LETS TALK BITCOIN

Episode 87 The Captive and the Mountain

Participants:

Adam B. Levine (AL) Host
Andreas M. Antonopoulos (AA) Co-host
Stephanie Murphy (SM) Co-host
Charlie Shrem (CS) Founding member of Bitcoin Foundation
David Perry (DP) Author of Coding in My Sleep blog, chief architect at Bitcoinstore.com


The following program is for informational purposes only. Cryptocurrency is a new
science so do your homework before putting money on the line.

AL: Today is February 25
th
2014. Welcome to Episode 87 of Lets Talk Bitcoin, a twice
weekly show about the ideas, people and projects building the new digital economy and the
future of money. Today, weve got a show thats a snapshot of the current scene. Last
week, Stephanie, Andreas and I broke new ground and had the embattled Charlie Shrem on
as a guest host that wound up being part interview, part tell all. This all happened against
the backdrop of extreme uncertainty coming out of MtGox and, as the episode came close
to airing, increasingly more information was coming to light. Late on Friday evening, I
turned on the recorder again with Charlie Shrem and eventually David Perry, of Coding in
My Sleep, as the hits just kept on coming with the news out of MtGox. Take this show for
what it is a moment frozen in time during what might be the death of the venerable
MtGox. [1:06]


___________________________________________


AL: My name is Adam B. Levine and Im pleased to introduce the other hosts here at LTB,
Dr. Stephanie Murphy. [1:14]

SM: Hi. [1:15]

AL: and Andreas M. Antonopoulos. [1:17]

AA: Hello. [1:18]

AL: Weve also got a special guest Charlie Shrem, founding member of the Bitcoin
Foundation and guy trapped in Brooklyn, at this point in time. Charlie, how are you doing?
[1:25]

CS: Hi, I could be better but not so bad. [1:28]

SM: Yeah, youve had a wild couple of weeks Charlie? *1:30+

CS: Yeah. [1:31]

SM: I dont know if people are familiar with your case but you, basically, have been the
target of a pretty serious investigation with some charges and its really affected your life,
huh? [1:41]

CS: Yeah, I mean I was speaking at a conference in Amsterdam. Their CES, their Consumer
Electronic Show was very big and as soon as I landed home at JFK airport in New York, I was
immediately arrested by a task force of over seven agents from the DEA and IRS, put into
Federal prison overnight before my (??) [2:04]

SM: This came as a complete shock to you? [2:06]

CS: Complete shock to me as we had been working with state government of New York for
over two years in my capacity of BitInstant, helping them develop the idea of the Bit Licence
that people are familiar with, developing the ideas for the hearings. I was the one who
actually helped them invite and create the panels. I was supposed to be testifying at the
New York state hearings as well and this is a political battle, I guess. I mean, I was arrested
the day before the hearings and my invitation rejected obviously as I was sitting in prison
during the hearings. Were not really sure whats going on. *2:38+

SM: Do you regret trying to work on that? [2:42]

CS: It kind of sucks that a lot of the information that is being used against me, I voluntarily
gave to them. The evidence comes down to pretty much emails and most of the stuff is
taken completely out of context and theyre... (Im not going to say joke) but its scary. They
are serious crimes if someone did them. Money laundering is not a joke. Operating a
money transmitter business is not a joke either. These are scary, scary charges and the
thing is, the time period that the alleged crimes took place was in early 2012, over a year
and a half ago. We changed the BitInstant model since then, I started at the Bitcoin
Foundation and I spoke to local, state and federal regulators. I signed proffer agreements.
Proffer agreements are, basically, where you go in there and you give them information and
they cant use this information against you. What they did was they used this information
as leads to use against me in the future. I pretty much dug my own grave here. People
warned me about this. They said Charlie, they will come after you and I was naive and I
said No, Im out in the open, Im not a criminal. Everyone knows who I am, I make
speeches, I go out there and Im very pro working with the state on Bitcoin. We need
regulation. There are things that need to happen if youre going to operate a company in
the United States. You need to follow the laws, legally or work to change them. People
warned me and they said You should stay under the radar and I said No, Im not going to
do that. Im going to be a Bitcoin evangelist. They were all right. It bit me in the ass. [4:09]

SM: Do you still think Bitcoin needs regulation? [4:13]

CS: I think that Bitcoin needs to work in cooperation with authorities and what that is, I
think that... Ill just give you an example, the state regulators, about a year ago, said to me
Charlie, how should we regulate Bitcoin? I said First of all, you need someone like me in
your office explaining to you that you cant regulate Bitcoin. However, you can regulate
effectively Bitcoin companies that operate in the space the financial service industry, that
you can do. They said Alright, should we apply the existing money transmitter laws to
them. I said Well no because those laws are not transparent, it takes years to get a
licence, you need over $5m and even though we live in the United States of America, we
need a different licence for every single state, whereas, if you live in Canada, no matter
what province you live in, you just need one licence and it works in the whole country. The
same thing in Europe; if you have a licence in Poland, you can work with every European
country. In the United States, why cant we have that? *5:10+

SM: Why set up a Bitcoin business in New York? Im not blaming you or anything but do
you wish that you had just gone a different route and gone to Panama or Canada or
something? [5:19]

CS: My understanding was that Im from New York, born and raised in New York with a lot
of roots and ties to it, the New York community here going back since I was a kid, very close
with a lot of people here and my family and friends are here. If youre going to operate in
Panama or Canada, if you want to be in the US market, you still need those licences. Its not
going to change anything if I go out... if I want to launch in Canada and just want to get the
European market or the Canadian market, thats one thing but there is such a huge Bitcoin
market in the United States that you have to do it. I went full frontal and went after it.
[5:59]

SM: Have you ever read Atlas Shrugged? [6:02]

CS: I didnt read it but Im really familiar with Ayn Rand. *6:05+

SM: Sometimes I feel like the Bitcoin world is like mirroring the plot of Atlas Shrugged. Ive
said it a couple of times before but... [6:13]

CS: No, its true. There was a quote on Reddit and I put it on my Facebook wall yesterday.
Its a quote that what she said was The first motor was considered foolish. The airplane
was considered impossible. The power loom was considered vicious. Anaesthesia was
considered sinful. But the men of unborrowed vision went ahead. They fought, they
suffered and they paid. But they won. [6:35]

AL: Thats a good quote. *6:36+

CS: If you ever read what Western Unions executives, back in the day, thought about the
telephone, its hilarious. When people are in something, they are blind to the next phase
and, I think, intentionally because it could replace them. [6:48]

AA: Charlie, looking at this from the inside really, do you see this as an attack against
Bitcoin or is this more likely large bureaucracies with inertia and individuals trying to make a
career out of adding Bitcoin to their prosecutors resume? *7:06+

CS: The latter. [7:07]

AA: This is not a warning shot for the Bitcoin eco-system? Were going to come and pick
you off one by one? [7:13]

CS: If youre not doing anything illegal, then you dont have anything to worry about. [7:17]

SM: (Laughter) Whos not doing something illegal? *7:20+

CS: Actually yeah, I should take that back but what Im getting at here is there was a reason
that they went after me Andreas. Like you said on the Joe Rogan show, there was a reason
that they arrested me the day before the Senate hearings, at the airport. If you read the
news article, they didnt say that I was landing; it said I was arrested at the airport, as if I
was fleeing. They did all this on purpose. [7:40]

AA: To help a prosecutor gain the publicity that will help with his state Senate run, for
example? [7:47]

CS: Exactly. Oddly enough, how did the press know I was going to be arrested? The press
was at the airport. Who told them? My lawyers didnt know. The only person that knew
they were going to be arresting me was the Prosecutors Office. Attaching things like money
laundering to it; they want to make me seem like a criminal. Why? I dont know. *8:05+

