In the Fight for Bitcoin’s Soul, the Pirates Are Losing

• Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption
• Ben Mezrich
• Flatiron (2019)

The thing about revolutions is that by the time word spreads, the pitchforks are already gathered in the town square.

Slowly, yet surefootedly, since the first whispers of Bitcoin in 2008, an upheaval has been mounting in the world of cryptocurrency and its related blockchain technology.

Now, increasingly, the schism is on view to the wider world.

Vancouver is one place to see it unfolding. There, six years ago, the world’s first Bitcoin ATM popped up. “Three young dudes” installed it, according to the millennial-focused Vice. It wasn’t long before another young man and his business partner, a convicted felon, installed Vancouver’s second Bitcoin automated teller machine. Fanfare abounded due to “the Left Coast’s healthy contempt for big banks.”

Today Vancouver is home to at least three publicly traded cryptocurrency mining companies, of which two have, at one point, been billed as the world’s largest. The city also houses Canada’s first regulated investment firm in cryptocurrency. More and more, those involved in Bitcoin are likely to be downtown office workers with single-syllable names like Brad or Chad, who wear grey Patagonia fleece vests over pastel Armani shirts and adhere to Eastern Time because of the financial markets. Their exploits are reported not in Vice, but the Globe and Mail’s business section, oftentimes cloaked by a paywall.

And those ATMs — a rebellious, brand-new concept at the time — may be shut down and carted away, according to the city. Now numbering more than 60, they invite fears of money laundering.

So goes the changing of the guard in crypto-blockchain. The idealistic, outsider mentality of the early adopters is being squeezed by the pragmatic, rule-abiding and regulator-pleasing ambitions of a new breed of entrants. That’s perhaps to be expected — and to some, even desired — as cryptocurrency marches toward more mainstream acceptance. But it also tears at the soul of Bitcoin, created as a middle finger to many who now embrace it.

Unfriended

The shift is laid bare in the adventures of Tyler and Cameron Winklevoss, chronicled in Ben Mezrich’s Bitcoin Billionaires.

Now widely regarded as cryptocurrency champions, the twin protagonists began the story as technology pariahs after settling with Mark Zuckerberg in a lawsuit over Facebook, which they say was partly their idea, developed together at Harvard where all three were students.

The twins were never fully satisfied. They felt cheated by Zuckerberg. But they did come into a lot of money that they wanted to invest. Yet all the startups turned them down, coveting the goodwill of Zuckerberg.

“Your dollars might be green, but they’re marked,” a startup founder told the brothers at a San Francisco Bay Area restaurant. “You should be glad this place will even serve you a hamburger.” Mezrich wrote of the twins, “Silicon Valley had unfriended them.”

The twins — who previously appeared in Mezrich’s first Facebook work, The Accidental Billionaires, which became the movie The Social Network — ended up pouring their money into Bitcoin. A digital currency that could function without a central authority had a certain appeal.

“Tyler and his brother had put their trust in the judicial system, only to be beaten. A system that had relied on trust in humans had failed them,” Mezrich wrote. “There was something about a system that relied on math.... Math was built on rules that no one, not even Zuckerberg, could break.”

The Winklevoss brothers also invested in one Charlie Shrem, an early-20-something dwelling in his mother’s basement. The New Yorker was co-founder of BitInstant, where Bitcoin could be bought using dollars. At one point, the company accounted for almost 30 percent of all Bitcoin transactions, and the young man became a celebrity-like figure.

But all was not well in the state of BitInstant. Shrem was constantly torn between the Winklevoss brothers and his first investor, Roger Ver, and his head of marketing, Erik Voorhees, libertarians both. Both had initial reservations about even taking the Winklevoss money.

“Early Bitcoiners were mostly made up of people like Voorhees, people who believed that nobody else should have a say in how individuals chose to act,” Mezrich wrote.

“Ver, he held philosophical beliefs similar to those of Voorhees, but seemed even more radical, even more of a fundamentalist. Ver had even once run for the California State Assembly under the Libertarian Party, but then had immigrated to Japan after spending 10 months in a federal prison back in 2006 for selling illegal fireworks.”

