Between 2012 and 2014, the established rhetoric coming from bitcoin’s staunchest supporters was that the cryptocurrency would disrupt payment clearing costs, kill-off intermediaries and economically bank the unbanked. Now that bitcoin is failing on most of those fronts, bitcoin purists claim all that was just fake news. Apparently the movement’s real purpose was to establish a bitcoin-based reserve system that mirrored established banking hierarchies.
Bitcoin asset holders have discovered there is logic in taking risk with middlemen if it means idle (and highly volatile) zero yielding assets can be transformed into yielding securities. As a consequence, Bitcoin has gone full-circle and become exactly what it sought out to destroy.
Financial hype cycles are predictable mostly because they mimic fashion fads and music fads. For example, there was a time in this reporter’s life when she aspired to be cutting edge and cool. Joyfully, no longer. This involved dying her hair pink (as much as she could get away with without being expelled), reading NME and Melody Maker, and listening to the most obscure bands available in the acceptable genre, which was Indy rock. If and when the bands went “mainstream”, however — something assessed by whether the year below was listening to them — it was time to move on and find something more obscure. “Are you seriously listening to Blur? What seriously? Jeez. I much prefer Radiohead. What!? You’ve never heard of Radiohead? I can’t believe it. I’ve been a fan for like ‘forever’. You’re not cool.“
Publicly, the Hong Kong-based bitcoin exchange Bitfinex has lumped its users with a 36 per cent haircut on all balances to cover the $70m hack which it experienced last week. The haircut applies to all customers irrespective of whether they were holding bitcoin balances or dollar balances or other altcoin balances. But customers don’t come away with nothing! No. Not in the world of virtual money creation. That would be crazy. They get a BFX token (an IOU) as compensation. Privately and anecdotally, however, customers are reporting some variance with regard to the way the haircut is being imposed. Some US customers, for example, who only had dollar balances are reporting they’ve been able to get all their money back.
On Wednesday, we argued that the loss of approximately $70m worth of bitcoin from customer segregated accounts held at Bitfinex should give the banking industry pause for thought with respect to adopting blockchain and bitcoin-based financial technologies. Today, we’re going to look at the wider implications of the hack, and the potential fallout in terms of legal risk.
The Hong-Kong based Bitfinex exchange is short 119,756 bitcoins after being hacked on Tuesday, though nobody can be sure what’s really happened because ‘hacking’ is a loose term and can encapsulate almost anything, including an internal security breach. (Do see the case of Mt Gox.) The mark-to-market value of the stolen coins is roughly $70m, but again who can really tell their true worth. Bitcoin is an asset class where the liquidation of 119,756 (approximately 0.8 per cent of the total bitcoin circulation) can move the market more than 20 per cent, suggesting a certain fantastical element to the valuation.
The SEC has issued a cease and desist order against Bitcoin Investment Trust (BIT) and SecondMarket, both founded by Digital Currency Group CEO Barry Silbert — and dubbed back in September 2013 by the NY Times’ Peter Lattman and Nathanial Popper as “a reliable and easy way to bet on the future price of bitcoin”. The Trust famously beat the Winklevoss brothers’ bitcoin ETF to market and drew significant column inches as a result. The Winklevoss ETF (for some strange reason associated possibly with risk?) is yet to receive regulatory approval, forcing the brothers to make significant amendments to their original regulatory filing if it’s to stand a chance of being approved.
Andrew O’Hagan’s 35,000 word write up of the Craig Wright Satoshi affair in the London Review of Books has been out and circulating since the weekend. The market has had time to digest the information and yet it doesn’t look all that much like anyone has found much closure from the account. For now at least, more questions than answers persist. Some interesting snippets nevertheless included:
Blockchain/fintech/bitcoin conferences are ten a penny these days, and we don’t mean to bore you with the minutiae of what went on at yet another one. But there was one thing that came out of a conference we attended in Istanbul this week that does bear noting. We’ll call it the coming age of bitcoin companies, by way of the moan factor.