AA: Its much harder to go after some of the real money laundering criminals in New York
because they have political power and can fight back. [8:14]

SM: They have licences. [8:14]

AA: No, I mean, its not about licences, its about raw political power. They can make a
prosecutors career, destroy it, they can absolutely destroy the career of a prosecutor and if
a prosecutor decides they want to go after someone who, say, has destroyed a million
families by mortgage foreclosure fraud, then that prosecutor is going to find themselves in
very deep trouble, very quickly. [8:38]

CS: Its a club. Its a club. The way it works is you have Assistant US Attorney... like, for
example, in my situation you have Preet Bharara. Preet Bharara is the US Attorney,
appointed by Barack Obama. There are other US Attorneys but he is one below Eric Holder.
When Eric Holder, the Attorney General, was... they were thinking about him resigning, the
first person on the list of taking his place was this guy, Preet Bharara. The reason is Preet
Bharara is the US Attorney of the Southern District of New York. The Southern District of
New York is the largest district in the country and it gets all the financial cases. [9:12]

AA: Of which there have been surprisingly few in the last five years. All the financial cases
and if yours is the biggest case theyre prosecuting, thats something wrong with our justice
system. [9:25]

CS: You have this guy, with tax holder money, to go after a 24 year old kid from Brooklyn
over nothing more than $1m. Its not the money laundering that we all understand it as.
Its not money laundering that theyre going after me where you take money, you launder it
and then you wash it and try to hide (??). This is Section 2A of the money laundering
statute. Section 2A Im not super familiar with it but its where you help move money
internationally and you conceal it in some way or another. I dont understand it specifically
but its not the standard money laundering that we all know it as. [10:04]

AL: Charlie, just so were clear, do you deny these charges against you? Are you fighting
these charges against you, these are incorrect charges? Were talking about how youre
being targeted but we havent actually talked about whether or not youre actually saying
its not true. *10:20+

CS: This is the money laundering statute that theyre going after me for. Section 2A of the
Internal Revenue Code 1986, it says Whoever transports, transmits or transfers, or
attempts to transport, transmit or transfer monetary instrument of funds from a place in
the United States or throughout a place outside of the United States, or to a place in the
United States, or through a place outside of the United States a) with the intent to promote,
carrying on a specified unlawful activity. Ive just come down to this this guy BTCKing was
allegedly advertising, on Silk Road, the ability to buy Bitcoin. This guy allegedly was on Silk
Road advertising Buy Bitcoin with cash. What he did was, he would then allegedly send
customers to BitInstant, customers would then use BitInstant, not to buy Bitcoin but to
merely fund their MtGox accounts because (I dont know if you know) BitInstant never sold
Bitcoin. It merely put money into your MtGox account. We had money in our MtGox
account; wed transfer it to your MtGox account. Then, wed put money into their MtGox
account. At that point, the BitInstant transaction was completed, over. Now, at that point,
the customer can then use that money to buy Bitcoin. Once they bought the Bitcoin, they
could then send the Bitcoin to their Silk Road wallet. Once it was in their Silk Road wallet,
they could then use it to buy illicit goods on Silk Road. [11:47]

AL: Did these customers look any different to your company when they were coming in?
[11:51]

CS: Absolutely not. [11:51]

AA: Heres the other thing. I mean, I visited the Silk Road back in the days... [11:56]

CS: Be careful admitting that. [11:57]

AA: No, I visited it in order to see what was on there and I wanted to understand... [12:02]

SM: For research purposes. [12:03]

CS: Research purposes only. [12:04]

AA: Yeah, I had no interest in the products they were offering but I really did want to see
what was offered because I was curious. What is the breadth of the products. I was reading
things on the news that we were talking about on the show so I visited the site and I logged
on. Heres the interesting thing. One thing I noticed is that yes, there were obviously a
broad variety of illegal products on there but there were also a lot of legal products. Silk
Road was not just selling drugs, they were also selling... [12:36]

CS: You could buy shirts, art, and clothing. [12:38]

AA: Banners and T-shirts and baseball caps, pins and mugs and things like that. In fact, I
met someone who asked me if they could take my safe paper wallet product, which is
essentially just a colored pre-printed sheet of paper for making prettier paper wallets. Its
now discontinued but, at the time, they asked me if they could sell it for me on the Silk
Road. Essentially, this was a merchant who was selling T-shirts and things like that, as far as
I know. [13:05]

CS: Interesting. [13:06]

AA: They said I sell on the Silk Road because, as a merchant site or market site, Ive got
buyers who have trust metrics and reviews behind them and Ive got a captive audience.
Ive got a large audience of people who already have money in the system on Silk Road and
therefore, can buy... essentially, can make impulse purchases of things like mugs and T-
shirts and Bitcoin pins, things that are perfectly legal. This was a merchant who was selling
legal stuff and just using Silk Road because that was a relatively vibrant marketplace with
people who had reviews on there. [13:42]

CS: It was really a drummed down version of EBay. [13:44]

AA: Exactly. [13:45]

CS: Version of EBay without all the rules and also the fees. EBay takes like 30%. [13:48]

AA: Obviously, 80-90%, probably, of the products on there were... perhaps you wouldnt
find on EBay and reading through the list was pretty eye-opening for me but... [14:02]

CS: I didnt know half of those drugs existed, right? What is this stuff? *14:06+

AA: I had to look some of those things up on Wikipedia but, at the same time, there was a
percentage of products that were perfectly legal, in fact, I think one of the users of the site
who had their funds seized is now suing to get it unseized under the claim that they only
used the site to purchase legal products. Even the claim that someone who has an account,
or even more so, someone who has money on Silk Road and has used it as a customer, that
that guarantees that they were buying drugs, I dont think is true. There was a substantial
non-infringing or non-illegal use going on, it wasnt zero, whatever that means. *14:48+

CS: I agree with you 100%. There are so many steps removed. If you can make the case
against me, you should be able to take down any person who runs an ATM machine because
more often, someone who is using that ATM machine is going to be pulling out cash in order
to buy drugs on the street, or anything illegal for that matter. [15:08]

SM: Yeah. [15:09]

AA: I think there is also a substantial difference between the allegations against you which
involve, from what I read at least, selling Bitcoin to someone who sold Bitcoin to someone
who possibly bought drugs. [15:20]

CS: Yeah. [15:20]

AA: Again, were talking about buyers of drugs, then the allegations for example against
(??) or HSBC, where they were delivering suitcases of cash and laundering suitcases of cash
for the most violent drug cartels in the world at a time when there was, effectively, almost a
civil war in Northern Mexico between the Sinaloa cartel and government forces that caught
up and killed 19,000 people, most of them civilians. [15:53]

CS: The government admitted... they already admitted to this. I forgot who made the
statement the other day but hes like Yeah, the reason we didnt arrest these guys is
because if we arrested HSBC executives, they would lose their banking licence and the banks
would fail. Too big to fail. I wasnt too big to fail. *16:10+

AA: Too big to fail is too big to jail. Again, I think beyond the scale, and I dont think the
scale is necessarily the issue because, at least in my mind, a crime that has a victim or that
victimizes people in the most horrible way, it doesnt really matter the scale although, of
course, we are talking about things that are six hundred thousand times larger in scale.
[16:32]

CS: Yeah. [16:32]

AA: Even without the scale, I think there is a fundamental difference between the idea that
someone who allegedly sold Bitcoin, thrice removed, from a potential buyer of recreational
narcotics versus someone who is funnelling money directly to the cartels. Thats a
qualitative difference, I think, thats important and it speaks to prosecutorial discretion,
right? Theres a reason prosecutors have discretion and its not so they can pick the cases
that give them the best resume with the lowest political risk. One can pursue the cases that
cause the most harm to society. [17:14]

