial problems. But the people quoted in the article made it clear why they were interested.

“You don't have to be battling all of the government's problems, you aren't going to buy bread with it, but it'll save you if you have a stash of stable currency that tends to appreciate in value,” twenty-two-year-old Emmanuel Ortiz told the newspaper.

Bitcoin, with its famous volatility, did fall in value against the peso in May and June 2013, when the problems at Mt. Gox created widespread pessimism. But by the end of the summer, Bitcoin had risen in value against the peso every other month of the year, and in September it was up 860 percent against the dollar since the beginning of the year while
the peso was down some 25 percent against the dollar.

The excitement was building in Argentina despite the fact that the government's strict control over the financial system made it all but impossible for Argentinians to buy coins from an online service like Coinbase or Bitstamp. But Argentinians were used to figuring out less-than-official ways to deal with the government's twisted financial policies. The most prominent signs of this,
during normal times, were the black market money changers—known as
arbolitos
—who were a regular presence in downtown Buenos Aires. For Bitcoin, a similarly informal network of money changing was developing. A few of Wences's friends, including Diego, offered to meet up with people in person to exchange pesos for Bitcoins, turning themselves into the first digital money changers. The vision that Wences had back in 2012—of an online gold that offered Argentinians an alternative to the peso—was beginning to come true.

W
HILE PEOPLE CLOSE
to Wences were leading the charge in Argentina, Wences himself did not have time to think much about his homeland. He was too busy dealing with the problem that he faced with his digital wallet, Lemon.

Since the spring, Wences had been trying to find ways to integrate Bitcoin into Lemon and had been looking for investors to support him. The people excited about Bitcoin asked why they should put their money into a company like Lemon, which Wences had been struggling to get off the ground for two years. Perhaps more dispiritingly, Wences was unable to bring around the existing board of Lemon, and particularly his chairman and old friend, Micky Malka.

“These people didn't invest in a Bitcoin company,” Micky would tell Wences about the Lemon investors. “What they invested in you created and it has value, and you are deciding for them to do something they would prefer not to do, which is throw it in the trash and do a Bitcoin company. If you want to do it, they will follow you, but that wouldn't be their preference.”

Micky's continued resistance over the course of the summer left Wences with an unfamiliar sense of uncertainty. He did not
want to give up Lemon—he had put too much energy into it and felt he owed it to his employees and investors to see it through. What's more, he had long ago told his wife that he would not do another startup. But Lemon was not his true passion, Bitcoin was, and he felt he was missing out every day he was not working on it full-time. Wences's chiseled face carried lines of discontent that his friends had not seen before.

In September he went to a number of his closest friends to ask for their advice. One of those friends, a banker at Allan & Co., expressed surprise that Wences hadn't reached this point sooner.

“You are too successful and too wealthy to do things that aren't your passion,” this friend told Wences.

When Wences told his friend about the obligation he felt he had to Lemon's employees and investors, the friend frowned in disagreement and told Wences that if Lemon could be sold it would allow the employees to continue working on Lemon while also getting money back to investors.

“You aren't an indentured servant to these people,” the friend said. “If you can land the plane, it's good for the employees and you can reboot with something new.”

After hearing something similar from another trusted friend, Wences went to his wife, Belle, and asked her what she thought. Belle surprised Wences by fully siding with his friends.

“You need to stop everything you are doing and do Bitcoin,” she told him.

“But Belle,” he said, “it's going to be another startup.”

She wasn't listening to it: “I've never seen you so intensely held by something.”

Wences immediately began offering Lemon around. He found that lots of big-name companies, including Facebook, PayPal, and Apple, were interested in buying Lemon, but only if Wences stayed
on board. Wences turned them down. He didn't need the money they were offering him—the Bitcoins he had bought when they cost a few dollars each were now worth tens of millions of dollars, in addition to his previous wealth. More important, he was now certain that his primary goal was to be able to work on Bitcoin full-time. Another company that was pursuing Wences, the security company Lifelock, offered to buy Lemon and let Wences go pursue his passion. He quickly began the paperwork to get his board's approval and free himself.