When Mt. Gox, the Japan-based bitcoin exchange run by Mark Karpeles, stopped honouring redemptions on February 7, 2014, the company initially blamed the affair on an obscure tech fail known as a malleability issue. Many, however, were unconvinced by the explanation, suspecting foul play, a hack or an inside job. When Mt. Gox filed for bankruptcy on February 28 it emerged 750,000 of customers’ bitcoins had been lost, plus 100,000 of Mt. Gox’s own stash — a sum collectively worth $473m at prevailing exchange rates. Karpeles himself, however, insisted the exchange had been the victim of external sabotage or fraud. Time went by. Customers put their complaints to the authorities. Alas, not much in the way of information came their way. At some point, rumours began to emerge that much of the run-up in bitcoin’s price to a record $1216.73 in November, 2013, had been driven by a bespoke algorithmic programme known as the Willy Bot, developed by Mt. Gox for its own profit, and that this punting bot may have been the cause of many of the losses. Without concrete evidence, however, this too remained a theory. The mystery prevailed. Customers began to accept the reality: the money was gone and they’d never get it back because that’s what happens when you punt on an unregulated exchange.
Bitcoin business pioneer Jeff Garzik told Cryptocoinsnews over the weekend his latest venture Bloq will behave as a sort of consulting platform to bridge the world of private blockchains with bitcoin, because it is “very important to make Bitcoin a part of the blockchain discussion again”. But he also said this (our emphasis): “It’s the overall mission to make blockchain more acceptable, more stable and more widespread than ever before,” Garzik said. “And I think that’s really going to be the success point within twenty years. Bloq is gonna be building a decentralized system. I like to call Bitcoin the first decentralized autonomous organism. There will be many more decentralized systems built on top of this technology and long-term Bloq is going to play a role in launching side chains and blockchains, and launching digital identity that’s affordable and tying all that together.”
A quick update on developments in the Craig Wright [is] or [is not] Satoshi story. In the last 24 hours Wright has posted on his blog that extraordinary claims require extraordinary proofs and that he will provide such proof over the coming days in the form of “a transfer from an early block”. This could be the much touted miracle of the movement of the Satoshi funds we’ve all been waiting for. At the same time Gavin Andresen, a lead developer in bitcoin, has stated that it was a “mistake” to have posted a personal blog testifying that he was “convinced beyond a reasonable doubt” of Dr Wright’s case. He told Dan Kaminsky, a noted security expert, in correspondence:
As the clairvoyant FT Alphaville said on March 31, Australian Craig Wright has come out to claim he is Satoshi Nakamoto, the pseudonymous creator of Bitcoin both in a personal blog post and in media interviews with The Economist, a former newspaper, blokes’ mag GQ, and the gullible old BBC. And he chose Monday, May 2 (a Bank holiday in the UK), to do the ‘Big Reveal’, which just happens to coincide with the first day of Consensus, a hullabaloo blockchain event in New York featuring famous self-styled bitcoin/blockchain radicals like Balaji Srinivasan of 21 Inc, Jack Markell, governor of Delaware State, and Larry Summers. (Yes, that Larry Summers.) As the world’s media now embraces a manufactured ‘Craig Wright media storm’, we should probably add some detail on how this story has developed and we need to look at the evidence thus far presented.
Whilst by no means an entirely undisputed theory, ancient historians generally believe the emergence of civilised states such as Sumer was closely connected to the role temples played in standardising, clearing and redistributing value in society. Temple authorities, the theory states, kept account of the assets and liabilities of each individual in a centralised manner, meaning citizens could claim as many goods from the temple store as the temple records permitted. This was often based on the amount of provable work they had done. Tangible coins were thus unnecessary. The accounting system was ubiquitous in society and trusted. As Benjamin Foster, a Yale Assyriologist, has noted historians have speculated that the religious complex was essential for spurring the sort of non-rivalrous collaboration that allowed for the cultivation and settlement of land in the first place.
Sergey Mavrodi, architect of the MMM Global pyramid scheme, has a habit of closing off his web-based addresses and messages with the assertion that he believes the “financial apocalypse is inevitable” and that “together we change the world!” On Monday, that prediction was seemingly coming true, albeit not for the financial system as much as for Mavrodi’s own investors.
You may have come across this story about Barclays partnering up with a “Goldman-backed” bitcoin payments app called Circle International Financial, which uses bitcoin to transfer central bank currencies as digital money increasingly moves into mainstream finance, and thought “wow” that sounds innovative and exciting. But is it? Is it really all that innovative? Let’s break down some of the key claims being made.