CS: One could make a case, not that Im making the case because this interview probably
will be used against me in the court of law so Im saying this, not me prosecutors. A case
could be made, not that Im making the case, but a case could be made that Silk Road did a
service to the drug industry because what youre doing is all these people are getting their
drugs from somewhere, whether its Silk Road or its on the street, theyre getting their
drugs somewhere. Now, would you rather them getting it from the street, supporting drug
cartels with dirty needles, spreading HIV, all these negative connotations, money thats
probably going to be used to kill people or would you rather them buy it on a safe
marketplace (??) reviews, high quality from people who are probably growing this stuff or
making this stuff in their own homes and not part of larger drug cartels kidnapping people.
[18:02]

AL: I think that thats a question, unfortunately, that theyve answered several times
before. They would much rather that there be the harm. [18:09]

AA: Right. This is really the underlying issue which is that the war on X is usually a great
excuse to do enormous amount of fundraising, essentially, unlimited budgets. In this
particular case, these online marketplaces threaten the cartels. They threaten the cartels
more than they threaten any other organization. They dont threaten the viability of drug
enforcement because, in fact, if anything they provide a very easy trail and a very easy way
to honey pot the co-conspirators involved in running the site. [18:45]

CS: Imagine Silk Road worked, imagine... [18:48]

AA: Yeah, it threatens the big cartels, it takes away their funding because if an addict, who
has no choice but to fulfil their addiction, has a choice between doing that dark street
corner with someone with a gun or a knife or a violent criminal versus via USPS (laughter)...
no contest. [19:07]

CS: Imagine states can issue medical marijuana licences and someone can upload their
licence ID number onto Silk Road, therefore, legally allowed to buy marijuana on Silk Road.
Imagine a situation like that. That would, effectively, wipe out marijuana industry and
whats the most imported drug from Mexico, its marijuana where the cartels make all their
money right now. [19:30]

AA: But it really good on a prosecutors resume if they can combine drugs, money
laundering and Bitcoin in one sentence. That looks better, at least, to their superiors and
the people making the appointments and to a certain section of voters. To me, it would
look better if they frogmarched a bunch of bank executives out of Wall Street for destroying
the lives of millions of people, while stealing trillions of dollars. [19:54]

CS: Exactly. Im going to get a jury if this case goes to trial. Theyre going to pick a jury of
old ladies who just hear drugs put this kid away. Its a scary thought. *20:04+

AA: Ive been on a jury with old ladies who are much smarter than the prosecutor
(laughter) and... [20:14]

CS: The prosecutor in a federal case, the prosecutor pretty much has a final say over whos
going to be on the jury and whos not. *20:19+

AA: Yeah, thats the difference. I was on a jury, actually, in a different country where a case
like that was prosecuted and I can tell you the jury of the peers knew very well what was
harmful and what was not. [20:30]

CS: Im learning that state cases are much more fair than federal ones are because federal
prison is nicer. People prefer to be tried federally. [20:40]

SM: I dont have much faith in juries but good luck Charlie. *20:44+

AA: Yeah, I hope you actually make it to a jury because, unfortunately, what weve seen
with the Justice System, especially in the Federal courts, is that 99% of these cases get plea
bargains because they present you with an impossible choice. Take a risk against a 60 year
sentence versus pleading out for a year or two. [21:04]

CS: Thats the whole thing. Thats what it is. [21:07]

AA: Its blackmail. *21:08+

CS: I cant discuss the merits of it but it would be face a 30 year sentence or work with us
and probably get no time so plead for everything. Now, I have to basically plead to things I
didnt do. *21:21+

AA: Which would help the prosecutors resume. *21:24+

CS: And kill my future. [21:25]

AA: And put a black mark on Bitcoin. [21:27]


______________________________________________


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______________________________________________


SM: I was disappointed, Charlie, honestly with the response that you got from the Bitcoin
Foundation. I dont know if you want to talk about that. *22:35+

CS: Just going to go there, yeah. [22:35]

SM: It seems like youve already been tried in the court of public opinion, as far as theyre
concerned. [22:41]

CS: The Foundation is, unfortunately, right now... there are a lot of people in the internal
Foundation in politics, unfortunately and I have so much support from a lot of board
members but I have board members who are out to get me. They want the power. Its a
power trip. [22:58]

SM: What power? (Laughter) [23:00]

CS: Unfortunately... well, money. The Foundation has a lot of money... [23:04]

SM: Sure. [23:05]

CS: ...and with money, you can pretty much do whatever you want. The Foundation has a
ton of money. The Foundation, at the end of the day, is my baby. I started that thing in a
room with Gavin and the Foundation will exist beyond the current board. The Foundation
itself is an amazing thing. The people that are involved in it and are running it today, may or
may not be. I mean, look at the response to MtGox. Theres no response to MtGox. If I was
running the Foundation right now, what Id do is Id go out there and Id send one of my
Foundation board members to Tokyo and sit in with MtGox every day. The Foundation
should be posting regular updates over whats going on with MtGox. The Foundation
should be treating MtGox as the Federal Government treated big banks during the 2008
crisis. [23:51]

AL: I think thats an interesting proposal for the Foundation to do but youve been with the
Foundation, like you said, since the beginning and Ive never seen it take any type of action.
[23:59]

CS: I resigned the minute I got arrested. The first thing I did was resign because I dont
want to bring the Foundation and drag them into my own political... legal situation. [24:07]

AL: Im not suggesting that, Charlie. Im just saying that there have been things like this
before that have seemed like maybe the Foundation should engage on and they havent.
Im just saying, like really? You would have actually sent a board member to... *24:20+

CS: Yes, Id actively... *24:21+

AA: This is the fifth Goxing. I mean, where was the Foundation during the previous four
Goxings? [24:26]

CS: I was working on it. [24:26]

AL: OK. [24:27]

CS: I was working on the MtGox issue. I was actively working with them in the Foundation
and I was very close to a resolution on that but I got arrested - a very close resolution.
Elizabeth Ploshay and I have been really, really good together working on a lot of these... no
one in the Foundation has any balls right now, except for Jon Matonis but Jon Matonis
works for the board, unfortunately and the board is just kind of like leaning back and not
doing much. [24:54]

AL: Why do you think that is? It seems like the opportunity for the Foundation to really
step out and lead on a lot of these issues is sort of passing by because there are other
organizations that have international goals, I guess, who seem like theyre coming up. Has it
just taken a long time to kind of spin up the organization to the point where you really can
address things like this? [25:11]

CS: I dont know. I mean, I guess, the mentality has just been things will blow over. If you
look at the MtGox Peter Vessenes issue, who is the chairman of the Foundation is Peter,
though obviously he is going to want to not do anything in that regard. People are saying
Kick Mark off of the Bitcoin Foundation board. Mark has never been to one meeting, ever.
[25:35]

AA: I publicly called for that and happily signed...[25:39]

CS: He hasnt been in one meeting. He wasnt even at the founding. The only reason hes
considered a founder is because they put money and they gave us a domain name. [25:44]

AA: I was one of the people who, not only signed that petition, but publicly called for Mark
to resign a while ago and not because of the problems with Gox or the bugs or whatever,
but because of the immediate reaction of putting out a press release that threw Bitcoin
under the bus and willing to sacrifice Bitcoin to protect his own incompetence. To me, that
was the final straw. You can make mistakes, you can be a useless businessman and Mark
can address that but you turn around and try to blame Bitcoin, the protocol, and say theres
a fundamental flaw in Bitcoin in a public forum. He actually re-upped that a couple of days
ago going in front of the Wall Street Journal and made an even worst statement in front of
the Wall Street Journal who quite happily reported them as facts. That is a direct violation
of the responsibilities of a director. [26:42]