September 30, 2013

T
he spinning top that had been Ross Ulbricht's life for much of the last three years was
wobbling out of control in late September. He was trying to chase down the truth of a tip he'd gotten about one of his most prolific vendors getting busted. At the same time, Ross was angling to arrange a meeting with redandwhite, the user who had been hired as an assassin earlier in the year. Ross had lent redandwhite $500,000 so he could become a vendor on the site, but recently redandwhite had disappeared. Meanwhile, when Silk Road's biggest imitator and competitor, Atlantis, shut down, the operators of the site told Ross they'd heard that the FBI had found a way to crack the anonymity of Tor. To add insult to injury, while he was trying to get a piece of trash out of a tree near his apartment in San Francisco, he got covered in poison oak.

“I have poison oak rash from head to toe,” he wrote to an old girlfriend in mid-September. “I wish you were here to comfort me :( ”

On the last day of September, he wrote in his diary that he was taking steps to get his life back under control: “Had revelation
about the need to eat well, get good sleep, and meditate so I can stay positive and productive.”

It would be his last journal entry.

The next day he spent the morning working at home on his Samsung 700z laptop. In the early afternoon, he left home in his jeans and T-shirt, with his computer in a bag tossed over his shoulder. He made the quick five-minute walk, past the local BART transit station, to one of his favorite haunts with good wifi, Bello Café. When he walked in and saw how crowded it was, he turned around to go next door to the local branch of the San Francisco Public Library. He did not take any particular notice of the two men sitting on a small metal bench across the street, one of them holding a Mac laptop.

Ross walked across a narrow alleyway and upstairs to the newly renovated library, which sat above a gourmet grocery store.
He headed to the far side of the library, away from the reference desk, where he chose a seat next to the science fiction section, looking out a window at the cute commercial strip across the street. He took his laptop out and went through the laborious process of logging into his carefully secured computer, onto the library's public wifi, and through to the encrypted programs he used to run Silk Road. When he opened the encrypted chat program, Pidgin, that he used to communicate with his staff he saw that one of his newer moderators, cirrus, had just pinged him: “Are you there?”

cirrus was the Silk Road member who used to go by the name scout. Early in the year, Ross had convinced scout to become a staff member by pointing out how unlikely it was that they would ever be caught.

“sure, someone could stand behind you w/o you realizing it,” he had said back then. But he said the chances of that were “incredibly small.”

On this Tuesday afternoon, cirrus asked Ross—or
dread, as he appeared on cirrus's screen—how he was doing.

“dread: im ok, you?”

“cirrus: Good, can you check out one of the flagged messages for me?”

“dread: sure”

“dread: let me log in.”

To get to the flagged messages, Ross signed into his administrative account on the Silk Road marketplace, an account that he had nicknamed mastermind. While he was getting in, he passed the time by asking about cirrus's past work exchanging Bitcoins. When cirrus told Ross that he had stopped the work because of the “reporting requirements,” Ross shot back: “damn regulators, eh?”

Finally Ross was into his account, and the plain-looking boxes on the screen showed just how successful the business still was.
There were 25,689 orders in transit from the site's 1,468 vendors. In his own administrative account, Ross had 50,577 Bitcoins, worth some $6.8 million at that day's exchange rate of around $140.

“ok, which post?” he asked cirrus.

This was the signal that cirrus had been waiting for. It told cirrus that Ross was now logged into the fortified inner sanctum of Silk Road. cirrus was, in reality, one of the men who had been sitting on the bench across from the café, Jered Der-Yeghiayan, a federal agent with the Department of Homeland Security. Der-Yeghiayan had convinced the woman who had previously been cirrus—and before that, scout—to hand over the account to the authorities.

Der-Yeghiayan was still outside, now with his computer open, and when he saw Ross's words pop up on his screen, asking him which flagged post cirrus was referring to, Der-Yeghiayan made
sure to keep the chat with Ross alive, but he also signaled to the FBI agent sitting next to him, who in turn, signaled to a team inside the library.