Bitcoinland is abuzz with speculation Craig Steven Wright will out himself as Satoshi Nakamoto, the cryptocurrency’s pseudonymous creator, within the next two weeks and that he is looking for backing in his verification from some of the industry’s biggest players. Wright, a self-declared cyber security expert who claims to hold a theology PhD, was originally identified as Satoshi in December 2015 following the publication by Wired and Gizmodo of supposedly leaked emails and documents purporting to prove Wright and a colleague, Dave Kleiman (now deceased), were the co-inventors of bitcoin. The source of the document leak was never identified.
When Diego Dzodan became Facebook’s vice-president for Latin America in June 2015, he probably thought he was taking a nice safe job with a decent wage and ample opportunity for promotion within the business. He probably didn’t think he’d end up being arrested. From the FT on Tuesday:
This is the first in an occasional series lamenting the hypothetical eventuality of a world without a free internet* and the extraordinary implications this could have for markets and companies. A tragedy of the web commons if you will. It is inspired both by India’s ruling to bar Facebook from subsidising internet availability with Free Basics packages (see Kadhim’s series of posts for more on that) but also Balaji Srinivasan (he of 21 Inc toaster fame), and his attempts — including a Stanford Bitcoin course — to convince the world the web should in fact be a paid-for luxury product of scarcity.
Mike Hearn, a key developer in the bitcoin eco-circus, quit bitcoin on Thursday. He did so with much fanfare. As is the norm these days, he shared his reasoning, angst and rage in a Medium blog post, saying that he quit due to a schism in the community about how to scale bitcoin. FT Alphaville met Hearn last year in an off-the-record encounter with a bunch of hedgies, who were sounding him out on whether or not bitcoin had legs as an investment. Hearn himself struck us as very reasonable. He was down to earth, pragmatic and totally open about the challenges bitcoin was facing. He was, nevertheless, still optimistic. Seemingly, that is no longer the case.
The bitcoin creation mystery continues… But first the story so far. After circulating in media hands for a couple of months, leaked documents and hacked emails connecting Australian Craig Steven Wright and the deceased American Dave Kleiman with the pseudonymous creator of the digital cryptocurrency bitcoin, Satoshi Nakamoto, were finally publicly revealed in investigative reports by Wired and Gizmodo on Wednesday. The case seemed a strong one. But then on Thursday, Motherboard published evidence which seemingly debunked or at least questioned the veracity of the Wired/Gizmodo material. At issue was the authenticity of the PGP keys which are needed to access to Satoshi’s 1m bitcoin fortune, which has sat unmoved and unspent for years. On Friday, meanwhile, ZDNet reported that SGI, the high performance computing firm connected to Wright’s alleged supercomputing activities, had denied any involvement with his company Cloudcroft Supercomputers. Since being outed as Satoshi Nakamoto, Wright’s Linkedin profile — which listed significant academic accomplishments including a doctorate from unknown sources — has been deleted. Other social media presence is also quickly disappearing from the web.
One of the ironies of the information age is how it’s turning out to obscure rather than improve our understanding of what’s really going on. The pressure to report quickly errs towards unverified reporting, or reporting based on facts distributed via unchecked sources or biased lobby groups intent on propagating causes, which in turn leads to an abundance of misinformation which confuses everyone. A racketeer like Mr Sergey Mavrodi, the man behind the MMM “transparent” pyramid schemes we drew attention to last week, flourishes in such an environment. The more contradictory the information about him on the internet, the better for him. The same goes for other transparent pyramid schemes (such as all cryptocurrencies). Historically-tested logic about why pyramids are economically flawed is reduced to an opinion, much the same way that scientifically-verified proof about how carbon emissions are causing climate change also gets reduced to an opinion by certain special-interest groups. Below we share a Q&A with Mavrodi. And he’s done us a little video to prove that we are communicating with the man himself…
You don’t even know what the thing is yet. How big it can get, how far it can go. This is no time to take your chips down. A million dollars isn’t cool, you know what’s cool? A billion dollars. And you know what’s even cooler than that? A trillion dollars via MMM, the Chinese Social Financial Network: