LET’S TALK BITCOIN Episode 87 – The Captive and the Mountain Participants: Adam B. Levine (ABL) – Host Andreas M. Antonopoulos (AA) – Co-host Stephanie Murphy (SM) – Co-host Charlie Shrem (CS) – Founding member of Bitcoin Foundation David Perry (DP) – Author of ‘Coding in My Sleep’ blog, chief architect at Bitcoinstore.com The following program is for informational purposes only. Cryptocurrency is a new science so do your homework before putting money on the line. ABL: Today is February 25 th 2014. Welcome to Episode 87 of Let’s Talk Bitcoin, a twice weekly show about the ideas, people and projects building the new digital economy and the future of money. Today, we’ve got a show that’s a snapshot of the current scene. Last week, Stephanie, Andreas and I broke new ground and had the embattled Charlie Shrem on as a guest host that wound up being part interview, part tell all. This all happened against the backdrop of extreme uncertainty coming out of MtGox and, as the episode came close to airing, increasingly more information was coming to light. Late on Friday evening, I turned on the recorder again with Charlie Shrem and eventually David Perry, of Coding in My Sleep, as the hits just kept on coming with the news out of MtGox. Take this show for what it is – a moment frozen in time during what might be the death of the venerable MtGox. [1:06] ___________________________________________ ABL: My name is Adam B. Levine and I’m pleased to introduce the other hosts here at LTB, Dr. Stephanie Murphy. [1:14] SM: Hi. [1:15]
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LET’S TALK BITCOINEpisode 87 – The Captive and the Mountain
Participants:
Adam B. Levine (ABL) – HostAndreas M. Antonopoulos (AA) – Co-hostStephanie Murphy (SM) – Co-hostCharlie Shrem (CS) – Founding member of Bitcoin Foundation David Perry (DP) – Author of ‘Coding in My Sleep’ blog, chief architect at Bitcoinstore.com
The following program is for informational purposes only. Cryptocurrency is a new science so do your homework before putting money on the line.
ABL: Today is February 25th 2014. Welcome to Episode 87 of Let’s Talk Bitcoin, a twice weekly show about the ideas, people and projects building the new digital economy and the future of money. Today, we’ve got a show that’s a snapshot of the current scene. Last week, Stephanie, Andreas and I broke new ground and had the embattled Charlie Shrem on as a guest host that wound up being part interview, part tell all. This all happened against the backdrop of extreme uncertainty coming out of MtGox and, as the episode came close to airing, increasingly more information was coming to light. Late on Friday evening, I turned on the recorder again with Charlie Shrem and eventually David Perry, of Coding in My Sleep, as the hits just kept on coming with the news out of MtGox. Take this show for what it is – a moment frozen in time during what might be the death of the venerable MtGox. [1:06]
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ABL: My name is Adam B. Levine and I’m pleased to introduce the other hosts here at LTB, Dr. Stephanie Murphy. [1:14]
SM: Hi. [1:15]
ABL: and Andreas M. Antonopoulos. [1:17]
AA: Hello. [1:18]
ABL: We’ve also got a special guest – Charlie Shrem, founding member of the Bitcoin Foundation and guy trapped in Brooklyn, at this point in time. Charlie, how are you doing? [1:25]
CS: Hi, I could be better but not so bad. [1:28]
SM: Yeah, you’ve had a wild couple of weeks Charlie? [1:30]
CS: Yeah. [1:31]
SM: I don’t know if people are familiar with your case but you, basically, have been the target of a pretty serious investigation with some charges and it’s really affected your life, huh? [1:41]
CS: Yeah, I mean I was speaking at a conference in Amsterdam. Their CES, their Consumer Electronic Show was very big and as soon as I landed home at JFK airport in New York, I was immediately arrested by a task force of over seven agents from the DEA and IRS, put into Federal prison overnight before my arraignment the next day. [2:04]
SM: This came as a complete shock to you? [2:06]
CS: Complete shock to me as we had been working with state government of New York for over two years in my capacity of BitInstant, helping them develop the idea of the Bit Licence that people are familiar with, developing the ideas for the hearings. I was the one who actually helped them invite and create the panels. I was supposed to be testifying at the New York state hearings as well and this is a political battle, I guess. I mean, I was arrested the day before the hearings and my invitation rejected obviously as I was sitting in prison during the hearings. We’re not really sure what’s going on. [2:38]
SM: Do you regret trying to work on that? [2:42]
CS: It kind of sucks that a lot of the information that is being used against me, I voluntarily gave to them. The evidence comes down to pretty much emails and most of the stuff is taken completely out of context and they’re... (I’m not going to say joke) but it’s scary. They are serious crimes if someone did them. Money laundering is not a joke. Operating a money transmitter business is not a joke either. These are scary, scary charges and the thing is, the time period that the alleged crimes took place was in early 2012, over a year and a half ago. We changed the BitInstant model since then, I started at the Bitcoin Foundation and I spoke to local, state and federal regulators. I signed proffer agreements. Proffer agreements are, basically, where you go in there and you give them information and they can’t use this information against you. What they did was they used this information as leads to use against me in the future. I pretty much dug my own grave here. People warned me about this. They said – Charlie, they will come after you and I was naive and I said – No, I’m out in the open, I’m not a criminal. Everyone knows who I am, I make speeches, I go out there and I’m very pro working with the state on Bitcoin. We need regulation. There are things that need to happen if you’re going to operate a company in the United States. You need to follow the laws, legally or work to change them. People warned me and they said – You should stay under the radar and I said – No, I’m not going to do that. I’m going to be a Bitcoin evangelist. They were all right. It bit me in the ass. [4:09]
SM: Do you still think Bitcoin needs regulation? [4:13]
CS: I think that Bitcoin needs to work in cooperation with authorities and what that is, I think that... I’ll just give you an example, the state regulators, about a year ago, said to me – Charlie, how should we regulate Bitcoin? I said – First of all, you need someone like me in your office explaining to you that you can’t regulate Bitcoin. However, you can regulate effectively Bitcoin companies that operate in the space – the financial service industry, that you can do. They said – Alright, should we apply the existing money transmitter laws to them. I said – Well no because those laws are not transparent, it takes years to get a licence,
you need over $5m and even though we live in the United States of America, we need a different licence for every single state, whereas, if you live in Canada, no matter what province you live in, you just need one licence and it works in the whole country. The same thing in Europe; if you have a licence in Poland, you can work with every European country. In the United States, why can’t we have that? [5:10]
SM: Why set up a Bitcoin business in New York? I’m not blaming you or anything but do you wish that you had just gone a different route and gone to Panama or Canada or something? [5:19]
CS: My understanding was that I’m from New York, born and raised in New York with a lot of roots and ties to it, the New York community here going back since I was a kid, very close with a lot of people here and my family and friends are here. If you’re going to operate in Panama or Canada, if you want to be in the US market, you still need those licences. It’s not going to change anything if I go out... if I want to launch in Canada and just want to get the European market or the Canadian market, that’s one thing but there is such a huge Bitcoin market in the United States that you have to do it. I went full frontal and went after it. [5:59]
SM: Have you ever read Atlas Shrugged? [6:02]
CS: I didn’t read it but I’m really familiar with Ayn Rand. [6:05]
SM: Sometimes I feel like the Bitcoin world is like mirroring the plot of Atlas Shrugged. I’ve said it a couple of times before but... [6:13]
CS: No, it’s true. There was a quote on Reddit and I put it on my Facebook wall yesterday. It’s a quote that what she said was – The first motor was considered foolish. The airplane was considered impossible. The power loom was considered vicious. Anaesthesia was considered sinful. But the men of unborrowed vision went ahead. They fought, they suffered and they paid. But they won. [6:35]
ABL: That’s a good quote. [6:36]
CS: If you ever read what Western Union’s executives, back in the day, thought about the telephone, it’s hilarious. When people are in something, they are blind to the next phase and, I think, intentionally because it could replace them. [6:48]
AA: Charlie, looking at this from the inside really, do you see this as an attack against Bitcoin or is this more likely large bureaucracies with inertia and individuals trying to make a career out of adding Bitcoin to their prosecutor’s resume? [7:06]
CS: The latter. [7:07]
AA: This is not a warning shot for the Bitcoin eco-system? We’re going to come and pick you off one by one? [7:13]
CS: If you’re not doing anything illegal, then you don’t have anything to worry about. [7:17]
SM: (Laughter) Who’s not doing something illegal? [7:20]
