Pay the Devil in Bitcoin: The Creation of a Cryptocurrency and How Half a Billion Dollars of It Vanished from Japan (Kindle Single) Read online

  PAY THE DEVIL IN BITCOIN

  The Creation of a Cryptocurrency and How Half a Billion Dollars of It Vanished from Japan

  JAKE ADELSTEIN AND NATHALIE STUCKY

  Text copyright © 2017 Jake Adelstein and Nathalie Stucky

  All rights reserved.

  No part of this book may be reproduced, or stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without express written permission of the authors.

  Cover design by Andrew Lee

  Bitcoin image on cover by Thomas Trutschel/photothek image UG/Alamy Stock Photo

  Contents

  Preface

  A Note on Sources

  Chapter One: Bitcoin and Its Mysterious Founder

  Chapter Two: Meet MagicalTux

  Chapter Three: The Silk Road

  Chapter Four: The Magical Mt. Gox

  Chapter Five: The Unusual Suspects

  Chapter Six: The Other Unusual Suspects

  Chapter Seven: Presumed Guilty Until Proven Guilty

  Epilogue

  Acknowledgments

  PREFACE

  BY JAKE ADELSTEIN

  There’s a saying in Japanese—Jigoku no sata mo kane shidai—meaning “Even at the gates of hell, what happens depends on how much money you have.” The saying is the inspiration for the title of this book and illustrates something we all know is true: we are treated very differently according to how much wealth we have. It can be the difference between heaven or hell.

  Some may ask, does hell really exist? Isn’t that a matter of metaphysical belief?

  Yes, it is. And in some ways, belief in heaven or hell is about as rational as belief in a cryptocurrency called bitcoin.

  Bitcoin is not just a cryptocurrency; it is a financial force, and the faith placed in its power and probity by true believers is what gives it value. In that sense, it is almost magical.

  There have been several excellent books written about bitcoin and a few good documentaries. This book is for people who are curious about this cryptocurrency and want to know more but don’t need a 350-page tome on the subject.

  It’s also a book about bitcoin and Japan. The two are interlinked in many ways: the mysterious founder has a Japanese name, and the first major bitcoin exchange, Mt. Gox, was established in Tokyo. Japan is also home to one of bitcoin’s foremost missionaries, Roger Ver, jokingly referred to as the “Bitcoin Jesus.”

  The Swiss journalist Nathalie Stucky and I have spent two years covering the rise and fall and rise again of bitcoin and the collapse of what was once the center of the bitcoin universe, Mt. Gox. Most of our articles covering the story were originally published in the Daily Beast, an American website focusing on politics, world affairs, and pop culture, which currently reaches more than twenty million readers per month. As time has gone by, we have become close to many of the people appearing in this book. Hopefully, this hasn’t affected our judgment. Ms. Stucky in particular became very close to and very fond of Mark Karpelès, the de facto creator of Mt. Gox, and the fondness appeared to be mutual. I’m about as fond of Karpelès as I am of his cats, but I do believe that he has been dealt an unfair hand.

  The gods of fortune in Japan are very fickle, although apparently they will take bribes. Even if you bribe them with money or commodities, however, they don’t always deliver.

  One of the first things you’re told as a journalist about the basics of investigative journalism is this: follow the money. If you follow the bitcoin, you are likely to encounter a strange alternate world populated by shady characters, drug dealers, diligent special agents, corrupt cops, hapless coders, and pirate hackers. It’s a fun world to explore.

  Bitcoin doesn’t exist in solid form like most fiat money. It’s shapeless, immaterial, usually traded over the Internet. Yet it wasn’t created out of nothing—the currency rests on complicated computer programming, a public ledger, a dedicated group of users—and it is given value by scarcity, trust, and above all human greed.

  And as long as the human race is greedy, I don’t think we’ll see bitcoin vanish from our world. The currency may be new, but the raw desire behind it has been around for ages.

  You can pay the devil in bitcoin. And since 2013, at least one church in New York City accepts donations in bitcoin as well.

  A NOTE ON SOURCES

  This book was written with the cooperation of former Mt. Gox employees, including CEO Mark Karpelès. Its creation involved extensive interviews with lawyers, journalists, police officers, and even people inside the prosecutor’s office, who went above and beyond the call of duty and sometimes against their own self-interests to share with us details of what they knew. We have added citations for those who would like to know more, but we have not given dates for each and every interview we conducted. Suffice it to say that when quotations are given without sources, they come from real conversations we had with our informants.

  The people we spoke with told us, in great detail, about the Mt. Gox case and related criminal cases, some of which are still ongoing. Some sources provided documents. In doing so, they took incredible risks. Some of them violated NDAs or rules set up by their organizations that forbade them from speaking to the press without permission, and, possibly, in speaking to us they broke the law. If they were caught cooperating with us or if the full contents of what they disclosed were to become public, they could face not only the loss of their jobs but prosecution for violations of Japan’s civil-servants law (for disclosure of information gained in capacity as a public official) or even retaliation from the firms that employ them.