Sitting at his computer, Ross heard a man and a woman fighting behind him.
“I'm so sick of you,” the woman shouted.

As Ross turned around to see what was happening, he saw out of the corner of his eye that someone swooped in on his table and grabbed his open laptop. Before he could turn around and do anything about it, several other people who had apparently been browsing in the stacks came at him and pinned him against the window. After he was handcuffed, other people who had been milling around the library converged on him and quickly walked him down the stairs and outside, where he was put into an unmarked van and read his Miranda rights. The plainclothes federal agents milling around outside the van had flown to San Francisco over the previous days. They came in from the many offices around the country that had been chasing Ross—or Dread Pirate Roberts—for months, and in some cases, years.

Ross didn't know it at the time, but his downfall had not come through the sophisticated hacking techniques and leaking IP addresses that he had worried about so much. The Internal Revenue Service agent who finally identified Ross
did so by searching on Google through old posts on the Bitcoin forum. There the agent found a single job advertisement that Ross had placed in late 2011, under the screen name altoid—the account he had used to post the first ad about Silk Road in early 2011. The job ad from altoid was seeking someone who wanted to be a “lead developer in a venture backed Bitcoin startup company.” The post had told interested applicants to contact “rossulbricht at gmail dot com.” This was the one time Ross had connected his own e-mail address with altoid and Ross had realized his mistake and deleted it. But his e-mail was captured in the forum posting of someone else who had responded
to Ross, leaving his name out there for the search engines. As much as Ross had wanted to create a new world, he still had to occasionally interact with the old one, searchable by Google, and that, rather than any mistakes in the new world, was what did him in.

The next morning, as Ross sat in a cell in Glenn Dyer Jail in Oakland, federal prosecutors in New York and Baltimore unsealed their own cases against him in federal court. The charges included narcotics conspiracy, conspiracy to commit computer hacking, and money laundering conspiracy, as well as an accusation that he had solicited a murder for hire to protect his site—the $80,000 he had allegedly paid to kill Curtis Green back in January. Almost any of the counts, individually, could lead to a life sentence.

“Silk Road has emerged as the most sophisticated and extensive criminal marketplace on the Internet today,” the New York complaint said.

The Government's investigation has revealed that, during its two-and-a-half years in operation, Silk Road has been used by several thousand drug dealers and other unlawful vendors to distribute hundreds of kilograms of illegal drugs and other illicit goods and services to well over a hundred thousand buyers, and to launder hundreds of millions of dollars deriving from these unlawful transactions.

Users of Silk Road visiting the hidden site that morning, hoping to score some heroin or pot, found an FBI emblem over the announcement: “
THIS HIDDEN SITE HAS BEEN SEIZED
.”

W
HEN
R
OSS
'
S ARREST
was made public at around noon, New York time, on October 2, Cameron and Tyler Winklevoss were
sitting together, with their laptops, at the dining room table in their family vacation home on Long Island.

It was an unseasonably warm day and they had spent the morning in the ocean on their paddleboards. They were no longer spending time on BitInstant, but they were still building up their stash of virtual currency and working with regulators to get approval for the Bitcoin ETF. At the dining room table where they had done their initial research on Bitcoin a year earlier, they read through the Silk Road indictment as they watched the price of Bitcoin begin to fall.

There had never been a reliable accounting of how much Silk Road was driving the overall Bitcoin market. But many of the headlines that the Winklevoss brothers read out to each other assumed that illegal transactions were a major force in Bitcoin that would now go missing.

“I just hope that mainstream adoption has surpassed the adoption of criminals and drug dealers. LOL! Otherwise its time to SELL! SELL! SELL!” one forum user wrote.

Selling is what a lot of people were doing, sending the price down to $110 from $140 within two hours after the news came out.

The panic was, of course, much worse on the Silk Road forums, where users were assuming that the government now had access to computers with information about every single Silk Road customer and vendor.