CS: We dont need to go into the specifics of transaction malleability but, honestly, it could
have been fixed a very long time ago. Look at the other exchanges, they fixed it in hours,
hours. Bitstamp was up with the trolls again within a day or two. Its not a difficult thing to
fix. It is a simple as assigning your own transaction ID to withdrawals. What is MtGox
doing? Why has it taken them two weeks to do this? Why are they posting updates saying
that theyre moving their address? The whole thing, honestly, is just a joke. Its a joke. Its
nothing more than a joke. [27:17]

AA: Its a joke that has now cost Bitcoin investors about $3bn. Thats what Karpeles has
done. His incompetence... [27:29]

CS: Hes had so much benefit of a doubt. Coindesk asked me yesterday What do you
think of Mark? I gave him my praises. Mark is a nice guy. He has a kid and a wife; I know
them. I know Mark personally. Hes not a scammer. Hes not but, honestly, after that
announcement this morning, Im so furious and so angry. I dont know how much I can
defend him anymore. [27:49]

AA: Its a fine line to walk. Ive certainly made the point, as well, that there is no indication
of fraud, theres no indication of solvency issues and Karpeles has never dealt in bad faith.
He is a visionary and an innovator who led the way and gave us price discovery when there
was none. He just failed, two years ago, to recognize his own limitations and appoint a
professional CEO to do the job that needs to be done. [28:15]

CS: The proposal for MtGox is this, if theyre listening... shut down the exchange. Let
people withdraw their money, relaunch as a new exchange with a new name thats not
using PHP, because PHP sucks and thats a whole other conversation. Let people withdraw
their money. Give people the choice to try your new exchange. I guarantee you people will.
People will try it but give them the choice, dont force them, and dont hold their money in
contempt. I have money there too. I have a lot of money there. I need it. I have legal fees
to pay for and I cant pay for them. *28:50+

AL: Circling back around here, youve had a hell of a journey Charlie, Ive got to tell you.
You were one of the very earliest people into Bitcoin with your name out there, with
BitInstant, before that you were a member of the community for a long time. Where do you
think that were going with this... its hard to talk time frames that are longer than, say, six
months but lets call it a year... what do you think the Bitcoin space is going to look like in a
year? [29:13]

CS: Were going to see a lot... I think that the last year was really a big year of regulation.
Bitcoin really got on the map of States, of governments, of regulators. Youve seen so many,
in 2013, so many countries came out and either outright banned Bitcoin or made it
something that needs to be licensable or so that its fully legal, we dont care about it. It
was the year of regulation and government involvement. 2014 is going to be a huge
infrastructure year and I said that at the end of my holiday message on Christmas Day, I
put out my holiday message that I do every year and I said it. Were already seeing it start
to happen because MtGox is falling. Other companies are going to replace MtGox or MtGox
will replace itself by something else. Were going to see big companies launch, like Circle.
Were going to see Coinbase up its game. Im working on a secret project; its going to come
out soon. There are a lot of new companies that I think are going to launch and I think that
Satoshi gave us an empty island and its up to us to build the bridges, roads, tunnels. I think
that 2014 is going to be the year of the railroad. What was the biggest infrastructure
project in the United States? it was the railroad. I think its one of the biggest projects,
right? Correct me if Im wrong. That was a huge infrastructure, not just for the railroad
itself but building cities around the railroad and building highways to follow the railroad and
all these different things it was one of the biggest infrastructure projects in the country. I
think that thats what were going to see this year. *30:46+

AA: In all of this, I have to say Charlie, given everything youre facing, you come back with
just unstoppable enthusiasm and passion about Bitcoin and my hats off to you, just for that.
[31:01]

CS: Bitcoin exists on its own. It is independent and this is one of the reasons I think why
Satoshi left so early on. He didnt want to be seen as Bitcoin himself, as Satoshi being
Bitcoin. Its very hard for people to grasp this concept because you need something
physical, you need a leader. If you look at ancient religions ancient religions needed idols
because they needed to envision what god would look like physically. Its a very hard
concept for a human mind to grasp but Bitcoin exists on its own with, or without me. I
could die tomorrow, I could be thrown... Bitcoin will still exist but we need good actors, like
me and you, help push in the right direction. If we all give up on Bitcoin, Andreas, if we all
say You know what, were scared were going to go to jail and people give up, Bitcoin is
going to go right back down into the underground and is going to go right back down into
the Silk Roadish actors and stuff like that, and the money launderers and the criminals and
its just going to be terrible. Were going to be ruining a great innovation. Were going to
be ruining something amazing. We have to work so hard to bring it above ground and to
make it for good use. [32:04]

AL: Knowing what you know now and having gone through what youve gone through, if
you could go back in time and give Charlie Shrem the younger some advice, what would that
be? [32:13]

CS: Hire a compliance officer thats what I would give myself the advice because me being
the compliance officer of BitInstant because I was the employee of BitInstant, so I was de
facto the compliance officer. Not knowing enough about the money transmitter regulations
in the US is what brought me down, unfortunately. [32:32]

AL: (??) perspective. [32:32]

CS: Companies need to take regulation seriously because there are companies right now
that are still acting, and I hope you guys are listening to this, companies because you think
that because I got arrested that youre going free and clear. They are going after you. They
are. They are investigating everyone. Everyone is on their radar. They are on the Bitcoin
Talk Forums. They are on Reddit. They are in the IRC channel. They are listening to this
interview. They are. They have big budgets. There is a government task force specifically
for Bitcoin. Be careful. Dont do anything illegal. Follow the law or work to change them.
Thats what advice I can give you but until you change them, you have to follow them. Your
ignorance will not keep you out of jail. It will not. Could we end it with that song that Ode
to Satoshi song? [33:20]

AL: Yeah, absolutely. [33:21]

CS: That was an awesome song. [33:23]

AL: We can forgive you that. Im glad you like it too man. Thats my f****g favorite song
thats come out so far. (Laughter) *33:27+

AA: Mine too. I was blown away. [33:30]

(Ode to Satoshi song played)


VERSE 1
Well, Satoshi Nakamoto
thats a name I love to say
We dont know much about him
but he came to save the day
When he wrote about the way things are
and the way things ought to be
He gave us all a protocol
this world has never seen

CHORUS:
Oh Bitcoin as youre going into the old blockchain
Oh Bitcoin I know youre going to reign, gonna reign
Till everybody knows, everybody knows,
Till everybody knows your name

VERSE 2
Down the road it will be told
about the death of old MtGox
About traders trading altercoins
and miners mining blocks
But them good old boys back in Illinois
and on down to Tennessee
See they dont care to be a millionaire
theyre just wanting to be free

CHORUS:
Oh Bitcoin as youre going into the old blockchain
Oh Bitcoin I know youre going to reign, gonna reign
Till everybody knows, everybody knows,
Till everybody knows your name

VERSE 3
From the ghettos of Calcutta
to the halls of Parliament
While the bankers count our money out
for every government
Oh Bitcoin flies on through the skies of Virtuality
A promise to deliver us
from age old tyranny

CHORUS:
Oh Bitcoin as youre going into the old blockchain
Oh Bitcoin I know youre going to reign, gonna reign
Till everybody knows, everybody knows,
Till everybody knows your name
Till everybody knows, everybody knows,
Till everybody knows your name
Give me some exposure
Till everybody knows your name

Singing Oh Lord pass me some more
Oh Lord before I have to go
Oh Lord pass me some more
Oh Lord before I have to go


___________________________________________________


AL: Now, we fast forward a week for live, late night analysis. The night of the leaked
release. Charlie, its February 24
th
right now, its 10.34pm Pacific Time. Weve been talking
about MtGox and I figured it probably was good to get your thoughts on it since you seem
to have some information. Thanks for joining us. [36:26]

