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Tech by VICE

Who's Willing to Go to Jail for Bitcoin?

In court on Monday, the government invoked the old days of Bitcoin—the rush of a financial frontier and the proud free-wheeling of the Silk Road—days that many proponents of Bitcoin wish could stay buried.

by ALEX PASTERNACK
Jan 30 2014, 7:00pm
Image: Victor Casale / Flickr 

On Monday, the morning after he was arrested by IRS and DEA agents at the airport on accusations of money laundering, Bitcoin evangelist Charlie Shrem appeared in Manhattan criminal court, where a US attorney told a judge that the 24-year-old shouldn't be released on bail. And to make his case, the attorney played a YouTube video.

In a video interview posted on the site on October 18, 2012, and played on a big screen in the courtroom, Shrem told the libertarian activist Adam Kokesh that that he was prepared to leave the US if his company were "taken down," and that he and other core Bitcoiners were "ready to go to jail for Bitcoin."

Bitcoin "works the same way file sharing works," he explained. "They can shut down Napster, they can shutdown Kazaa, they can shut down Bittorrent clients, but they can never shut down file sharing." He continued:

What the government can also do is try to arrest or take down companies that try to push Bitcoin ahead. If our company which acts as a bridge between bitcoins and dollars were taken out, Bitcoin would take a hit. We have contingency plans, I have a plane ticket ready to take me to Singapore with another corporation already set up. And you know a lot of us core Bitcoiners are ready to go to jail for Bitcoin.

"We have someone from the Department of Homeland Security trying to come to our office and speak to us," he said with a grin. "We don't wanna let 'em in."

It looked like the old days of Bitcoin: the rush of a financial frontier and the proud free-wheeling of the Silk Road—days that many proponents of Bitcoin today wish could stay buried online, as they propose new ideas for self-regulation and wash themselves of more extreme libertarian hues in a continuing reach for mainstream adoption. Happily for Bitcoin's boosters, a Google search for the term no longer starts with entries about the Silk Road. But like email records or Tor-based transactions, sometimes thought to be secret, old improprieties aren't invisible. And they're especially visible when they're part of the mainstream narrative, where Shrem was sometimes front and center, cheering the ideals of a decentralized currency model.

In spite of Shrem's idealism however, the government says he worked with a Silk Road exchanger named "BTCKing" for ten months to launder over $1 million in bitcoin. Just a week after the interview, on October 27, 2012, Shrem's business with the exchanger, whose real name is Robert Faiella, ended when BitInstant's cash processor told Shrem he had failed to provide "an acceptable response" to "numerous requests for information" about BitInstant's "resellers and their clients."  There's no evidence that Shrem continued to engage with the Silk Road. 

On Monday, Shrem was released on a $1 million bond, subject to house arrest until his next court date. That figure was derived from Shrem's known assets, including his family's two mortgages. But apart from the mention of an offshore account there was no mention of any Bitcoin assets, nor of his ownership in the Bitcoin-accepting midtown nightclub EVR. His lawyer told the judge that Shrem's claim to being a "millionaire" was based on speculation. While Bloomberg Businessweek had dubbed him a "Bitcoin millionaire", attorney Keith Miller said that BitInstant simply had a valuation of millions of dollars, but that that had changed since the company ceased operating over the summer.

In arguing that Shrem had "a strong incentive to flee," a government attorney told Judge Henry Pitman that Shrem had "held himself out to be a Bitcoin millionaire," that he boasted on Twitter of owning a private plane, and that during his arrest at JFK airport, investigators had found documents that "showed he has an offshore bank account."

The flee concern isn't insignificant—Ross Ulbricht, the alleged founder of the Silk Road, was planning to leave the country when he was nabbed, while a number of Bitcoin exchanges have set up in or moved to other countries, like Guatemala or Panama. And Bitcoin makes fleeing easier, Assistant US Attorney Serrin Turner argued, as IRS Special-Agent-in-Charge Toni Weirauch sat next to him. "Think of [bitcoins] as a portable offshore bank account," he said. 

But Shrem's YouTube testimony was more complicated than it might have seemed. He wasn't articulating a desire to flagrantly break the law; he wasn't "ready to go to jail" for drugs, presumably not. He may have been shooting from the hip, but he was parroting a kind of fervor that's given rise to Bitcoin: a passion for decentralization and a distaste for regulation. 

BitInstant was one of 22 firms that were targeted in June and August by the New York Department of Financial Services in an inquiry into their business practices. In July, BitInstant closed, days after it was hit with a class action lawsuit by customers who claimed the company made "false representation about its services and the inflated fees that it failed to refund as promised.” 

Even as Shrem continued to fly around the world—the government said he'd left the country nine times in the past year—there had been a sense floating around the community that things were amiss at BitInstant; Shrem himself said that he had ceased operations at Bitinstant temporarily because "we want to make sure all of our ducks are in a row."

With Bitcoin in some legal and regulatory limbo, one Bitcoin enthusiast told me today that the prevailing attitude is "you only wanna break one law at a time"—meaning, if you're dealing in Bitcoin, you don't want to push the limits any farther than you already are. Shrem himself was pushing a similar idea in recent public appearances. 