CS: Actually yeah, I should take that back but what I’m getting at here is there was a reason that they went after me Andreas. Like you said on the Joe Rogan show, there was a reason that they arrested me the day before the Senate hearings, at the airport. If you read the news article, they didn’t say that I was landing; it said I was arrested at the airport, as if I was fleeing. They did all this on purpose. [7:40]
AA: To help a prosecutor gain the publicity that will help with his state Senate run, for example? [7:47]
CS: Exactly. Oddly enough, how did the press know I was going to be arrested? The press was at the airport. Who told them? My lawyers didn’t know. The only person that knew they were going to be arresting me was the Prosecutor’s Office. Attaching things like money laundering to it; they want to make me seem like a criminal. Why? I don’t know. [8:05]
AA: It’s much harder to go after some of the real money laundering criminals in New York because they have political power and can fight back. [8:14]
SM: They have licences. [8:14]
AA: No, I mean, it’s not about licences, it’s about raw political power. They can make a prosecutor’s career, destroy it, they can absolutely destroy the career of a prosecutor and if a prosecutor decides they want to go after someone who, say, has destroyed a million families by mortgage foreclosure fraud, then that prosecutor is going to find themselves in very deep trouble, very quickly. [8:38]
CS: It’s a club. It’s a club. The way it works is you have Assistant US Attorney... like, for example, in my situation you have Preet Bharara. Preet Bharara is the US Attorney, appointed by Barack Obama. There are other US Attorneys but he is one below Eric Holder. When Eric Holder, the Attorney General, was... they were thinking about him resigning, the first person on the list of taking his place was this guy, Preet Bharara. The reason is Preet Bharara is the US Attorney of the Southern District of New York. The Southern District of New York is the largest district in the country and it gets all the financial cases. [9:12]
AA: Of which there have been surprisingly few in the last five years. All the financial cases and if yours is the biggest case they’re prosecuting, that’s something wrong with our justice system. [9:25]
CS: You have this guy, with tax holder money, to go after a 24 year old kid from Brooklyn over nothing more than $1m. It’s not the money laundering that we all understand it as. It’s not money laundering that they’re going after me where you take money, you launder it and then you wash it and try to hide [inaudible]. This is Section 2A of the money laundering statute. Section 2A – I’m not super familiar with it but it’s where you help move money internationally and you conceal it in some way or another. I don’t understand it specifically but it’s not the standard money laundering that we all know it as. [10:04]
ABL: Charlie, just so we’re clear, do you deny these charges against you? Are you fighting these charges against you, these are incorrect charges? We’re talking about how you’re being targeted but we haven’t actually talked about whether or not you’re actually saying it’s not true. [10:20]
CS: This is the money laundering statute that they’re going after me for. Section 2A of the Internal Revenue Code 1986, it says – Whoever transports, transmits or transfers, or attempts to transport, transmit or transfer monetary instrument of funds from a place in the United States or throughout a place outside of the United States, or to a place in the United States, or through a place outside of the United States a) with the intent to promote, carrying on a specified unlawful activity. I’ve just come down to this – this guy BTCKing was allegedly advertising, on Silk Road, the ability to buy Bitcoin. This guy allegedly was on Silk Road advertising – Buy Bitcoin with cash. What he did was, he would then allegedly send customers to BitInstant, customers would then use BitInstant, not to buy Bitcoin but to merely fund their MtGox accounts because (I don’t know if you know) BitInstant never sold Bitcoin. It merely put money into your MtGox account. We had money in our MtGox account; we’d transfer it to your MtGox account. Then, we’d put money into their MtGox account. At that point, the BitInstant transaction was completed, over. Now, at that point, the customer can then use that money to buy Bitcoin. Once they bought the Bitcoin, they could then send the Bitcoin to their Silk Road wallet. Once it was in their Silk Road wallet, they could then use it to buy illicit goods on Silk Road. [11:47]
ABL: Did these customers look any different to your company when they were coming in? [11:51]
CS: Absolutely not. [11:51]
AA: Here’s the other thing. I mean, I visited the Silk Road back in the days... [11:56]
CS: Be careful admitting that. [11:57]
AA: No, I visited it in order to see what was on there and I wanted to understand... [12:02]
SM: For research purposes. [12:03]
CS: Research purposes only. [12:04]
AA: Yeah, I had no interest in the products they were offering but I really did want to see what was offered because I was curious. What is the breadth of the products. I was reading things on the news that we were talking about on the show so I visited the site and I logged on. Here’s the interesting thing. One thing I noticed is that yes, there were obviously a broad variety of illegal products on there but there were also a lot of legal products. Silk Road was not just selling drugs, they were also selling... [12:36]
CS: You could buy shirts, art, and clothing. [12:38]
AA: Banners and T-shirts and baseball caps, pins and mugs and things like that. In fact, I met someone who asked me if they could take my safe paper wallet product, which is essentially just a colored pre-printed sheet of paper for making prettier paper wallets. It’s now discontinued but, at the time, they asked me if they could sell it for me on the Silk Road. Essentially, this was a merchant who was selling T-shirts and things like that, as far as I know. [13:05]
CS: Interesting. [13:06]
AA: They said – I sell on the Silk Road because, as a merchant site or market site, I’ve got buyers who have trust metrics and reviews behind them and I’ve got a captive audience. I’ve got a large audience of people who already have money in the system on Silk Road and therefore, can buy... essentially, can make impulse purchases of things like mugs and T-shirts and Bitcoin pins, things that are perfectly legal. This was a merchant who was selling legal stuff and just using Silk Road because that was a relatively vibrant marketplace with people who had reviews on there. [13:42]
CS: It was really a drummed down version of EBay. [13:44]
AA: Exactly. [13:45]
CS: Version of EBay without all the rules and also the fees. EBay takes like 30%. [13:48]
AA: Obviously, 80-90%, probably, of the products on there were... perhaps you wouldn’t find on EBay and reading through the list was pretty eye-opening for me but... [14:02]
CS: I didn’t know half of those drugs existed, right? What is this stuff? [14:06]
AA: I had to look some of those things up on Wikipedia but, at the same time, there was a percentage of products that were perfectly legal, in fact, I think one of the users of the site who had their funds seized is now suing to get it unseized under the claim that they only used the site to purchase legal products. Even the claim that someone who has an account, or even more so, someone who has money on Silk Road and has used it as a customer, that that guarantees that they were buying drugs, I don’t think is true. There was a substantial non-infringing or non-illegal use going on, it wasn’t zero, whatever that means. [14:48]
CS: I agree with you 100%. There are so many steps removed. If you can make the case against me, you should be able to take down any person who runs an ATM machine because more often, someone who is using that ATM machine is going to be pulling out cash in order to buy drugs on the street, or anything illegal for that matter. [15:08]
SM: Yeah. [15:09]
AA: I think there is also a substantial difference between the allegations against you which involve, from what I read at least, selling Bitcoin to someone who sold Bitcoin to someone who possibly bought drugs. [15:20]
CS: Yeah. [15:20]
AA: Again, we’re talking about buyers of drugs, then the allegations for example against Wachovia or HSBC, where they were delivering suitcases of cash and laundering suitcases of cash for the most violent drug cartels in the world at a time when there was, effectively, almost a civil war in Northern Mexico between the Sinaloa cartel and government forces that caught up and killed 19,000 people, most of them civilians. [15:53]
CS: The government admitted... they already admitted to this. I forgot who made the statement the other day but he’s like – Yeah, the reason we didn’t arrest these guys is because
if we arrested HSBC executives, they would lose their banking licence and the banks would fail. Too big to fail. I wasn’t too big to fail. [16:10]
AA: Too big to fail is too big to jail. Again, I think beyond the scale, and I don’t think the scale is necessarily the issue because, at least in my mind, a crime that has a victim or that victimizes people in the most horrible way, it doesn’t really matter the scale although, of course, we are talking about things that are six hundred thousand times larger in scale. [16:32]
CS: Yeah. [16:32]
AA: Even without the scale, I think there is a fundamental difference between the idea that someone who allegedly sold Bitcoin, thrice removed, from a potential buyer of recreational narcotics versus someone who is funnelling money directly to the cartels. That’s a qualitative difference, I think, that’s important and it speaks to prosecutorial discretion, right? There’s a reason prosecutors have discretion and it’s not so they can pick the cases that give them the best resume with the lowest political risk. One can pursue the cases that cause the most harm to society. [17:14]
CS: One could make a case, not that I’m making the case because this interview probably will be used against me in the court of law so I’m saying this, not me prosecutors. A case could be made, not that I’m making the case, but a case could be made that Silk Road did a service to the drug industry because what you’re doing is all these people are getting their drugs from somewhere, whether it’s Silk Road or it’s on the street, they’re getting their drugs somewhere. Now, would you rather them getting it from the street, supporting drug cartels with dirty needles, spreading HIV, all these negative connotations, money that’s probably going to be used to kill people or would you rather them buy it on a safe marketplace [with] reviews, high quality from people who are probably growing this stuff or making this stuff in their own homes and not part of larger drug cartels kidnapping people. [18:02]
ABL: I think that that’s a question, unfortunately, that they’ve answered several times before. They would much rather that there be the harm. [18:09]
AA: Right. This is really the underlying issue which is that the war on X is usually a great excuse to do enormous amount of fundraising, essentially, unlimited budgets. In this particular case, these online marketplaces threaten the cartels. They threaten the cartels more than they threaten any other organization. They don’t threaten the viability of drug enforcement because, in fact, if anything they provide a very easy trail and a very easy way to honey pot the co-conspirators involved in running the site. [18:45]
CS: Imagine Silk Road worked, imagine... [18:48]
AA: Yeah, it threatens the big cartels, it takes away their funding because if an addict, who has no choice but to fulfil their addiction, has a choice between doing that dark street corner with someone with a gun or a knife or a violent criminal versus via USPS (laughter)... no contest. [19:07]
CS: Imagine states can issue medical marijuana licences and someone can upload their licence ID number onto Silk Road, therefore, legally allowed to buy marijuana on Silk Road. Imagine a situation like that. That would, effectively, wipe out marijuana industry and what’s
the most imported drug from Mexico, it’s marijuana where the cartels make all their money right now. [19:30]
AA: But it really good on a prosecutor’s resume if they can combine drugs, money laundering and Bitcoin in one sentence. That looks better, at least, to their superiors and the people making the appointments and to a certain section of voters. To me, it would look better if they frogmarched a bunch of bank executives out of Wall Street for destroying the lives of millions of people, while stealing trillions of dollars. [19:54]
CS: Exactly. I’m going to get a jury if this case goes to trial. They’re going to pick a jury of old ladies who just hear drugs – put this kid away. It’s a scary thought. [20:04]
AA: I’ve been on a jury with old ladies who are much smarter than the prosecutor (laughter) and... [20:14]
CS: The prosecutor in a federal case, the prosecutor pretty much has a final say over who’s going to be on the jury and who’s not. [20:19]
AA: Yeah, that’s the difference. I was on a jury, actually, in a different country where a case like that was prosecuted and I can tell you the jury of the peers knew very well what was harmful and what was not. [20:30]
CS: I’m learning that state cases are much more fair than federal ones are because federal prison is nicer. People prefer to be tried federally. [20:40]
SM: I don’t have much faith in juries but good luck Charlie. [20:44]
AA: Yeah, I hope you actually make it to a jury because, unfortunately, what we’ve seen with the Justice System, especially in the Federal courts, is that 99% of these cases get plea bargains because they present you with an impossible choice. Take a risk against a 60 year sentence versus pleading out for a year or two. [21:04]
CS: That’s the whole thing. That’s what it is. [21:07]
AA: It’s blackmail. [21:08]
CS: I can’t discuss the merits of it but it would be face a 30 year sentence or work with us and probably get no time so plead for everything. Now, I have to basically plead to things I didn’t do. [21:21]
AA: Which would help the prosecutor’s resume. [21:24]
CS: And kill my future. [21:25]
AA: And put a black mark on Bitcoin. [21:27]
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SM: I was disappointed, Charlie, honestly with the response that you got from the Bitcoin Foundation. I don’t know if you want to talk about that. [22:35]
CS: Just going to go there, yeah. [22:35]
SM: It seems like you’ve already been tried in the court of public opinion, as far as they’re concerned. [22:41]
CS: The Foundation is, unfortunately, right now... there are a lot of people in the internal Foundation in politics, unfortunately and I have so much support from a lot of board members but I have board members who are out to get me. They want the power. It’s a power trip. [22:58]
SM: What power? (Laughter) [23:00]
CS: Unfortunately... well, money. The Foundation has a lot of money... [23:04]
SM: Sure. [23:05]
CS: ...and with money, you can pretty much do whatever you want. The Foundation has a ton of money. The Foundation, at the end of the day, is my baby. I started that thing in a room with Gavin and the Foundation will exist beyond the current board. The Foundation itself is an amazing thing. The people that are involved in it and are running it today, may or may not be. I mean, look at the response to MtGox. There’s no response to MtGox. If I was running the Foundation right now, what I’d do is I’d go out there and I’d send one of my Foundation board members to Tokyo and sit in with MtGox every day. The Foundation should be posting regular updates over what’s going on with MtGox. The Foundation should be treating MtGox as the Federal Government treated big banks during the 2008 crisis. [23:51]
ABL: I think that’s an interesting proposal for the Foundation to do but you’ve been with the Foundation, like you said, since the beginning and I’ve never seen it take any type of action. [23:59]
CS: I resigned the minute I got arrested. The first thing I did was resign because I don’t want to bring the Foundation and drag them into my own political... legal situation. [24:07]
ABL: I’m not suggesting that, Charlie. I’m just saying that there have been things like this before that have seemed like maybe the Foundation should engage on and they haven’t. I’m just saying, like really? You would have actually sent a board member to... [24:20]
CS: Yes, I’d actively... [24:21]
AA: This is the fifth Goxing. I mean, where was the Foundation during the previous four Goxings? [24:26]
CS: I was working on it. [24:26]
ABL: OK. [24:27]
CS: I was working on the MtGox issue. I was actively working with them in the Foundation and I was very close to a resolution on that but I got arrested - a very close resolution. Elizabeth Ploshay and I have been really, really good together working on a lot of these... no one in the Foundation has any balls right now, except for Jon Matonis but Jon Matonis works for the board, unfortunately and the board is just kind of like leaning back and not doing much. [24:54]
ABL: Why do you think that is? It seems like the opportunity for the Foundation to really step out and lead on a lot of these issues is sort of passing by because there are other organizations that have international goals, I guess, who seem like they’re coming up. Has it just taken a long time to kind of spin up the organization to the point where you really can address things like this? [25:11]
CS: I don’t know. I mean, I guess, the mentality has just been things will blow over. If you look at the MtGox Peter Vessenes issue, who is the chairman of the Foundation is Peter, though obviously he is going to want to not do anything in that regard. People are saying – Kick Mark off of the Bitcoin Foundation board. Mark has never been to one meeting, ever. [25:35]
AA: I publicly called for that and happily signed...[25:39]
CS: He hasn’t been in one meeting. He wasn’t even at the founding. The only reason he’s considered a founder is because they put money and they gave us a domain name. [25:44]
AA: I was one of the people who, not only signed that petition, but publicly called for Mark to resign a while ago and not because of the problems with Gox or the bugs or whatever, but because of the immediate reaction of putting out a press release that threw Bitcoin under the bus and willing to sacrifice Bitcoin to protect his own incompetence. To me, that was the final straw. You can make mistakes, you can be a useless businessman and Mark can address that but you turn around and try to blame Bitcoin, the protocol, and say there’s a fundamental
flaw in Bitcoin in a public forum. He actually re-upped that a couple of days ago going in front of the Wall Street Journal and made an even worst statement in front of the Wall Street Journal who quite happily reported them as facts. That is a direct violation of the responsibilities of a director. [26:42]
CS: We don’t need to go into the specifics of transaction malleability but, honestly, it could have been fixed a very long time ago. Look at the other exchanges, they fixed it in hours, hours. Bitstamp was up with the trolls again within a day or two. It’s not a difficult thing to fix. It is a simple as assigning your own transaction ID to withdrawals. What is MtGox doing? Why has it taken them two weeks to do this? Why are they posting updates saying that they’re moving their address? The whole thing, honestly, is just a joke. It’s a joke. It’s nothing more than a joke. [27:17]
AA: It’s a joke that has now cost Bitcoin investors about $3bn. That’s what Karpeles has done. His incompetence... [27:29]
CS: He’s had so much benefit of a doubt. Coindesk asked me yesterday – What do you think of Mark? I gave him my praises. Mark is a nice guy. He has a kid and a wife; I know them. I know Mark personally. He’s not a scammer. He’s not but, honestly, after that announcement this morning, I’m so furious and so angry. I don’t know how much I can defend him anymore. [27:49]
AA: It’s a fine line to walk. I’ve certainly made the point, as well, that there is no indication of fraud, there’s no indication of solvency issues and Karpeles has never dealt in bad faith. He is a visionary and an innovator who led the way and gave us price discovery when there was none. He just failed, two years ago, to recognize his own limitations and appoint a professional CEO to do the job that needs to be done. [28:15]
CS: The proposal for MtGox is this, if they’re listening... shut down the exchange. Let people withdraw their money, relaunch as a new exchange with a new name that’s not using PHP, because PHP sucks and that’s a whole other conversation. Let people withdraw their money. Give people the choice to try your new exchange. I guarantee you people will. People will try it but give them the choice, don’t force them, and don’t hold their money in contempt. I have money there too. I have a lot of money there. I need it. I have legal fees to pay for and I can’t pay for them. [28:50]
ABL: Circling back around here, you’ve had a hell of a journey Charlie, I’ve got to tell you. You were one of the very earliest people into Bitcoin with your name out there, with BitInstant, before that you were a member of the community for a long time. Where do you think that we’re going with this... it’s hard to talk time frames that are longer than, say, six months but let’s call it a year... what do you think the Bitcoin space is going to look like in a year? [29:13]
CS: We’re going to see a lot... I think that the last year was really a big year of regulation. Bitcoin really got on the map of States, of governments, of regulators. You’ve seen so many, in 2013, so many countries came out and either outright banned Bitcoin or made it something that needs to be licensable or so that it’s fully legal, we don’t care about it. It was the year of regulation and government involvement. 2014 is going to be a huge infrastructure year and I said that at the end of my holiday message – on Christmas Day, I put out my holiday message that I do every year and I said it. We’re already seeing it start to happen because MtGox is
falling. Other companies are going to replace MtGox or MtGox will replace itself by something else. We’re going to see big companies launch, like Circle. We’re going to see Coinbase up its game. I’m working on a secret project; it’s going to come out soon. There are a lot of new companies that I think are going to launch and I think that Satoshi gave us an empty island and it’s up to us to build the bridges, roads, tunnels. I think that 2014 is going to be the year of the railroad. What was the biggest infrastructure project in the United States? – it was the railroad. I think it’s one of the biggest projects, right? Correct me if I’m wrong. That was a huge infrastructure, not just for the railroad itself but building cities around the railroad and building highways to follow the railroad and all these different things – it was one of the biggest infrastructure projects in the country. I think that that’s what we’re going to see this year. [30:46]
AA: In all of this, I have to say Charlie, given everything you’re facing, you come back with just unstoppable enthusiasm and passion about Bitcoin and my hat’s off to you, just for that. [31:01]
CS: Bitcoin exists on its own. It is independent and this is one of the reasons I think why Satoshi left so early on. He didn’t want to be seen as Bitcoin himself, as Satoshi being Bitcoin. It’s very hard for people to grasp this concept because you need something physical, you need a leader. If you look at ancient religions – ancient religions needed idols because they needed to envision what god would look like physically. It’s a very hard concept for a human mind to grasp but Bitcoin exists on its own with, or without me. I could die tomorrow, I could be thrown... Bitcoin will still exist but we need good actors, like me and you, help push in the right direction. If we all give up on Bitcoin, Andreas, if we all say – You know what, we’re scared we’re going to go to jail and people give up, Bitcoin is going to go right back down into the underground and is going to go right back down into the Silk Roadish actors and stuff like that, and the money launderers and the criminals and it’s just going to be terrible. We’re going to be ruining a great innovation. We’re going to be ruining something amazing. We have to work so hard to bring it above ground and to make it for good use. [32:04]
ABL: Knowing what you know now and having gone through what you’ve gone through, if you could go back in time and give Charlie Shrem the younger some advice, what would that be? [32:13]
CS: Hire a compliance officer – that’s what I would give myself the advice because me being the compliance officer of BitInstant because I was the employee of BitInstant, so I was de facto the compliance officer. Not knowing enough about the money transmitter regulations in the US is what brought me down, unfortunately. [32:32]
ABL: Very interesting perspective. [32:32]
CS: Companies need to take regulation seriously because there are companies right now that are still acting, and I hope you guys are listening to this, companies because you think that because I got arrested that you’re going free and clear. They are going after you. They are. They are investigating everyone. Everyone is on their radar. They are on the Bitcoin Talk Forums. They are on Reddit. They are in the IRC channel. They are listening to this interview. They are. They have big budgets. There is a government task force specifically for Bitcoin. Be careful. Don’t do anything illegal. Follow the law or work to change them. That’s what advice I can give you but until you change them, you have to follow them. Your
ignorance will not keep you out of jail. It will not. Could we end it with that song – that Ode to Satoshi song? [33:20]
ABL: Yeah, absolutely. [33:21]
CS: That was an awesome song. [33:23]
ABL: We can forgive you that. I’m glad you like it too man. That’s my f****g favorite song that’s come out so far. (Laughter) [33:27]
AA: Mine too. I was blown away. [33:30]
(Ode to Satoshi song played)
VERSE 1Well, Satoshi Nakamoto
that’s a name I love to sayWe don’t know much about him
but he came to save the dayWhen he wrote about the way things are
and the way things ought to beHe gave us all a protocol this world has never seen
CHORUS: Oh Bitcoin as you’re going into the old blockchain
Oh Bitcoin I know you’re going to reign, gonna reignTill everybody knows, everybody knows,
Till everybody knows your name
VERSE 2Down the road it will be told about the death of old MtGox
About traders trading altercoinsand miners mining blocks
But them good old boys back in Illinoisand on down to Tennessee
See they don’t care to be a millionairethey’re just wanting to be free
CHORUS: Oh Bitcoin as you’re going into the old blockchain
Oh Bitcoin I know you’re going to reign, gonna reignTill everybody knows, everybody knows,
Till everybody knows your name
VERSE 3From the ghettos of Calcutta
to the halls of Parliament
While the bankers count our money outfor every government
Oh Bitcoin flies on through the skies of VirtualityA promise to deliver usfrom age old tyranny
CHORUS: Oh Bitcoin as you’re going into the old blockchain
Oh Bitcoin I know you’re going to reign, gonna reignTill everybody knows, everybody knows,
Till everybody knows your nameTill everybody knows, everybody knows,
Till everybody knows your nameGive me some exposure
Till everybody knows your name
Singing Oh Lord pass me some moreOh Lord before I have to goOh Lord pass me some moreOh Lord before I have to go
___________________________________________________
ABL: Now, we fast forward a week for live, late night analysis. The night of the leaked release. Charlie, it’s February 24th right now, it’s 10.34pm Pacific Time. We’ve been talking about MtGox and I figured it probably was good to get your thoughts on it since you seem to have some information. Thanks for joining us. [36:26]
CS: Thanks for having me. It’s 1.30 in the morning, I’m having a drink. It’s been a long day. [36:32]
ABL: Tell me about that. How’s this long day been? [36:36]
CS: It’s been tough. I’ve been on the phone with a lot of people from friends in Austria and Australia and the Caribbean and California and New York, trying to calm people down and get whatever information I can out. The MtGox withdrawal thing really got me angry. The fact that MtGox blamed the Bitcoin protocol and played the blame game pissed off a lot of us, including Gavin who wrote a blog post about it. I guess we may have been naive and we may have not seen the signs or I guess, felt that it was better to believe that MtGox wasn’t falling apart than to believe they were. Now the information that came out today, it’s all unverified at the moment. We don’t know. We don’t know what’s true and what’s not true. The market’s definitely reacting. The price at Bitstamp is down to $400 right now. Who knows how low it will go. It’s a scary night. The scariest part is that so many friends and family had funds in MtGox. People are sending me messages that they were going to use the 10 or 14 bitcoins that they had to pay for tuition and I feel bad for the guys who lost thousands of coins but I feel worse for the people who lost 10 to 20 bitcoins. [37:57]
ABL: To be clear, we are talking about something that is very much not confirmed, at this point, and this is based off of a pdf that was shared that claims to be an internal strategy document that basically, details the reforming of MtGox. Is that correct? [38:16]
CS: Yes. [38:16]
ABL: OK. [38:17]
CS: Unfortunately, a lot of what’s in the document coincides to the information that I had already known over the past few days. [38:25]
ABL: OK, let’s talk about that because I actually agree with you, it does correspond to some of the information that I have too like the rebranding thing. One of the things that’s interesting about this is that MtGox is rebranding towards a brand that is just Gox and I thought that was a little strange at first because they only bought the domain a couple of days ago. The guy talking about it says that he actually approached MtGox about them buying it so it’s not like it was even their idea. [38:56]
CS: I think that they chose that domain name for better... or lack of a better one to choose from. Two days ago, I was on your podcast and I said – MtGox guys, if you’re listening, this is what I think you should do. Change your name, totally rebrand everything, new exchange, new everything – remember I said that? [39:17]
ABL: Yeah. [39:17]
CS: One of the things I said also on your podcast was that I called to the Foundation to get more involved in MtGox and to physically go to Tokyo. Do you remember me saying that? [39:28]
ABL: Yes I do and actually, I was going to play it along with this because I figured this would be an addendum to it. [39:34]
CS: I said that and as soon as I got off the call, I emailed the founding members of the Bitcoin Foundation. It’s true that half of the board members now are part of the founding member team so I emailed all of the founding members, including Peter Vessenes, myself, Patrick Murck, Roger Ver, Gavin and Mark and Gonzague and I think one other person. Seven founding members and I emailed all of them and Jon Matonis and I said – Guys, let’s have a call Sunday night because we need to figure out what our strategy is here. We need to all be on the same page and if you, as a board, need to have a vote on Monday, then you need you need to have one on Monday but let’s kind of all be on the same page here. Through all of this, I’ve kind of had Mark’s ear. Mark and I worked together very closely in the BitInstant days, early on when very few people knew about Bitcoin, Mark and I became friends. I know his wife and I told you I know his family and everything and I never thought him to be a scammer or a fraud. Maybe I did but it was very hard for me to believe because when you know someone personally, when you play with their children, when you eat dinner with their family, it’s hard to think that they’re a fraudster. It’s hard. It’s hard to have that in your head. It’s really difficult. I really struggled because when you think of people that are scammers or fraudsters, you say – These are guys that are fleeing, that are in the Cayman Islands or whatever, and they’re all over the place and they’re not real people and they’re... that’s what you think. [41:02]
ABL: Mark wasn’t going anywhere. He’s stable and, like you said, he has a family and he has something to lose. I completely agree with that. Can we talk about the information in this document that you say corresponds with information you have because I’d be curious to compare notes on that. [41:15]
CS: Sure, sure. [41:15]
ABL: Let me take a sec here and pull it up, hang on. [41:18]
CS: I called this founders’ meeting and we got in a call. Usually, it’s just Gonzague on this call and Mark’s legally allowed, as a founding member, to have a proxy. During this call, it was all of us, including Mark, Gonzague and Roger Ver sitting in MtGox’s offices. On that call, the board was still very kept out of the dark on what was going on but from the words that were exchanged, we garnered that MtGox, by stepping down from [inaudible] and the other Foundation and having Roger there as an adviser, and the word NDA being thrown around, and the word rebranding being thrown around, and the word resignation being thrown around, we all decided that what we were going to assume from this meeting was that Mark was deciding to step down from MtGox and that new management was being involved and that Roger was involved somehow in bringing together a possible new buyer to MtGox and that some sort of rebranding or renewal of MtGox was taking place on this Sunday night. Today’s Monday night, just... today’s Tuesday morning/Monday night for those who are listening. This is 24 hours later. That all took place and we all left that call happy because Mark stepped down from the Foundation which was a very honorable move and he was stepping down from MtGox. We all assumed that buyers were being involved and that MtGox was solvent because who would buy a company that was insolvent and that everything would be OK. That’s what we understood from Sunday night. Then Monday comes along and this document has been released and I was the first person on Twitter tweeting to the Two-Bit Idiot, the guy who... Ryan, who actually released the first blog post... that was the first person saying – Dude, prove who you are. Prove that this document exists. Prove yourself because this is very detrimental to the community. I called him out on it and he actually called my cellphone and it turns out I actually knew who this guy was. We had been speaking before but he never told me that this is who he was. He showed me the document and unfortunately, now I’m inclined to believe that this document is real. [43:46]
ABL: Let’s talk about that. I’m looking at the document right now. It is the crisis strategy draft and it has both the old MtGox logo on it, sort of faded in the background and the new Gox logo on it, which is a mountain. I confirmed that this branding is actually branding that they’ve been working on. The branding is, in fact, legitimate at first glance and it appears to, at this point, also only be internal so that does lend some credibility to this in my eyes. It’s a kind of strangely worded document in a lot of places. Really, it seems to be taking a lot of responsibility and that’s something that I’ve never seen MtGox do. [44:24]
CS: Oddly enough, on that note, on the note that I do have Mark’s ear, I said – Mark, the draft just surfaced. The problem is, if you blame Bitcoin again, the core users will all hate you and the media will report Bitcoin is broken on your word. It’s shitty advice Mark, you have to receive but I think it’s true. I’ve always been honest with you. He said – I know. [44:49]
ABL: OK, so this was you telling him that he has to resign? [44:53]
CS: No, this is a few hours ago, me telling Mark that you have to take responsibility for your issues, not blame Bitcoin. [44:59]
ABL: I think that’s plausible. The strange part to me is that this seems to have come about really fast. It just seems like this is, maybe I’m wrong... I don’t know. [45:09]
CS: What do you mean, which part? [45:11]
ABL: Well, I just mean there was a time frame... I guess this does look like it was put together for right now. It says – Now to February 25th. Today is February 24th, so that implies again, that this document was written just days ago because we haven’t even... [45:28]
CS: I think this document was written last week. [45:29]
ABL: It was written last week. [45:31]
CS: Yep. [45:32]
ABL: OK. The time frame on the Gox.com purchase would have been three days ago. I guess that does make sense if we’re talking about a deal that started being made a week or two ago. OK, yeah. That’s plausible too. It reads like a quickly written document. Do you have any comments on... I mean, is there anything else in here that’s like... that’s making you think this is proprietary information only. The fact that it’s on here is a sign. [45:58]
CS: People are saying that the document is poorly written in bad English and that’s just because I think the person who wrote it was Gonzague, whose English is not that good. [46:09]
ABL: This corresponds with how you know that they operate. [46:14]
CS: Yep. [46:15]
ABL: OK. Do you think this is real? [46:17]
CS: Unfortunately, I do. [46:18]
ABL: Let’s talk about that for a second. One of the problems I’ve had with Ryan’s coverage of this issue is that he was really hyperbolic. He basically said this is the end of Bitcoin and that seems like it’s patently not the case to me. It seems like this is a system that doesn’t have things like bailouts, simply cleaning itself out and yeah, it’s going to suck for people, like you said. People have money in there and that’s a painful thing but, at the same time, MtGox has had problems for years and so, at some point, don’t they have to fail. Don’t they have to go away in order to do this? [46:50]
CS: If they went down when no one had money in there, that’s one thing but the fact that they went down when people had money there, that’s the worst part. [46:58]
ABL: I agree with that but isn’t this the point? People are going to say about this, as they’re already saying, that this is the end of Bitcoin; that Bitcoin has been destroyed; it’s been proved..blah blah blah. We know those things aren’t true. Bitcoin isn’t about MtGox. MtGox is the weakest part of the Bitcoin eco-system and really, they’ve been out of their league for years. They’ve just had enough momentum that they haven’t had to actually recognize that fact. [47:22]
CS: People that are selling Bitcoin right now are the ones who were in it short and who are scared and who have too much to lose. I haven’t sold one bitcoin, in fact, I don’t even have a trading account any more to sell any bitcoin. I’m assuming that you haven’t sold any bitcoin either and most of the people I know haven’t been selling either. [47:39]