CS: Thanks for having me. Its 1.30 in the morning, Im having a drink. Its been a long day.
[36:32]

AL: Tell me about that. Hows this long day been? *36:36+

CS: Its been tough. Ive been on the phone with a lot of people from friends in Austria and
Australia and the Caribbean and California and New York, trying to calm people down and
get whatever information I can out. The MtGox withdrawal thing really got me angry. The
fact that MtGox blamed the Bitcoin protocol and played the blame game pissed off a lot of
us, including Gavin who wrote a blog post about it. I guess we may have been naive and we
may have not seen the signs or I guess, felt that it was better to believe that MtGox wasnt
falling apart than to believe they were. Now the information that came out today, its all
unverified at the moment. We dont know. We dont know whats true and whats not
true. The markets definitely reacting. The price at Bitstamp is down to $400 right now.
Who knows how low it will go. Its a scary night. The scariest part is that so many friends
and family had funds in MtGox. People are sending me messages that they were going to
use the 10 or 14 bitcoins that they had to pay for tuition and I feel bad for the guys who lost
thousands of coins but I feel worse for the people who lost 10 to 20 bitcoins. [37:57]

AL: To be clear, we are talking about something that is very much not confirmed, at this
point, and this is based off of a pdf that was shared that claims to be an internal strategy
document that basically, details the reforming of MtGox. Is that correct? [38:16]

CS: Yes. [38:16]

AL: OK. [38:17]

CS: Unfortunately, a lot of whats in the document coincides to the information that I had
already known over the past few days. [38:25]

AL: OK, lets talk about that because I actually agree with you, it does correspond to some
of the information that I have too like the rebranding thing. One of the things thats
interesting about this is that MtGox is rebranding towards a brand that is just Gox and I
thought that was a little strange at first because they only bought the domain a couple of
days ago. The guy talking about it says that he actually approached MtGox about them
buying it so its not like it was even their idea. *38:56+

CS: I think that they chose that domain name for better... or lack of a better one to choose
from. Two days ago, I was on your podcast and I said MtGox guys, if youre listening, this
is what I think you should do. Change your name, totally rebrand everything, new
exchange, new everything remember I said that? [39:17]

AL: Yeah. [39:17]

CS: One of the things I said also on your podcast was that I called to the Foundation to get
more involved in MtGox and to physically go to Tokyo. Do you remember me saying that?
[39:28]

AL: Yes I do and actually, I was going to play it along with this because I figured this would
be an addendum to it. [39:34]

CS: I said that and as soon as I got off the call, I emailed the founding members of the
Bitcoin Foundation. Its true that half of the board members now are part of the founding
member team so I emailed all of the founding members, including Peter Vessenes, myself,
Patrick Murck, Roger Ver, Gavin and Mark and Gonzague and I think one other person.
Seven founding members and I emailed all of them and Jon Matonis and I said Guys, lets
have a call Sunday night because we need to figure out what our strategy is here. We need
to all be on the same page and if you, as a board, need to have a vote on Monday, then you
need you need to have one on Monday but lets kind of all be on the same page here.
Through all of this, Ive kind of had Marks ear. Mark and I worked together very closely in
the BitInstant days, early on when very few people knew about Bitcoin, Mark and I became
friends. I know his wife and I told you I know his family and everything and I never thought
him to be a scammer or a fraud. Maybe I did but it was very hard for me to believe because
when you know someone personally, when you play with their children, when you eat
dinner with their family, its hard to think that theyre a fraudster. Its hard. Its hard to
have that in your head. Its really difficult. I really struggled because when you think of
people that are scammers or fraudsters, you say These are guys that are fleeing, that are
in the Cayman Islands or whatever, and theyre all over the place and theyre not real
people and theyre... thats what you think. *41:02+

AL: Mark wasnt going anywhere. Hes stable and, like you said, he has a family and he has
something to lose. I completely agree with that. Can we talk about the information in this
document that you say corresponds with information you have because Id be curious to
compare notes on that. [41:15]

CS: Sure, sure. [41:15]

AL: Let me take a sec here and pull it up, hang on. [41:18]

CS: I called this founders meeting and we got in a call. Usually, its just Gonzague on this
call and Marks legally allowed, as a founding member, to have a proxy. During this call, it
was all of us, including Mark, Gonzague and Roger Ver sitting in MtGoxs offices. On that
call, the board was still very kept out of the dark on what was going on but from the words
that were exchanged, we garnered that MtGox, by stepping down from (??) the other
Foundation and having Roger there as an adviser, and the word NDA being thrown around,
and the word rebranding being thrown around, and the word resignation being thrown
around, we all decided that what we were going to assume from this meeting was that Mark
was deciding to step down from MtGox and that new management was being involved and
that Roger was involved somehow in bringing together a possible new buyer to MtGox and
that some sort of rebranding or renewal of MtGox was taking place on this Sunday night.
Todays Monday night, just... todays Tuesday morning/Monday night for those who are
listening. This is 24 hours later. That all took place and we all left that call happy because
Mark stepped down from the Foundation which was a very honorable move and he was
stepping down from MtGox. We all assumed that buyers were being involved and that
MtGox was solvent because who would buy a company that was insolvent and that
everything would be OK. Thats what we understood from Sunday night. Then Monday
comes along and this document has been released and I was the first person on Twitter
tweeting to the Two-Bit Idiot, the guy who... Ryan, who actually released the first blog
post... that was the first person saying Dude, prove who you are. Prove that this
document exists. Prove yourself because this is very detrimental to the community. I called
him out on it and he actually called my cellphone and it turns out I actually knew who this
guy was. We had been speaking before but he never told me that this is who he was. He
showed me the document and unfortunately, now Im inclined to believe that this
document is real. [43:46]

AL: Lets talk about that. Im looking at the document right now. It is the crisis strategy
draft and it has both the old MtGox logo on it, sort of faded in the background and the new
Gox logo on it, which is a mountain. I confirmed that this branding is actually branding that
theyve been working on. The branding is, in fact, legitimate at first glance and it appears
to, at this point, also only be internal so that does lend some credibility to this in my eyes.
Its a kind of strangely worded document in a lot of places. Really, it seems to be taking a lot
of responsibility and thats something that Ive never seen MtGox do. *44:24+

CS: Oddly enough, on that note, on the note that I do have Marks ear, I said Mark, the
draft just surfaced. The problem is, if you blame Bitcoin again, the core users will all hate
you and the media will report Bitcoin is broken on your word. Its shitty advice Mark, you
have to receive but I think its true. Ive always been honest with you. He said I know.
[44:49]

AL: OK, so this was you telling him that he has to resign? [44:53]

CS: No, this is a few hours ago, me telling Mark that you have to take responsibility for your
issues, not blame Bitcoin. [44:59]

AL: I think thats plausible. The strange part to me is that this seems to have come about
really fast. It just seems like this is, maybe Im wrong... I dont know. *45:09+

CS: What do you mean, which part? [45:11]

AL: Well, I just mean there was a time frame... I guess this does look like it was put together
for right now. It says Now to February 25
th
. Today is February 24
th
, so that implies again,
that this document was written just days ago because we havent even... *45:28+

CS: I think this document was written last week. [45:29]

AL: It was written last week. [45:31]

CS: Yep. [45:32]

AL: OK. The time frame on the Gox.com purchase would have been three days ago. I guess
that does make sense if were talking about a deal that started being made a week or two
ago. OK, yeah. Thats plausible too. It reads like a quickly written document. Do you have
any comments on... I mean, is there anything else in here thats like... thats making you
think this is proprietary information only. The fact that its on here is a sign. *45:58+

CS: People are saying that the document is poorly written in bad English and thats just
because I think the person who wrote it was Gonzague, whose English is not that good.
[46:09]