But the Winklevoss twins saw an opportunity. The best analysis they had seen suggested that Silk Road accounted for no more than 4 percent of all Bitcoin transactions, hardly a driving force. More important, they knew that Silk Road was one of the biggest black marks holding Bitcoin back with ordinary people, who assumed the blockchain was just a payment network for drug dealers. This arrest could help sever Bitcoin's association with crime.
The criminal complaint itself stated explicitly that prosecutors did not view the cryptocurrency only as a tool for breaking laws.

“Bitcoins are not illegal in and of themselves and have known legitimate uses,” the FBI agent, who drew up the complaint, wrote.

This brief sentence was one of the strongest statements to date about the legality of Bitcoin in the United States—and it came from one of the divisions of the government most likely to want to shut Bitcoin down.

The twins didn't want to buy coins while the price was still dropping, but when they saw it begin to stabilize, Cameron, who had done most of the trading, began placing $100,000 orders on Bitstamp, the Slovenian Bitcoin exchange. Cameron compared the moment to a brief time warp that allowed them to go back and buy at a lower price. They had almost $1 million in cash sitting with Bitstamp for exactly this sort of situation, and Cameron now intended to use it all.

The twins were not the only people to seize this opportunity. About an hour after the price fell to $110, a surge of buying pushed it back above $130. By the time Ross was brought to court on Friday for a bail hearing, the price was just a few dollars shy of the $140 mark, where it had been before his arrest.
In court, Ross was in shackles and wore a red prison jumpsuit. He said little and showed no obvious emotion. His publicly assigned lawyer said that Ross denied all the charges. The judge began preparations for moving Ross to New York, where he would await trial.

O
N THE SAME
day as Ross's court appearance in San Francisco, a very different side of Bitcoin was on display at a gathering south of the bay. Some of the most influential Bitcoin players were gathered at the San Carlos Airport outside San Jose. They were there
to board privately chartered flights to Truckee, California, the closest town to Dan Morehead's vacation house on the shore of Lake Tahoe.

Morehead had been helping Pete Briger examine the Bitcoin opportunities available to Fortress. He had set up a sort of mini hedge fund that would buy and hold Bitcoins and sell shares to rich investors, while also looking to make investments in Bitcoin startups. In October, he invited leading virtual-currency advocates to his home in Tahoe for the first-ever Bitcoin Pacifica, a weekend of socializing and conversation about his favorite digital money.

Among the people boarding the planes were the two founders of Bitstamp. Morehead had paid to fly them in from Slovenia and was hoping to finalize a $10 million investment in the exchange.

Roger Ver was in from Tokyo and spent most of the weekend in a sweatshirt he had made with a picture of two honey badgers copulating. Roger also brought along Nic Cary, the young man he had hired to run Blockchain.info. Morehead was pushing Roger to sell part of his stake in Blockchain.info, which was coming to look increasingly valuable.

Morehead had also roped in Neal Stephenson, the author of the science fiction book
Cryptonomicon
, which had popularized the idea of virtual currencies when it was published in 1999. Roger quickly got Stephenson set up with his first Bitcoin wallet, from Blockchain.info.

Wences Casares couldn't make the trip to Lake Tahoe—he was too busy closing the sale of Lemon—but his longtime collaborator, Micky Malka, made the journey. Jesse Powell, Roger's old friend, had volunteered to drive up to Morehead's house with a few people, so that, in the event that Morehead's chartered plane crashed, there would be a few people left to continue leading Bitcoin.

Once everyone was at Morehead's house, the conversations predictably came back again and again to Silk Road. Few of the
attendees were pessimistic about what Ross's arrest would mean for Bitcoin. This seemed to many of them like the exact line in the sand that Bitcoin had needed to mark a division between its early, renegade years and its future in the mainstream. At dinner in Morehead's enormous living room, Roger sat with Briger and Nejc Kodric, the chief executive of Bitstamp. The men placed their bets on where the price would be in a year. While Briger was somewhat cautious, betting that the price would fall to $120, slightly below where it was that day in October 2013, Nejc guessed that it would be thirteen times as much, or $1,300, and Roger was even more optimistic, guessing $1,320.