  Therefore, in order to protect sources, we have changed some names and obscured certain details. Bitcoin is a virtual currency, but our sources are real people. We would like to ensure their well-being, at least, and to thank here those who can’t be named—thank you!

  CHAPTER ONE

  BITCOIN AND ITS MYSTERIOUS FOUNDER

  We use money every day, and we never stop to think about it. While we may be moving toward a cashless society, we still carry around wallets containing one-dollar bills with the face of George Washington on them, or hundred-yen coins engraved with cherry blossoms, and we expect the value of what we’re carrying to remain fairly constant. Currency traders make money on guessing when my hundred-yen coin is going to be worth less or more than a dollar bill.

  At this point in time, the rate is about one hundred yen to the dollar. It makes calculating things easy. But that won’t last for long.

  The US dollar is still the gold standard of world currency, but the value of a currency can fluctuate tremendously, and it often depends on the way governments manipulate the market or on external political factors that can’t be controlled.

  When the result of the Brexit vote was Britain deciding to leave the EU, the euro and the pound plummeted. That was not a planned move.

  In Japan, Prime Minister Shinzo Abe’s economic plan, dubbed “Abenomics,” drove down the value of the yen for an extended period of time.

  For centuries, almost every currency in the world has been issued by governments, which have considerable power to affect its value and even regulate its supply.

  And then along came bitcoin (BTC) in 2008. It’s not backed by any government. There is no Royal Bank of Bitcoin. Yet increasingly it has been accepted as a valid form of payment.

  What is bitcoin? A dummy currency
printed on poker chips? A Ponzi scheme? The wet dream of criminal enterprises?

  No. Bitcoin is the name of a digital cryptocurrency created by a volunteer network of computer users. It is held electronically. It aims to be a secure method of buying items and sending money without the transaction fees of services like PayPal. If you don’t want to spend forty dollars transferring a small amount of money out of Japan to the United States, use bitcoin instead. To buy it or sell it, all you need to do is set up an online account. On coinbase.com, this can be done in a matter of minutes. You can use other online exchanges to buy it with your credit card, or you can buy it from someone with hard cash. You can even use free bitcoin software to set up your own virtual wallet to receive money by logging into blockchain.info.

  The appeal of bitcoin is that it liberates you from the conventional banking system. And you don’t actually need to understand how the digital currency works in order to use it, just as you don’t need to be an expert to use a computer.

  Bitcoin may have started as an experiment, but it has become a genuine player in the financial world and the world at large, even gaining recognition as a word by the stodgiest of sources. Along with the term “twerk,” it was listed in the Oxford Dictionaries in its quarterly update in August 2013. This delighted members of the bitcoin community, although some expressed disappointment that the word satoshi—the smallest denomination of bitcoin possible—didn’t make the cut. The dictionary defines the word as “[a] type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”

  Angus Stevenson, head of dictionary projects there, has said that the criterion for what word makes it into the publication is strict. “Inclusion in the ODO provides a recognition that a term has entered public consciousness and wide public use, it doesn’t make any judgement on whether it is good, bad, worthwhile or anything else.

  “It’s just that we feel that, as a word, it is in genuine wide use and we feel it will stick around as part of the language. It may become a byword for a failed scheme, but we don’t know in real terms what will become of it.”1

  It has indeed seemed possible that it might end up as “a byword for a failed scheme.”

  Bitcoin attracted great media attention after the collapse, in February 2014, of the world’s first large-scale bitcoin exchange, Mt. Gox. Mt. Gox entered bankruptcy protection on February 28, 2014, after asserting that it had been hacked and had lost nearly 850,000 BTC with an estimated value of over $460 million at the time. The actual amount that was lost, hacked, or stolen eventually turned out to be 650,000 BTC, after 200,000 BTC was later recovered (still an astronomical amount of money). Hundreds of thousands of people lost money in the collapse. Some individuals lost $150,000; some claim to have lost millions. A month after the collapse, the Japanese police opened a formal investigation into what happened to the missing amount at the request of Mark Karpelès, who provided them with all the data he had.

  Only 1 percent of those who lost money were Japanese.

  This is ironic because Japan is essentially the birthplace of bitcoin. Its enigmatic creator, Satoshi Nakamoto, is supposedly Japanese. Mt. Gox, which transformed the currency from a novelty into a money market staple, was located in Tokyo.

  The Japanese government now regulates the currency and the transactions related to it. Officials are also apparently looking for Nakamoto-san, whose real identity is unknown. Why? Perhaps to give him an award or, alternatively, arrest him.

  It’s hard to talk about bitcoin without Nakamoto coming to mind. It’s like trying to talk about Christianity without bringing Jesus into the picture.

  We are assuming here that this person is a man, but he could be a “she” or even a “they.” One could say he/she/they is the most sought-after figure in the information technology world.