ABL: Right, no. I’ve actually been buying like a lot of people. I intentionally put myself in risk in MtGox because I kind of just figured that this was another continuation of the problems that they’ve always had which is that they’re slower than everybody else to do everything. That’s the thing is that this isn’t a complete wipe. This isn’t everybody in MtGox has lost everything. They’re saying here that they’re going to take one month to restructure and then come back and that they’re fixing all the problems that I’ve actually had as my primary complaint. [48:06]
CS: The problem with that is that if you look at their assets, it’s what... 30%, 20%... I don’t know what they actually owe everyone of the customer deposits. That’s the scariest part. [48:20]
ABL: OK, let me look at these numbers here for a second. I hadn’t looked at this. [48:23]
CS: Their assets are $32m USD which equals 2,000 BTC. What’s 2,000 BTC at the current price? [48:29]
ABL: Wait a second, wait a second. They only have 2,000 BTC is what... [48:34]
CS: I think that’s $1m. So if $33m, right... but their liabilities look like it’s more like $55m plus another $150m worth. If you’re talking about not even 20% do they have. [48:54]
ABL: This document implies that they have no cold storage wallets. [48:59]
CS: They said that their cold storage wallet was leaked. The whole thing was leaked. [49:04]
ABL: The whole thing was leaked. OK, let’s talk about leaking because I’ve... again, I’m very curious about this particular [inaudible]. [49:10]
CS: This is my biggest sceptical part of the whole thing. The math does not add up. [49:14]
ABL: Yeah. [49:14]
CS: David Perry from Coding in My Sleep, and I have spent hours, a few hours ago, going through the numbers and it just doesn’t make any sense at all. I’ll read you what our analysis is. This is what we’re thinking. [49:29]
ABL: OK. I was going to say, what do you feel about... I mean, do you have an interest in pulling in David Perry to the conversation? [49:34]
CS: Yeah, essentially, this was our analysis. We said, we both found at first... I had started to believe that this was true before he did and he was trying to convince me that it can’t be true because of the numbers, the sheer numbers don’t make any sense, right? The basic math, just from in our heads... we figured out, OK... 740,000 BTC ... 750 whatever, 744,000 BTC since malleability became known in 2011. That’s about 20,000 BTC per month. Figure 675-680 BTC per day. Even at the current prices, that’s over $300,000 per day. That’s just not the kind of money that you misplace and don’t notice. [50:17]
ABL: Seriously. [50:18]
CS: Even if we give the hacker credit and suggest that they’ve been doing it since the day Gox opened, the first day that Gox opened, that’s still $250m, $250,000 per day. In all fairness, the hackers could have probably taken a lot more coins when they were less valuable and [inaudible] now that the fact the USD per coin is higher and figure like it wasn’t just a specific amount per day. It still works out to an average at about 409 coins per day, if they started the day Gox opened up shop. Even when the coins were $0.05, that’s still almost $1,000 per month their books didn’t balance by. I know that the Japanese financial service authority was auditing their books monthly. We’re talking about 6% of all coins in existence or ten times the amount of money in any known Bitcoin address. They’ve stolen that much money over that time. I’m just thinking, the law of average has to kick in and then you’re buying the medium market price for the entire four year span which is like what... $90 per coin? $95 per coin? At a daily take of like $48k, $48,000. If they stole $40,000 worth of BTC from Gox every day for four years, you arrive at 744,000 BTC. No one can say that they’ve stolen the bulk of it right at the start because that amount of Bitcoin didn’t even exist at the time. [51:36]
ABL: The idea that they could have had their entire cold storage system exhausted due to a leak in their accounting system... because really, that’s what we’re talking about when it comes to this hot wallet leak theory, is that because of a mismatch in the accounting, the cold storage transfers were overfunding the hot wallet, or something like that. That really seems to be a weak point and just the idea that they simply could have had that much stolen literally, their entire stock of Bitcoin stolen, without knowing about it. I got to imagine that at some point in their security chain, somebody has to spot check a paper wallet and discover that ooop! there’s nothing here and on none of the other systems either. I mean, right? [52:20]
CS: Doesn’t make any sense. [52:21]
ABL: I appreciate that human incompetence really can reach incredible bounds but this seems beyond... beyond. [52:27]
CS: I ran a company and I know exactly what it feels like to be out of control of your finances. It’s difficult. You’re moving so much money around that you have no idea what’s happening but to lose that kind of money? We were doing $600,000 a day in volume at BitInstant. If we had lost even $1,000, we would have known. We may not have known how much money we were making or losing on one given day but we still balanced our books at the end of the month. We had some sort of hold on it. MtGox was 20 times more funded and had a team that was a lot older, more experienced and much larger than my team at
BitInstant. I didn’t have a CFO. I was the CFO. That’s how much it tells you how bad it was. [53:10]
ABL: Another part of this plan is that Mark Karpeles is going to step down. He’s been the CEO since he purchased it from Jed McCaleb, four years ago, right? [53:18]
CS: Yeah. [53:18]
ABL: They purchased it four years ago, he’s been the CEO from that point. Really, he feels more like an engineer to me. He feels like a technical guy, who’s sort of avoiding confrontation and so that kind of makes sense to me. What I don’t understand is why... [53:32]
CS: There are things that we’re not being told. There are missing pieces and the missing pieces are showing us that this whole thing doesn’t make sense and we’re going to come to conclusions that probably, where the missing pieces are... There are things that we don’t know and honestly, we would have never known about this because if this document didn’t leak, I’m hoping that MtGox would have gotten a buyer, the buyer would have recapitalized MtGox or recapitalized it enough to continue being a Ponzi scheme because if you look, and I hate to use that word loosely, but if you look at the past... if they really didn’t have all this money, MtGox was being a Ponzi scheme. They were delaying withdrawals, right? They were delaying withdrawals because they needed to wait for money to come in and that’s what essentially, a Ponzi scheme is. They probably would have been recapitalized enough, even a few million, to be able to speed up withdrawals a little bit and give people the bitcoins that they wanted back. [54:26]
ABL: I think that I have people... it’s really funny. People are freaking out. I have people who are telling me that they have their funds for their start-up kept in Bitcoin and they’re like – I’ve got to sell it all now to make sure they don’t go down with the ship. These are people who believe in the vision and who understand that what’s going on right now is not going to be the end and yet, there’s this fear that because the media is going to see this failure, they’re going to crucify Bitcoin. I’m not that concerned about that. I haven’t sold any. I’m intentionally exposing myself to risk and I’m not sure if that’s going to wind up paying off for me but, at the same time, this feels like it’s nothing but a transitory problem because this will go away. This will eventually end. [55:06]
CS: If everyone sells Bitcoin today and there are only two bitcoins left in existence and you and I, Adam, decide to start our own financial institution, one in California and one in New York and we decide to use the Bitcoin infrastructure and use those two bitcoins still in existence to be able sell money between our two financial institutions, that already gives reason for Bitcoin to succeed and be worth money. [55:32]
ABL: Yeah, absolutely. You’re completely right on that. Again, it’s about the actual service that you can provide with it. I’ve heard you give the poker chip with wings analogy and I think that’s a really good one because that’s the intrinsic value of Bitcoin. It’s whatever you can do, that you can do with Bitcoin versus what it would cost you to do it with something else and how much extra time it would take to do it with something else. [55:53]
CS: Exactly. [55:53]
ABL: Those things are all still exactly true. It’s frustrating because you just have to have a long term time frame where you can sit through this sort of short term nonsense where individual actors do things that then makes us all look bad. [56:06]
CS: People are really pissed at me right now. [56:08]
ABL: Yeah, I bet people are pissed at you right now but again, you’re kind of personalizing this and I think that that’s probably a mistake. You’ve responded to him in a way that was, I think, appropriate with scepticism and we still don’t know if this is legit. It’s hard to tell when you’ve got truth mixed in with lies and that really is what this feels like to me because there are parts of it that work but there are other parts that don’t really make any sense. [56:31]
__________________________________________________
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_____________________________________________
ABL: This is our special midnight session of Let’s Talk Bitcoin – Part 2. Coming back and still joined by Charlie Shrem and now joined by David Perry, chief architect over at www.Bitcoinstore.com. Gentlemen, thanks for joining me on this tumultuous night. [58:09]
DP: Thanks for having us. [58:10]