The absence of regulation around Bitcoin—part of its decentralized appeal, but also a potential weakness—was the reason that New York State's Superintendent of Financial Services, Ben Lawsky, called a two-day public hearing this week to discuss the creation of a "BitLicense."

“If you want to develop a virtual currency or a virtual currency exchange business, knock yourself out,” U.S. Attorney Preet Bharara told the Association of Certified Anti-Money Laundering Specialists in a speech on Monday. “But you have to follow the rules. All of them. And if you want to invest in such a business, you better kick the tires and make sure compliance there is not a joke.”

On Tuesday, Shrem resigned from the board of the non-profit Bitcoin Foundation, which is devoted to spreading the adoption of the currency as a highly adaptable, decentralized, and inexpensive micropayment system. In a statement, Jon Matonis, the foundation's executive director, wrote, "While Charlie has contributed a great deal of personal effort and resources to enhance the adoption of Bitcoin worldwide, a prolonged legal dispute would inevitably detract from advancing that core mission."

But that mission looks increasingly at odds with another of Bitcoin's missions, one highlighted by Shrem's YouTube appearance. In talking about leaving the country or going to jail for Bitcoin, Shrem was parroting the anarcho-libertarian rhetoric of some of its most die-hard adherants, whom he referred to as the "core Bitcoiners." In his public appearances, Shrem wasn't flaunting the rules but sounding Bitcoin's political rallying cry: the traditional centralized banking system is tantamount to coercion.   

Even if Bitcoin were to fail and they rounded us all up and put us in a dark room for the rest of our lives, the idea of Bitcoin is too big right now...

The libertarian streak evidenced by Shrem's YouTube video may be fading from Bitcoin's core—you won't hear any "core Bitcoiners" professing a willingness to go to jail—but the adherents still see regulation as a hindrance to innovation. While Wall Street complains that Bitcoin is under-regulated, the Bitcoiners volley back more vitriol at the banks: if Wall Street traders involved in the financial crisis can escape criminal prosecution, and bankers at HSBC can launder drug money with relatively minimal penalties, the powerful financial industry deserves a shake-up that government can't be expected to bring.

This is part of its populist appeal, the political aspect that has captivated everyone from Satoshi to the Dread Pirate Roberts to Silicon Valley investors. To some, the Bitcoin cause is about changing banking for the whole wide world, but it also echoes a resistance against government and corporate intrusion that began in the days of public crypto and that has bloomed in the post-Snowden era.

"What Bitcoin does and why the government hates it," Shrem told Kokesh later in the same 2012 interview, "it takes the power of monetary policy out of the hands of the government.... Even if Bitcoin were to fail and they rounded us all up and put us in a dark room for the rest of our lives, the idea of Bitcoin is too big right now. The following it's amassed is huge."

But central to the health and future of security and anonymity and virtual currencies is trust. The strength of a democratic government, like the strength of its currency, depends upon trust in that government and the protections afforded by its laws.

Trust in bitcoin depends not just upon the open-source code that verifies every transaction (and eventually perhaps on some regulation), but also upon the personalities who help spread its adoption. And to some of those people, the profit motive, not the long-term practical and political ideals, can be corrosive.

Trust in Bitcoin has been widely attacked: it's a volatile, "virtual high risk speculative commodity" and "a hyper asset bubble," some say; at the start of its rise, as Shrem knew, a portion of Bitcoin's business (estimated to be a fairly large portion) was happening in illegal markets. And maybe, as the Dread Pirate Roberts seemed to believe, the early success of the cryptocurrency would depend upon that dark market. Even now, in the wake of the FBI's Silk Road bust, some bitcoins—now estimated to have a $12 billion market cap—are still fueling illicit activity (just as a large portion of the world's cash is too).

So how will Bitcoin retain the benefits of a cash-like system without the drawbacks of that system? How will the currency's proponents continue to trump the virtues of deregulation (or regulation lite) while the boogeyman of the Silk Road lingers in the background? The dilemma has never been starker.

At the hearings this week, the venture capitalist Fred Wilson suggested a safe harbor law to protect those who had been less than scrupulous in an era before regulations, when Bitcoin's math was fuzzier. “The vice phase is in the rear view mirror," he said.

But that phase is on full display in the government's complaint against Shrem (pdf). He knew the Silk Road was illegal, and said so just months after he launched Bitinstant, on January 17, 2012, when he first replied to "BTCKing." "This is illegal," he wrote to the money exchanger. But a few days later, his co-founder Gareth Nelson asked Shrem why he was doing business with someone with such clear affiliation with Silk Road. "He has not broken a law and Silk Road itself is not illegal,” Shrem emailed back. He added, “We make good profit from him.”

Whether or not this is a matter of self-delusion, the moment conveyed the stark contrasts that make Bitcoin so intriguing (to regulators and to journalists): Bitcoin lies somewhere between a fringe currency and a lawless marketplace, between those who see it as freedom from an old financial system—as currency, as a money transfer tool, as a store of value—and those who see it, or saw it, as freedom from the law.

As government regulators and Bitcoin lovers talk about how to make the boundaries clearer—how to make Bitcoin more boring, essentially—Shrem's is a cautionary tale for an era of Bitcoin that still lingers: on the frontiers of finance, it can be easy for one kind of freedom to bleed into the other, especially when they're both making good profit.