The twins wanted Shrem to meet bankers and finance big-wigs and submit to regulation. Ver wanted Shrem to move to Panama to take advantage of laxer rules. It was no wonder the sides disliked each other, and friction and tension mounted. Ver offered to buy the twins out, and if they rejected that, for them to buy him out. The twins declined to even meet Ver in person.

The vortex of Wall Street

That struggle for Shrem represents a bigger phenomenon, happening all over the cryptocurrency world. Bitcoin Billionaires is a masterfully told story of the tipping of the fragile balance between crypto-blockchain’s opposing ideologies.

“The libertarians and anarchists saw Bitcoin as a weapon in their war against regulated society,” Mezrich wrote. “The entrepreneurs and VCs (venture capitalists) increasingly gravitating toward cryptocurrency wanted Bitcoin to be part of that society, a new, programmable money.”

All that culminated in a dramatic moment, seeded and foreshadowed in the book’s beginning and stretched with suspense in its telling, yet also reported widely and breathlessly in the media more than five years ago: Shrem was arrested and jailed for unwittingly flouting money-laundering laws.

The company collapsed. The backers went their separate ways. Although painful, the brothers had the last laugh, for that outcome happened precisely because Shrem did not listen to them.

Meanwhile, with the rise of cryptocurrency prices, the Winklevoss twins graced the New York Times front page as Bitcoin’s new champions. They were keynote speakers for Bitcoin’s biggest conference. They were subpoenaed to brief regulators to help them craft rules. They eventually became the world’s first publicly known Bitcoin billionaires. Cast out of the Silicon Valley garden, the Winklevoss brothers had walked a lonely path and succeeded as outsiders.

But they were not outsiders enough. As Mezrich summed up Voorhees’s thoughts about the twins, “they still weren’t Bitcoiners.” Men of Harvard and descended from riches — and Olympic rowers — they still belonged to that perceived establishment club that many early Bitcoiners were against. As the book nears its end, the Winklevoss twins attend a party full of Silicon Valley power people who welcome them. They hug Facebook’s co-founder and former No. 2 at a separate event. They are being re-absorbed.

Indeed, Big Tech is moving into cryptocurrency. Silicon Valley had recognized the Winklevoss twins as pioneers with foresight. The twins never do reconcile with Zuckerberg in the book, but the latter is now also entering the game with a new Facebook cryptocurrency.

Here come, too, Big Finance and Big Brother. “I want you to know that I’m pro-Wall Street, pro-business, pro-banking, pro-America,” the banking heir Matthew Mellon — once chairman of the New York Republican State Committee’s finance committee, who died in 2018 leaving behind at least $670 million in cryptocurrency — told the Winklevoss twins. “And I think that’s exactly where Bitcoin should live.”

Mezrich wrote, “Cameron and Tyler also knew that government regulation would come; and unlike many in the room, they believed that it was important to embrace and help shape that.”

A fluid, shapeless beast

You could say massive change is roiling the Bitcoin community — except there is no real Bitcoin community. This isn’t the law society, for which you have to pass some test. The Bitcoin community is a fluid, shapeless beast. New entrants are fomenting a philosophical clash between libertarians, first in, who saw Bitcoin as a counter to the financial and governing institutions they distrusted, and reformers who are either glad to build bridges to those institutions or even live within them.

It’s not a stretch to say Bitcoin’s appearance in the aftermath of the 2008 financial crisis was more than a coincidence. In its first batch of transactions on Jan. 3, 2009, Bitcoin’s mysterious creator, Satoshi Nakamoto, attached a message that directly referenced that sordid affair.

Nakamoto cited a Times of London article of a potential second government bailout for banks, which both suffered from and indirectly caused the financial crisis. Billions were to be given to the usurers — again — to rescue them from a storm of their own making.

Thus the world’s first cryptocurrency was made precisely to circumvent banks and governments. “It’s very attractive to the Libertarian viewpoint if we can explain it properly,” Nakamoto wrote in a mailing list.