ABL: David, we were having a conversation about the numbers in this document that describes itself to be the MtGox situation crisis strategy draft. This is the document that was first revealed by Two-Bit Idiot and that has elements in it that seem to be legit and seem to be
confirmed by information but then also have elements in it that seem to defy logic just because they are crazy. Let’s talk about the financial assets and liabilities pitch. Charlie and I covered this a little bit earlier but I think that it’s worth going over again. This basically ascribes that MtGox lost, through this leak in their hot wallet, 624,000 BTC and that all they actually have is 2,000 BTC which seems like an awful lot of Bitcoin to lose before our guy notices. [58:59]
DP: It really does. [59:01]
ABL: I mean, this defies belief for me. David, do you think that there’s... I mean, is there any possibility that something like this could go unnoticed in a system like this? [59:10]
DP: If you just go down to the pure numbers, you’re right. It’s absolutely absurd and it’s... if it’s the 744,000 that the paper claims, it’s something like 500 BTC a day, if the attacks start the moment MtGox starts doing business. That’s obscene. It’s absurd. How can anyone possibly not notice... even back when they were $0.05 a piece, that should have been enough for a decent accountant to have noticed something was off. When they’re $1,000 a piece, that’s obscene. [59:40]
ABL: As we were talking earlier with Charlie, he was saying that they are actually being audited by the Japanese Financial System on a monthly basis. The idea that something like this could go unnoticed is basically just out of the realm of possibility. [59:53]
DP: I don’t understand how anything like this could possibly go unnoticed for this long. The transaction malleability thing, they were in business a full year before that happened so that makes an even higher amount that has to go missing, across a much shorter time. [1:00:08]
ABL: Right. [1:00:08]
DP: The paper said they lost it over the course of two years... that’s insane. That’s insane. That’s the GDP of some countries. [1:00:14]
ABL: Right. [1:00:16]
CS: Makes no sense at all. You have to have noticed this amount of money leaking. You’re talking about 10-15% of all the money that you own leaking every day. [1:00:24]
DP: That’s not a leak, it’s a flood. [1:00:26]
ABL: Seriously. I mean, that’s like... you have the puddle remaining and the dam is completely emptied and it’s all gone and no one noticed the entire time. [1:00:35]
CS: Which leads me to believe, Adam, what I said before that something is up here. There is something that we don’t know. They’re not telling us. [1:00:42]
ABL: When you say there’s something that we don’t know that they’re not telling us, does that mean that you think that they lost funds in another way, in addition to this? Or, more that we simply don’t know what’s up? The thing I’m really trying to ascertain here is whether or not we think this is an outlier enough of a weird fact that this document probably is not legit
and this is the point is to cause this fear because it’s doing a good job of causing fear certainly. [1:01:07]
CS: When you say, not legit, are we talking about someone else outside of the MtGox corporation fabricating it or someone within MtGox? [1:01:15]
ABL: Yes. [1:01:15]
CS: I definitely don’t believe that it’s someone outside MtGox fabricating it. [1:01:18]
ABL: You think that this is an internal document from MtGox and not like the consolidation of multiple different assets coming from other documents and then having other things added to it. You don’t think this is a composite? [1:01:29]
CS: No, I’m pretty sure that this came directly from someone within MtGox. [1:01:33]
ABL: OK. Again, you must be right, in that case, that there just must be a missing variable here that we simply don’t have because I just can’t fathom a situation where something like this could happen, to this point. The plan could just be formed yesterday. [1:01:49]
CS: There’s some type of fraud going on here and whether it’s minimal fraud or whether it’s ignorance and things like that or whether they’re just completely lying and even lying to their buyers over... a potential buyer over where this money went. There’s no way that that type of money... [1:02:04]
DP: If this has come from inside Gox, this document, I have to question who... like there’s things in this that you don’t put in a business brief. There’s this whole paragraph about how Gox could go bankrupt at any moment and totally deserves to. Who writes that in a business briefing? [1:02:23]
ABL: Right. I totally agree with you on the business briefing sense but, at the same time, if you look at how MtGox has conducted themselves in their press releases, to this point, this actually... it does kind of make a little bit of sense because, in the past, they’ve been very, very defensive, right? They’ve been very deflecting and putting blame on other people, so if he really is resigning then maybe this is just – OK, fine. We did it, we’ll be the martyr for it. [1:02:47
CS: Yes. This document is basically saying – We are too big to fail. This document is saying that. [1:02:52]
ABL: Explain that. How is it saying that? [1:02:54]
CS: Because it is saying – We will go bankrupt at any moment. If we go down, then Bitcoin could possibly go down, that the reality is that MtGox could go bankrupt at any moment and... read the... I’ll read the document to you – However, with the Bitcoin just recently getting accepted into the public eye, the likely damage and public perception to this class of technology can put it back five to ten years and cause governments to react swiftly and harshly. [1:03:18]
ABL: I don’t believe that’s true. Do you believe that’s true? [1:03:21]
CS: Whether or not we believe that’s true or not, because I don’t personally, MtGox is like... this is an apocalypse. Look at the worst crisis strategy. This is a crisis. Bitcoin is going down. We are too big to fail. [1:03:34]
ABL: Right but this is a MtGox crisis is the point, it’s a MtGox crisis. I understand why the media conflates MtGox and Bitcoin; that makes sense to me because they don’t understand what they’re looking at when they look at a decentralized protocol that’s also money, so they just attribute it to the biggest, earliest exchange. I understand that. I don’t understand why MtGox believes that. [1:03:52]
DP: That’s true. I mean, from the perspective of an insider and from the perspective of anyone who has been involved with Bitcoin in any real way, Gox has fallen into the background more and more the longer we’ve been sitting here talking. It doesn’t really matter what happens to them once the media stops screaming about it. That’s the question is – how much damage is it going to do while the media is still screaming about it? Once they shut up, it’s fine. They’ve gone away. Bitcoin will continue, Gox free, no problem. How much damage is going to happen in that interim? [1:04:30]
CS: Mark believes that this will take down Bitcoin and I even said to him... I said to him in a chat, a few hours ago, I said – Do you think this is the end of Bitcoin? He said, possibly. [1:04:40]
ABL: I don’t understand why. [1:04:43]
CS: What they’re saying is this... think of it as if you’re in their position... you have a company and you’re in it and you lose a ton of money. How do you lose a ton of money? I don’t know. You’re scared for your life. You have thousands of people’s livelihoods that you just lost. You’re talking about tens of millions of dollars has disappeared. What do you do? You say – We need a bailout. We are too big to fail. We need money immediately. That’s exactly what they’re doing. [1:05:13]
ABL: You think, actually, they’re just telling people... [1:05:17]
CS: It’s a strategy. [1:05:17]
ABL: ...you need to give us money because, otherwise, we’re going to take down Bitcoin with us. [1:05:20]
CS: Exactly. It’s exactly the strategy. [1:05:23]
ABL: OK. They’re looking for fundraising... not with this document but this strategy, broadly speaking, is to, in fact, bring in funders who can... [1:05:31]
CS: I think this document was circulated to people that were potentially going to be investing or buying into the company. I think that that’s how it got leaked because the only people who probably knew of this document were Mark and Gonzague who probably created this document. Outside of them two, they probably distributed it to people and somehow, someone got hold of someone’s computer and it got leaked. [1:05:51]
ABL: At this point, we believe that this is a legitimate document (laughter), that they appear to have done something crazy that appears to have lost them all of their money, or at least all of the money that was stored in bitcoins, supposedly in cold storage wallets but apparently not and that, apparently, they lost such a large amount of money doing this, that it is sort of unfathomable and they think that it’s going to take down Bitcoin because it’s going to result in so much lost money. [1:06:18]
CS: Now that you’ve said it and you kind of outlined it out, it makes no sense. [1:06:22]
ABL: Yeah. [1:06:23]
CS: Yes, it does make sense because it’s the only thing that makes sense. It’s just... it’s so screwed up. [1:06:28]
DP: It makes sense until you get to that big number – that ridiculous... like, I would believe this completely if the paper said 100,000 BTC or 90,000 BTC or 250,000 BTC. This is like more than 6%, I think, of all of the bitcoins that exist at this moment. [1:06:50]
ABL: It’s the majority of the money that MtGox has had. That’s the real thing of it, this is a huge amount of money. [1:06:59]
DP: This is like you had to lose every dollar you’ve ever touched to get to this amount. [1:07:06]
