Banking on Bitcoin Page #5

being, in some ways,

the most important

FBI digital crime investigator

of the last few years.

He was the one who took

down anonymous, essentially.

So we decided to start looking

at some of the services on Tor,

and silk road being one them,

other cases, they would hit Tor,

and they would kind of throw

their hands in the air

and say "it's Tor, there's not

much we can do about it."

I found it interesting to kind of

take a look at it and tackle it.

Bitinstant was basically born

because if you wanted

to move your dollars

into a bitcoin exchange,

it takes at least three days.

And since the major exchange,

mt. Gox, was in Tokyo

it could take a week or more.

So that's really problematic,

and basically

Charlie figured out that

if you just held a balance

of dollars at the exchange,

you could go to him and say,

"Charlie, I'll give you $100.

Will you give me $100

of credit at the exchange?"

And you can literally then have

your dollars at the exchange

in ten seconds

as opposed to a week.

So that's hugely helpful, especially

when bitcoin is so volatile

and you need to know exactly

what price you're going to get.

Charlie was raising capital

right as, sort of, I joined.

During that process,

he came across lots of

interested investors who were

starting to get a whiff

that maybe this

bitcoin thing was cool.

We had an interesting

debate early on

about do we invest in bitcoin

or bitcoin companies

and we sort of

decided to do both.

More towards investing

in actually bitcoin

in the asset early days,

but also trying to place

a few bets in the ecosystem

to support the companies,

support the entrepreneurs,

and see how that went.

A few days after they first

found out about bitcoin,

they were in the bitinstant

offices in New York

meeting with Erik and Charlie.

And Erik and Charlie essentially

talked them through bitcoin

and answered all of their

questions and concerns.

What made you invest

in bitinstant?

There are a lot of companies

and exchanges and websites.

With respect to bitcoin, regulation

is obviously a big question.

What you do want is a company

that sort of takes that seriously

and understands that

there's the technology element,

there's building the company,

and then there's also

creating the company

that works with regulators.

And so that's bitinstant.

It's not this sort of

completely underground thing?

Yeah, Charlie the ceo happens to have

been in this space for a long time,

so he's sort of on

the pulse and the cutting edge.

You know, you come out

and you say, like,

"we want this bitcoin thing

to overturn everything,"

but at the same time

we have to be compliant

and you have to know

your customer.

You have to know every single

customer no matter what.

Even if they're transferring

a dollar or $1,000.

And how reasonable is that?

The term "money laundering"

was invented by banks,

and knowing your customer

shouldn't be

this complicated,

expensive thing.

And you shouldn't treat everyone

like a criminal in the beginning.

They really wanted us involved.

People were really friendly,

because it benefits you

to onboard more people in,

so bitcoin's always been

this very friendly community

and it's also... in some ways

it's self-serving that way,

but we were there

for the right reasons.

At the time, bitinstant

was the big company

other than mt. Gox.

It was the way that most

Americans were able

to buy bitcoins.

Here it is.

So bitinstant

was located right there.

I think it's the one

that now says "bling."

It was a whirlwind six months.

Going from total obscurity

with no money

to becoming one of

the hot startups of bitcoin.

But almost as soon as the twins made

their investment in the company,

it began falling apart.

The twins had a much more

practical approach

to bitcoin and bitinstant.

They wanted to see

the company making money

and making as much money

as it could

as quickly as it could.

They saw early on

that it would be regulated,

that it wasn't

gonna be this big,

and have no one be

interested in regulating it.

So they feared that

all kinds of regulators

would come in

at all different angles

and tie the thing up

in a complete morass

where nothing

would ever get done.

So they wanted to help

drive the regulation

so that whatever regulation

would be there would work

and would not end up being a

complete dead end for bitcoin.

That strategy is smarter,

from purely

a business perspective,

but I'm not in this purely

from a business perspective.

I am in this for business

and because I'm trying

to change the world

and make it better,

and building bitcoin companies

and begging for regulation

that matches exactly

the banking regulation

that has caused so many problems

I feel like is

counterproductive.

For the most part, bitinstant

was actually taking steps

to make sure that people weren't using

the service for illegal purposes,

but Charlie made the mistake

in dealing with btcking

of acknowledging that he knew

what btcking was doing,

and that he was acquiring

bitcoins to sell them

to silk road customers.

In this case,

Charlie worked with the guy

and wrote emails that

essentially acknowledged

he knew what this guy was up to.

That stunning arrest

of the drug kingpin

who goes by the name

"dread pirate Roberts"

and appears to have cornered

the Internet drug market.

His real name is Ross ulbricht

and his website, silk road,

is packed with products

like cocaine and heroin.

The payment system

is all through bitcoins,

which is basically

digital currency,

not backed up by

any international banks,

not backed up by any us banks,

but simply based on

the confidence of the users

who exchange these bitcoins

computer to computer.

There's a reason why

the case was tried in New York,

in the Southern district,

and largely that

was because of bitcoin.

Ross was caught

in San Francisco.

The silk road servers

were out of the country.

So why was Ross's case tried in

the Southern district of New York

where most of the financial

regulations cases are dealt with?

Where the district attorney,

preet bharara

has been all over bitcoin.

Where Charles schumer, the senator,

has been all over bitcoin.

Ross ulbricht's case

is a bitcoin case.

There's absolutely

no denying it.

The level of threat

that the silk road posed

to the marketplace,

to wall street,

whether it's a perceived threat

or an actual threat,

was humongous.

And the idea that somebody

could create a marketplace

where you could freely transact

without oversight or regulation

had to be dealt

a massive and public blow.

Bitcoin kind of monetized that

anonymous part of the Internet

and made it possible

to trade in things

that the federal government

doesn't want you to trade in.

Law enforcement moves slowly

but it's a big heavy wheel

that grinds finely,

so, you know, someone

was running a hidden service,

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