AL: This corresponds with how you know that they operate. [46:14]

CS: Yep. [46:15]

AL: OK. Do you think this is real? [46:17]

CS: Unfortunately, I do. [46:18]

AL: Lets talk about that for a second. One of the problems Ive had with Ryans coverage of
this issue is that he was really hyperbolic. He basically said this is the end of Bitcoin and that
seems like its patently not the case to me. It seems like this is a system that doesnt have
things like bailouts, simply cleaning itself out and yeah, its going to suck for people, like you
said. People have money in there and thats a painful thing but, at the same time, MtGox
has had problems for years and so, at some point, dont they have to fail. Dont they have
to go away in order to do this? [46:50]

CS: If they went down when no one had money in there, thats one thing but the fact that
they went down when people had money there, thats the worst part. *46:58+

AL: I agree with that but isnt this the point? People are going to say about this, as theyre
already saying, that this is the end of Bitcoin; that Bitcoin has been destroyed; its been
proved..blah blah blah. We know those things arent true. Bitcoin isnt about MtGox.
MtGox is the weakest part of the Bitcoin eco-system and really, theyve been out of their
league for years. Theyve just had enough momentum that they havent had to actually
recognize that fact. [47:22]

CS: People that are selling Bitcoin right now are the ones who were in it short and who are
scared and who have too much to lose. I havent sold one bitcoin, in fact, I dont even have
a trading account any more to sell any bitcoin. Im assuming that you havent sold any
bitcoin either and most of the people I know havent been selling either. *47:39+

AL: Right, no. Ive actually been buying like a lot of people. I intentionally put myself in risk
in MtGox because I kind of just figured that this was another continuation of the problems
that theyve always had which is that theyre slower than everybody else to do everything.
Thats the thing is that this isnt a complete wipe. This isnt everybody in MtGox has lost
everything. Theyre saying here that theyre going to take one month to restructure and
then come back and that theyre fixing all the problems that Ive actually had as my primary
complaint. [48:06]

CS: The problem with that is that if you look at their assets, its what... 30%, 20%... I dont
know what they actually owe everyone of the customer deposits. Thats the scariest part.
[48:20]

AL: OK, let me look at these numbers here for a second. I hadnt looked at this. *48:23]

CS: Their assets are $32m USD which equals 2,000 BTC. Whats 2,000 BTC at the current
price? [48:29]

AL: Wait a second, wait a second. They only have 2,000 BTC is what... [48:34]

CS: I think thats $1m. So if $33m, right... but their liabilities look like its more like $55m
plus another $150m worth. If youre talking about not even 20% do they have. *48:54+

AL: This document implies that they have no cold storage wallets. [48:59]

CS: They said that their cold storage wallet was leaked. The whole thing was leaked.
[49:04]

AL: The whole thing was leaked. OK, lets talk about leaking because Ive... again, Im very
curious about this particular (??) [49:10]

CS: This is my biggest sceptical part of the whole thing. The math does not add up. [49:14]

AL: Yeah. [49:14]

CS: David Perry from Coding in My Sleep, and I have spent hours, a few hours ago, going
through the numbers and it just doesnt make any sense at all. Ill read you what our
analysis is. This is what were thinking. [49:29]

AL: OK. I was going to say, what do you feel about... I mean, do you have an interest in
pulling in David Perry to the conversation? [49:34]

CS: Yeah, essentially, this was our analysis. We said, we both found at first... I had started
to believe that this was true before he did and he was trying to convince me that it cant be
true because of the numbers, the sheer numbers dont make any sense, right? The basic
math, just from in our heads... we figured out, OK... 740,000 BTC ... 750 whatever, 744,000
BTC since malleability became known in 2011. Thats about 20,000 BTC per month. Figure
675-680 BTC per day. Even at the current prices, thats over $300,000 per day. Thats just
not the kind of money that you misplace and dont notice. [50:17]

AL: Seriously. [50:18]

CS: Even if we give the hacker credit and suggest that theyve been doing it since the day
Gox opened, the first day that Gox opened, thats still $250m, $250,000 per day. In all
fairness, the hackers could have probably taken a lot more coins when they were less
valuable and (??) the USD per coin is higher and figure like it wasnt just a specific amount
per day. It still works out to an average at about 409 coins per day, if they started the day
Gox opened up shop. Even when the coins were $0.05, thats still almost $1,000 per month
their books didnt balance by. I know that the Japanese financial service authority was
auditing their books monthly. Were talking about 6% of all coins in existence or ten times
the amount of money in any known Bitcoin address. Theyve stolen that much money over
that time. Im just thinking, the law of average has to kick in and then youre buying the
medium market price for the entire four year span which is like what... $90 per coin? $95
per coin? At a daily take of like $48k, $48,000. If they stole $40,000 worth of BTC from Gox
every day for four years, you arrive at 744,000 BTC. No one can say that theyve stolen the
bulk of it right at the start because that amount of Bitcoin didnt even exist at the time.
[51:36]

AL: The idea that they could have had their entire cold storage system exhausted due to a
leak in their accounting system... because really, thats what were talking about when it
comes to this hot wallet leak theory, is that because of a mismatch in the accounting, the
cold storage transfers were overfunding the hot wallet, or something like that. That really
seems to be a weak point and just the idea that they simply could have had that much
stolen literally, their entire stock of Bitcoin stolen, without knowing about it. I got to
imagine that at some point in their security chain, somebody has to spot check a paper
wallet and discover that ooop! theres nothing here and on none of the other systems
either. I mean, right? [52:20]

CS: Doesnt make any sense. [52:21]

AL: I appreciate that human incompetence really can reach incredible bounds but this
seems beyond... beyond. [52:27]

CS: I ran a company and I know exactly what it feels like to be out of control of your
finances. Its difficult. Youre moving so much money around that you have no idea whats
happening but to lose that kind of money? We were doing $600,000 a day in volume at
BitInstant. If we had lost even $1,000, we would have known. We may not have known
how much money we were making or losing on one given day but we still balanced our
books at the end of the month. We had some sort of hold on it. MtGox was 20 times more
funded and had a team that was a lot older, more experienced and much larger than my
team at BitInstant. I didnt have a CFO. I was the CFO. Thats how much it tells you how
bad it was. [53:10]

AL: Another part of this plan is that Mark Karpeles is going to step down. Hes been the
CEO since he purchased it from Jed McCaleb, four years ago, right? [53:18]

CS: Yeah. [53:18]

AL: They purchased it four years ago, hes been the CEO from that point. Really, he feels
more like an engineer to me. He feels like a technical guy, whos sort of avoiding
confrontation and so that kind of makes sense to me. What I dont understand is why...
[53:32]

CS: There are things that were not being told. There are missing pieces and the missing
pieces are showing us that this whole thing doesnt make sense and were going to come to
conclusions that probably, were the missing pieces (??) There are things that we dont
know and honestly, we would have never known about this because if this document didnt
leak, Im hoping that MtGox would have gotten a buyer, the buyer would have recapitalized
MtGox or recapitalized it enough to continue being a Ponzi scheme because if you look, and
I hate to use that word loosely, but if you look at the past... if they really didnt have all this
money, MtGox was being a Ponzi scheme. They were delaying withdrawals, right? They
were delaying withdrawals because they needed to wait for money to come in and thats
what essentially, a Ponzi scheme is. They probably would have been recapitalized enough,
even a few million, to be able to speed up withdrawals a little bit and give people the
bitcoins that they wanted back. [54:26]