CS: Exactly. You wake up in the morning and you say – Uh oh, all of our money is gone but it’s not like it happened... they said it happened overnight. They admitted in that document that it was a leak and that it happened over time, over weeks, they said. [1:07:19]
ABL: Over weeks? [1:07:20]
CS: Did you not notice it? [1:07:21]
DP: Over weeks? [1:07:22]
CS: It happened over years, if it did actually happen at all. Who’s to say that someone didn’t take it? [1:07:27]
DP: This is only ridiculous in the context of transaction malleability. If that’s the attack they used to get this, you don’t steal that much with that attack and not get noticed. That’s what makes it ridiculous. Something else happened, easy. [1:07:43]
CS: Let’s take a step back here for a second because a lot of people throw around that word ‘transaction malleability’ and I guess, personally, I understand it but I don’t fully understand it. The only way, from my research, that you can steal money or hack into an account with the problem with transaction malleability, is if someone is manually processing that order. Transaction malleability is not a hole in the Bitcoin protocol. Transaction malleability is saying – Here is a transaction ID of a withdrawal that you gave me customer service agent but there is no Bitcoin, so please resend it. [1:08:16]
ABL: This is actually not the case though. [1:08:18]
DP: At level one tech support, before you even get to the tech support level, you may run into some kind of automated system that makes what they thought was the reasonable assumption – Oh, this guy says he didn’t get his money, let’s look at the transaction ID that we’ve captured. Oh, it’s not on the blockchain, the transaction was orphaned, send it, don’t even bother contacting tech support with it. Not the way I would have programmed it but... [1:08:42]
CS: No. You’re saying that this was an automated system? [1:08:42]
ABL: Yes, yes. That actually... [1:08:44]
CS: What didn’t have it though? [1:08:45]
ABL: Yes, apparently they did. [1:08:46]
CS: Where? [1:08:47]
ABL: Apparently, they had a system that... this is my information too. They had a system that checked for the transaction ID and if they found that the transaction ID was not sent on a withdrawal, then there was an automated system that was resending transactions. [1:09:00]
DP: I think it had limits on it and there were things you have to gain. [1:09:05]
CS: There’s no way you can lose seven hundred and... [1:09:05]
ABL: It’s like your house being stolen from under you and you not noticing while you’re standing there. [1:09:09]
CS: It makes no sense. [1:09:10]
DP: That’s the thing that makes it the most illicit that this transaction malleability thing because of the way they implemented it. You know there’s a limit on what that system is allowed to do and you know when the hot wallet runs out, someone’s got to go manually process transactions out of the cold storage somewhere. There are checks and balances with that. It’s not even that ridiculous. It’s more ridiculous – it’s like your house being stolen out from under you, one brick at a time, while you’re standing there. [1:09:38]
CS: Exactly. [1:09:39]
DP: That’s what makes it insane. How do you even accomplish that? [1:09:43]
ABL: OK. I don’t think that we’re going to answer any of those questions tonight but this is a very interesting time right now. Let’s get a price, Bitcoin average, and see what we look like. The global average price of Bitcoin right now is 0.459 USD per milliBit, or $459 per Bitcoin. If you are able to buy bitcoins, then it’s on sale. I’m curious – where do you think the price is going to go on this because again, I don’t really care, I’m not selling any but I might buy some if they go down low enough. I don’t think this is going to have a lasting impact. I think maybe we’ll see two weeks, three weeks, something like that and then the storm blows over because the prediction is going to be... all the headlines are going to be
‘This is the end of Bitcoin’. Of course, inevitably, that won’t be the case at all. This is just going to be another phase and then MtGox will be, essentially, cleaned out of the system and we won’t have that liability in the future. Do you think we’ll see $100? Do you think we’ll see two digits? [1:10:42]
DP: That’s a really, really difficult one. It depends a lot on what the media does with this story, you’re absolutely right. The headlines could be ‘The Death of Bitcoin’; the headlines could be smarter than that. The reporting has improved a lot. [1:10:57]
CS: Yeah. It could be ‘The Death of MtGox/The Bitcoin Price on Trading’ but the world is used to impulse trading in a way. [1:11:08]
ABL: It seems like the biggest concern, potentially, that we should have about the media is actually MtGox coming out and saying something along the lines of... it’s us, it’s Bitcoin, as they’ve kind of done and say that this is the end of Bitcoin. If MtGox publicly says – This is the end of Bitcoin, then I think that that’s going to get a lot of play in the media. [1:11:27]
CS: I think MtGox is giving up, honestly. They have Bitcoin domain names, they still have $33m USD sitting in a bank account. They’re not completely wiped clean. [1:11:39]
ABL: Right. [1:11:39]
CS: They still have money. That’s a lot of money that you can start a new exchange with. They can do what Bitfloor did; they can say – We have 15 (I forget the number) but we have 15 or 17% of your money; we can give you 10% of it or you can own part of the exchange. I don’t think this is the end of MtGox but I do think this is the end of the MtGox management. [1:11:58]
DP: It’s not necessarily the end of MtGox but it is almost certainly the end of Mark. [1:12:04]
CS: I just feel bad for him because, on one side I know him to be a nice guy with a good family and a good heart, but on the other side there are so many questions I have unanswered. I don’t know who else to answer them. It just screams fraud and negligence and ignorance but there’s no one else to really pin this on because who else was physically in control of all this? [1:12:25]
ABL: Charlie, you’ve been in contact with Mark and I think that that’s something that is not true about most people. Are you able to ask him if this document is real because it seems like that’s really the thing that we need to know? [1:12:36]
CS: The thing is with Mark is I have his ear and the reason I have his ear is because I don’t challenge him, I don’t confront him but I’m trying to just tread very, very lightly. I feel like... [1:12:48]
ABL: Could you just link and ask? [1:12:50]
CS: I feel like if you read the logs of the chats that I’ve had with him in the past four hours, you will come to the conclusion and say to yourself, Charlie, he did admit that this was real. That’s why I’m inclined to admit that it’s real. I’ve asked him things like what’s the deal with
this document and he says – It was circulated between me and some other... you know, like he didn’t outright say it is real, but he didn’t say that he... [1:13:13]
ABL: He didn’t say it was not real? [1:13:15]
CS: Yeah. He admitted that he knew of its existence before the leak. [1:13:18]
ABL: OK. That pretty much is a confirmation. OK, well that’s really interesting. It sounds like we’re not going to get all the answers that we want tonight but there are definitely some questions that have been raised here, more important than anything else I think. How exactly did they lose the majority of the bitcoins that were under their care? [1:13:35]
CS: You need a blockchain and someone to really analyse it and you need MtGox to cooperate with them because MtGox can open up their books. You don’t just walk away with a $200m theft. [1:13:49]
ABL: $200m at these depressed prices too. One of the interesting things is this call for regulation that some people have said might come out of this. This could be the rebirth of the coin ‘taint’ proposal too. I mean, if you think about it, this is the exact sort of situation that would necessitate the kneejerk reaction that makes that make sense in a wrong sort of way. [1:14:13]
CS: The coin ‘taint’ proposal is that the coin ‘taint’ proposal that the Coin Validation company has been proposing is saying – Let’s outright ban certain Bitcoin transactions and let’s outright make it public which ones are green and which ones are red. I don’t think that’s the way to go about it. I think it needs to be in the background. I think that that process needs to be a constant communication between all the Bitcoin companies, with law enforcement, to actively be working on bringing down bad actors within the Bitcoin space. [1:14:47]
DP: With the Coin Validation thing, the coin ‘taint’ concept, I would just remind everyone that Bitcoin was built to be decentralized for a reason. We don’t like the central authorities that normally tell us who we can and cannot do business with so why would you ever take a system that was built to defeat that and then allow someone to tell you who you can and cannot do transactions with? You’re taking something that was built to be better and turning it into the same thing you already have. [1:15:17]
ABL: Well, lots of questions and not too many answers. I think that’s it for tonight. Thanks for joining me on this special episode of Let’s Talk Bitcoin. Charlie Shrem and David Perry, thanks again. [1:15:26]
____________________________________________
CREDITS:
Thanks for listening to Episode 87 of Let’s Talk Bitcoin.
‘Brooklyn Captive’ was produced by Adam B. Levine and edited by Denise Levine, with Stephanie Murphy, Andreas M. Antonopoulos, Adam B. Levine and Charlie Shrem
‘The Venerable MtGox’ was produced by Adam B. Levine and edited by Denise Levine, with Charlie Shrem, Adam B. Levine and David Perry
Music for this episode was provided by Jared Rubens and General Fuzz
Questions or comments? Email [email protected].
Have a good one! [1:15:53]
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