Almost half of Bitcoin holders consider themselves libertarians. In its earliest days, Bitcoin was the domain of rebels and exiles and dark-web drug dealers. Ironically, as Bitcoin gained mainstream attention and exploded in price, in a moment of vindication, it was those early adopters who suddenly found themselves millionaires and magnates and barons. Their success simply reinforced the non-conformist, anti-authoritarian belief that drove Bitcoin.

That renegade impulse has been widely indifferent to — or even supportive of — Bitcoin’s famous use as the medium of exchange on the illicit online marketplace Silk Road, which allowed users to buy and sell weapons, heroin, you name it. To the wider public, however, 2013’s high-profile takedown of the operation has permanently cemented into its consciousness the link between cryptocurrency and crime.

To some Bitcoin faithful, that’s just a cost that comes with the higher purpose of granting users absolute control over their assets. Outside cryptocurrency circles, some see that feature as a serious bug. There’s no recourse for scams and hacks. In Russia, people have been tortured to reveal their passwords. Police can catch the crooks, sure, but the coins are gone.

In a recent magazine article about under-policed American small towns — strangely analogous to the cryptocurrency space — the writer says, “The social contract is not a buffet — if you opt out because you want absolute freedom, you have to accept that no one will come to save your ass when trouble starts.”

Cryptocurrency’s reputation problem is compounded by the small number of high-profile scandals from young men more geeks than businesspeople who suddenly come into more wealth and power than they can handle. They’ve built empires with great promise, but like the lottery winners that ended up penniless, swiftly ran aground.

The majority of the world’s bitcoins used to be traded on Mt. Gox, a former Magic: The Gathering card-game exchange in Japan. It was run by Mark Karpeles, a Frenchman who loves his cats, but neglected day-to-day operations. Soon he felt the weight of finance jargon like “compliance,” “know your customer” and “money-service business.” By 2015, Mt. Gox had collapsed, and Karpeles had gone to jail. Hundreds of millions belonging to the exchange’s former users remain unreturned.

Vancouver’s cautionary tale: QuadrigaCX

In Canada, the pair that installed Vancouver’s second Bitcoin ATM went on to make bigger history, impressive, then scandalous. Gerald Cotten and Michael Patryn built their QuadrigaCX exchange into the country’s biggest platform for buying and selling cryptocurrency. In its heyday, if you wanted to buy Bitcoin in Canada, Quadriga was the place to go. There was talk of a stock-exchange listing for that Vancouver startup.

Yet beneath the surface, Cotten eschewed proper corporate structure and banking relations, almost running this entire company from a laptop. Quadriga experienced trouble processing users’ withdrawals. Then Cotten died, according to his widow, taking to the grave the password needed to access almost $200 million in cryptocurrency.

What could have been a crown jewel was run so stupidly that it had been paralyzed by the death of one man. Then media outed Patryn as a convicted technology-finance fraudster, allegedly trying to hide his past under a new name. To this day, Quadriga’s collapse is still being fought over in court. The U.S. Federal Bureau of Investigation has started probing the matter.

Will Bitcoin become mainstream? That would dash its pioneers’ pirate dreams. But for many now betting on cryptocurrency, quelling the public’s fear of its lawless roots is a prime goal. If it happens, the Winklevoss twins will deserve credit. The Ivy League insiders, forced outside by Silicon Valley’s scorn, became guerrillas by gambling on cryptocurrency, and now are helping to pull it inside the fences of government-regulated finance. “The world was listening, and the voices they needed to hear weren’t those of anarcho-libertarians in Panama,” Mezrich wrote.

In many ways this story resonates with the genesis of the internet itself. Apple and more than a few other Silicon Valley giants of today were born in a spirit of overturning the old order, done in garages and dormitories — and basements, not unlike that of Shrem’s mother. Somewhere along the line, the internet proliferated because the rebels ceased being rebels. “Facebook isn’t the revolution anymore,” said the man who first introduced the Winklevoss twins to Bitcoin. “Facebook is the Establishment.”

There lies the path of revolutions. Successful ones, at least.