AL: I think that I have people... its really funny. People are freaking out. I have people who
are telling me that they have their funds for their start-up kept in Bitcoin and theyre like
Ive got to sell it all now to make sure they dont go down with the ship. These are people
who believe in the vision and who understand that whats going on right now is not going to
be the end and yet, theres this fear that because the media is going to see this failure,
theyre going to crucify Bitcoin. Im not that concerned about that. I havent sold any. Im
intentionally exposing myself to risk and Im not sure if thats going to wind up paying off for
me but, at the same time, this feels like its nothing but a transitory problem because this
will go away. This will eventually end. [55:06]

CS: If everyone sells Bitcoin today and there are only two bitcoins left in existence and you
and I, Adam, decide to start our own financial institution, one in California and one in New
York and we decide to use the Bitcoin infrastructure and use those two bitcoins still in
existence to be able sell money between our two financial institutions, that already gives
reason for Bitcoin to succeed and be worth money. [55:32]

AL: Yeah, absolutely. Youre completely right on that. Again, its about the actual service
that you can provide with it. Ive heard you give the poker chip with wings analogy and I
think thats a really good one because thats the intrinsic value of Bitcoin. Its whatever you
can do, that you can do with Bitcoin versus what it would cost you to do it with something
else and how much extra time it would take to do it with something else. [55:53]

CS: Exactly. [55:53]

AL: Those things are all still exactly true. Its frustrating because you just have to have a
long term time frame where you can sit through this sort of short term nonsense where
individual actors do things that then makes us all look bad. [56:06]

CS: People are really pissed at me right now. [56:08]

AL: Yeah, I bet people are pissed at you right now but again, youre kind of personalizing
this and I think that thats probably a mistake. Youve responded to him in a way that was, I
think, appropriate with scepticism and we still dont know if this is legit. Its hard to tell
when youve got truth mixed in with lies and that really is what this feels like to me because
there are parts of it that work but there are other parts that dont really make any sense.
[56:31]


__________________________________________________


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[57:51]


_____________________________________________


AL: This is our special midnight session of Lets Talk Bitcoin Part 2. Coming back and still
joined by Charlie Shrem and now joined by David Perry, chief architect over at
www.Bitcoinstore.com. Gentlemen, thanks for joining me on this tumultuous night. [58:09]

DP: Thanks for having us. [58:10]

AL: David, we were having a conversation about the numbers in this document that
describes itself to be the MtGox situation crisis strategy draft. This is the document that
was first revealed by Two-Bit Idiot and that has elements in it that seem to be legit and
seem to be confirmed by information but then also have elements in it that seem to defy
logic just because they are crazy. Lets talk about the financial assets and liabilities pitch.
Charlie and I covered this a little bit earlier but I think that its worth going over again. This
basically ascribes that MtGox lost, through this leak in their hot wallet, 624,000 BTC and that
all they actually have is 2,000 BTC which seems like an awful lot of Bitcoin to lose before our
guy notices. [58:59]

DP: It really does. [59:01]

AL: I mean, this defies belief for me. David, do you think that theres... I mean, is there any
possibility that something like this could go unnoticed in a system like this? [59:10]

DP: If you just go down to the pure numbers, youre right. Its absolutely absurd and its... if
its the 744,000 that the paper claims, its something like 500 BTC a day, if the attacks start
the moment MtGox starts doing business. Thats obscene. Its absurd. How can anyone
possibly not notice... even back when they were $0.05 a piece, that should have been
enough for a decent accountant to have noticed something was off. When theyre $1,000 a
piece, thats obscene. *59:40+

AL: As we were talking earlier with Charlie, he was saying that they are actually being
audited by the Japanese Financial System on a monthly basis. The idea that something like
this could go unnoticed is basically just out of the realm of possibility. [59:53]

DP: I dont understand how anything like this could possibly go unnoticed for this long. The
transaction malleability thing, they were in business a full year before that happened so that
makes an even higher amount that has to go missing, across a much shorter time. [1:00:08]

AL: Right. [1:00:08]

DP: The paper said they lost it over the course of two years... thats insane. Thats insane.
Thats the GDP of some countries. *1:00:14+

AL: Right. [1:00:16]

CS: Makes no sense at all. You have to have noticed this amount of money leaking. Youre
talking about 10-15% of all the money that you own leaking every day. [1:00:24]

DP: Thats not a leak, its a flood. *1:00:26+

AL: Seriously. I mean, thats like... you have the puddle remaining and the dam is
completely emptied and its all gone and no one noticed the entire time. *1:00:35+

CS: Which leads me to believe, Adam, what I said before that something is up here. There
is something that we dont know. Theyre not telling us. *1:00:42+

AL: When you say theres something that we dont know that theyre not telling us, does
that mean that you think that they lost funds in another way, in addition to this? Or, more
that we simply dont know whats up? The thing Im really trying to ascertain here is
whether or not we think this is an outlier enough of a weird fact that this document
probably is not legit and this is the point is to cause this fear because its doing a good job of
causing fear certainly. [1:01:07]

CS: When you say, not legit, are we talking about someone else outside of the MtGox
corporation fabricating it or someone within MtGox? [1:01:15]

AL: Yes. [1:01:15]

CS: I definitely dont believe that its someone outside MtGox fabricating it. *1:01:18+

AL: You think that this is an internal document from MtGox and not like the consolidation
of multiple different assets coming from other documents and then having other things
added to it. You dont think this is a composite? *1:01:29+

CS: No, Im pretty sure that this came directly from someone within MtGox. [1:01:33]

AL: OK. Again, you must be right, in that case, that there just must be a missing variable
here that we simply dont have because I just cant fathom a situation where something like
this could happen, to this point. The plan could just be formed yesterday. [1:01:49]

CS: Theres some type of fraud going on here and whether its minimal fraud or whether its
ignorance and things like that or whether theyre just completely lying and even lying to
their buyers over... a potential buyer over where this money went. Theres no way that that
type of money... [1:02:04]

DP: If this has come from inside Gox, this document, I have to question who... like theres
things in this that you dont put in a business brief. Theres this whole paragraph about how
Gox could go bankrupt at any moment and totally deserves to. Who writes that in a
business briefing? [1:02:23]

AL: Right. I totally agree with you on the business briefing sense but, at the same time, if
you look at how MtGox has conducted themselves in their press releases, to this point, this
actually... it does kind of make a little bit of sense because, in the past, theyve been very,
very defensive, right? Theyve been very deflecting and putting blame on other people, so if
he really is resigning then maybe this is just OK, fine. We did it, well be the martyr for it.
[1:02:47

CS: Yes. This document is basically saying We are too big to fail. This document is saying
that. [1:02:52]

AL: Explain that. How is it saying that? [1:02:54]

CS: Because it is saying We will go bankrupt at any moment. If we go down, then Bitcoin
could possibly go down, that the reality is that MtGox could go bankrupt at any moment
and... read the... Ill read the document to you However, with the Bitcoin just recently
getting accepted into the public eye, the likely damage and public perception to this class of
technology can put it back five to ten years and cause governments to react swiftly and
harshly. [1:03:18]

AL: I dont believe thats true. Do you believe thats true? *1:03:21+

CS: Whether or not we believe thats true or not, because I dont personally, MtGox is like...
this is an apocalypse. Look at the worst crisis strategy. This is a crisis. Bitcoin is going down.
We are too big to fail. [1:03:34]

AL: Right but this is a MtGox crisis is the point, its a MtGox crisis. I understand why the
media conflates MtGox and Bitcoin; that makes sense to me because they dont understand
what theyre looking at when they look at a decentralized protocol thats also money, so
they just attribute it to the biggest, earliest exchange. I understand that. I dont understand
why MtGox believes that. [1:03:52]