  Bitcoin was essentially born on October 31, 2008, when Nakamoto published a scientific paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” for a cryptography mailing list, describing the currency and the way the problem of double spending can be resolved to prevent the currency from being copied. Cryptography is the art of creating secret and secure means of communication, and it fascinates many programmers. The paper proposed a digital currency that could be “sent directly from one party to another without going through a financial institution.”

  However, while bitcoin was heralded as something that might liberate the financial markets in the way the Internet liberated information, there were some inherent problems. Ironically, it was Special Agent Tigran Gambaryan of the Internal Revenue Service (IRS) who in a March 2015 affidavit gave the best definition of bitcoin available for the layman, a definition made so simple that even a federal judge could understand. This isn’t to imply that federal judges are stupid; they’re just not computer science experts.2 Read closely and you’ll understand more about bitcoin than many journalists writing about it, and perhaps many people who trade it.

  Bitcoin is a form of decentralized, convertible virtual currency that exists through the use of an online, decentralized ledger system [the blockchain]. While Bitcoin mainly exists as an internet-based form of currency, it is possible to “print out” the necessary information and exchange Bitcoin via a physical medium [cold storage, paper wallets]. The currency is not issued by any government, bank, or company, but rather is generated and controlled through computer software operating via a decentralized network. To acquire bitcoins, a typical user will purchase them from a Bitcoin seller or “exchanger.” It is also possible to “mine” bitcoin by verifying other users’ transactions. Bitcoin is just one form of digital currency, and there are a significant number of other varieties of digital currency.

  Bitcoin exchangers typically accept payments of fiat currency (currency which derives its value from government regulation or law), or other convertible virtual currencies in order to obtain bitcoins. When a user wishes to purchase bitcoins from an exchanger, the user will typically send payment in the form of fiat or other convertible virtual currency to an exchanger, usually via wire or ACH, for the corresponding number of bitcoins based on a fluctuating exchange rate. The exchanger, often for a commission, will then typically attempt to broker the purchase with another user of the exchange that is trying to sell bitcoins, or, in some instances, will act as the seller itself. If the exchanger can place a buyer with a seller, then the transaction can be completed.

  When a user acquires bitcoins, they are sent to the user’s Bitcoin address. This is somewhat analogous to a bank account number [or a safety-deposit box], which is comprised of a case-sensitive string of letters and numbers amounting to a total of 26 to 35 characters. The user can then conduct transactions with other Bitcoin users, by transferring bitcoins to their Bitcoin addresses, via the internet.

  Little to no personally identifiable information about the payer or payee is transmitted in a Bitcoin transaction. Bitcoin transactions occur using a public key and a private key. A public key is used to receive bitcoins and a private key is used to allow withdrawals from a Bitcoin address. Only the Bitcoin address of the receiving party and the sender’s private key are needed to complete the transaction, which by themselves rarely reflect any identifying information.

  All Bitcoin transactions are recorded on what is known as the block chain. This is essentially a distributed public ledger that keeps track of all Bitcoin transactions, incoming and outgoing, and updates approximately six times per hour. The block chain records every Bitcoin address that has ever received a bitcoin and maintains records of every transaction and all the known balances for each Bitcoin address.

  Digital currencies, including Bitcoin, have many known legitimate uses. However, much like cash, bitcoins can be used to facilitate illicit transactions and to launder criminal proceeds, given the ease with which they can be used to move money anonymously. As is demonstrated herein, however, in some circumstances bitcoin payments may b
e traced to accounts at traditional financial institutions using the block chain.3

  The idea of public keys and private keys is a little hard to grasp. Think of it this way: the public key is like a safety-deposit box that’s open to the public. Anyone can put money into the box, but only the person with the private key (combination) can take the money out. If you want to take out the bitcoin deposited, you’ll of course need to know where the safety-deposit box is and also have the combination. If you don’t have both, your bitcoin is just about worthless.

  A digital currency seemed like a good idea to many programmers, but there was always a major issue: digital items are easy to reproduce, easier than coinage or paper money. The act of spending digital money presents a problem if it does not remove the data from its owner. It’s like when you send a digital photo from your cell phone to a friend via e-mail, you duplicate the digital data: there is one version of your photo on your phone and the same data on your friend’s. Nakamoto came up with a brilliant solution in early 2009 by implementing the scheme called “proof-of-work” that would require users to verify all transactions in order to generate the currency and have it all recorded on a public ledger, so the users could police the system themselves and be rewarded for doing so.

  Bobby Lee, the chief executive of China’s best-known bitcoin exchange, BTCC (formerly BTCChina), explained it this way when we interviewed him:

  What happened with bitcoin that is revolutionary in the digital world, is that it allowed [you] to send something via the internet, like you send an email, except that when you send an email both the recipient and the expeditor have the email; but with bitcoin, when you send ten coins to someone, there are ten less in your wallet, and ten additional coins in the [other] person’s wallet. And that is a powerful difference. It was impossible before bitcoin came along. For example, on Microsoft Word, it is the basic difference between “copy/paste” and “cut/paste.”