DP: Thats true. I mean, from the perspective of an insider and from the perspective of
anyone who has been involved with Bitcoin in any real way, Gox has fallen into the
background more and more the longer weve been sitting here talking. It doesnt really
matter what happens to them once the media stops screaming about it. Thats the question
is how much damage is it going to do while the media is still screaming about it? Once
they shut up, its fine. Theyve gone away. Bitcoin will continue, Gox free, no problem.
How much damage is going to happen in that interim? [1:04:30]

CS: Mark believes that this will take down Bitcoin and I even said to him... I said to him in a
chat, a few hours ago, I said Do you think this is the end of Bitcoin? He said, possibly.
[1:04:40]

AL: I dont understand why. *1:04:43+

CS: What theyre saying is this... think of it as if youre in their position... you have a
company and youre in it and you lose a ton of money. How do you lose a ton of money? I
dont know. Youre scared for your life. You have thousands of peoples livelihoods that
you just lost. Youre talking about tens of millions of dollars has disappeared. What do you
do? You say We need a bailout. We are too big to fail. We need money immediately.
Thats exactly what theyre doing. *1:05:13+

AL: You think, actually, theyre just telling people... *1:05:17+

CS: Its a strategy. *1:05:17+

AL: ...you need to give us money because, otherwise, were going to take down Bitcoin with
us. [1:05:20]

CS: Exactly. Its exactly the strategy. *1:05:23+

AL: OK. Theyre looking for fundraising... not with this document but this strategy, broadly
speaking, is to, in fact, bring in funders who can... [1:05:31]

CS: I think this document was circulated to people that were potentially going to be
investing or buying into the company. I think that thats how it got leaked because the only
people who probably knew of this document were Mark and Gonzague who probably
created this document. Outside of them two, they probably distributed it to people and
somehow, someone got hold of someones computer and it got leaked. *1:05:51+

AL: At this point, we believe that this is a legitimate document (laughter), that they appear
to have done something crazy that appears to have lost them all of their money, or at least
all of the money that was stored in bitcoins, supposedly in cold storage wallets but
apparently not and that, apparently, they lost such a large amount of money doing this, that
it is sort of unfathomable and they think that its going to take down Bitcoin because its
going to result in so much lost money. [1:06:18]

CS: Now that youve said it and you kind of outlined it out, it makes no sense. *1:06:22+

AL: Yeah. [1:06:23]

CS: Yes, it does make sense because its the only thing that makes sense. Its just... its so
screwed up. [1:06:28]

DP: It makes sense until you get to that big number that ridiculous... like, I would believe
this completely if the paper said 100,000 BTC or 90,000 BTC or 250,000 BTC. This is like
more than 6%, I think, of all of the bitcoins that exist at this moment. [1:06:50]

AL: Its the majority of the money that MtGox has had. Thats the real thing of it, this is a
huge amount of money. [1:06:59]

DP: This is like you had to lose every dollar youve ever touched to get to this amount.
[1:07:06]

CS: Exactly. You wake up in the morning and you say Uh oh, all of our money is gone but
its not like it happened... they said it happened overnight. They admitted in that document
that it was a leak and that it happened over time, over weeks, they said. [1:07:19]

AL: Over weeks? [1:07:20]

CS: Did you not notice it? [1:07:21]

DP: Over weeks? [1:07:22]

CS: (??) over years, if it did actually happen at all. Whos to say that someone didnt take it?
[1:07:27]

DP: This is only ridiculous in the context of transaction malleability. If thats the attack they
used to get this, you dont steal that much with that attack and not get noticed. Thats what
makes it ridiculous. Something else happened, easy. [1:07:43]

CS: Lets take a step back here for a second because a lot of people throw around that word
transaction malleability and I guess, personally, I understand it but I dont fully understand
it. The only way, from my research, that you can steal money or hack into an account with
the problem with transaction malleability, is if someone is manually processing that order.
Transaction malleability is not a hole in the Bitcoin protocol. Transaction malleability is
saying Here is a transaction ID of a withdrawal that you gave me customer service agent
but there is no Bitcoin, so please resend it. [1:08:16]

AL: This is actually not the case though. [1:08:18]

DP: At level one tech support, before you even get to the tech support level, you may run
into some kind of automated system that makes what they thought was the reasonable
assumption Oh, this guy says he didnt get his money, lets look at the transaction ID that
weve captured. Oh, its not on the blockchain, the transaction was orphaned, send it, dont
even bother contacting tech support with it. Not the way I would have programmed it but...
[1:08:42]

CS: No. Youre saying that this was an automated system? *1:08:42+

AL: Yes, yes. That actually... [1:08:44]

CS: What didnt have it though? *1:08:45+

AL: Yes, apparently they did. [1:08:46]

CS: Where? [1:08:47]

AL: Apparently, they had a system that... this is my information too. They had a system that
checked for the transaction ID and if they found that the transaction ID was not sent on a
withdrawal, then there was an automated system that was resending transactions.
[1:09:00]

DP: I think it had limits on it and there were things you have to gain. [1:09:05]

CS: Theres no way you can lose seven hundred and... *1:09:05+

AL: Its like your house being stolen from under you and you not noticing while youre
standing there. [1:09:09]

CS: It makes no sense. [1:09:10]

DP: Thats the thing that makes it the most illicit that this transaction malleability thing
because of the way they implemented it. You know theres a limit on what that system is
allowed to do and you know when the hot wallet runs out, someones got to go manually
process transactions out of the cold storage somewhere. There are checks and balances
with that. Its not even that ridiculous. Its more ridiculous its like your house being
stolen out from under you, one brick at a time, while youre standing there. *1:09:38+

CS: Exactly. [1:09:39]

DP: Thats what makes it insane. How do you even accomplish that? *1:09:43+

AL: OK. I dont think that were going to answer any of those questions tonight but this is a
very interesting time right now. Lets get a price, Bitcoin average, and see what we look like.
The global average price of Bitcoin right now is 0.459 USD per milliBit, or $459 per Bitcoin. If
you are able to buy bitcoins, then its on sale. Im curious where do you think the price is
going to go on this because again, I dont really care, Im not selling any but I might buy
some if they go down low enough. I dont think this is going to have a lasting impact. I think
maybe well see two weeks, three weeks, something like that and then the storm blows
over because the prediction is going to be... all the headlines are going to be This is the end
of Bitcoin. Of course, inevitably, that wont be the case at all. This is just going to be
another phase and then MtGox will be, essentially, cleaned out of the system and we wont
have that liability in the future. Do you think well see $100? Do you think well see two
digits? [1:10:42]

DP: Thats a really, really difficult one. It depends a lot on what the media does with this
story, youre absolutely right. The headlines could be The Death of Bitcoin; the headlines
could be smarter than that. The reporting has improved a lot. [1:10:57]

CS: Yeah. It could be The Death of MtGox/The Bitcoin Price on Trading but the world is
used to impulse trading in a way. [1:11:08]

AL: It seems like the biggest concern, potentially, that we should have about the media is
actually MtGox coming out and saying something along the lines of... its us, its Bitcoin, as
theyve kind of done and say that this is the end of Bitcoin. If MtGox publicly says This is
the end of Bitcoin, then I think that thats going to get a lot of play in the media. *1:11:27+

CS: I think MtGox is giving up, honestly. They have Bitcoin domain names, they still have
$33m USD sitting in a bank account. Theyre not completely wiped clean. *1:11:39+

AL: Right. [1:11:39]

CS: They still have money. Thats a lot of money that you can start a new exchange with.
They can do what Bitfloor did; they can say We have 15 (I forget the number) but we have
15 or 17% of your money; we can give you 10% of it or you can own part of the exchange. I
dont think this is the end of MtGox but I do think this is the end of the MtGox management.
[1:11:58]

DP: Its not necessarily the end of MtGox but it is almost certainly the end of Mark.
[1:12:04]

CS: I just feel bad for him because, on one side I know him to be a nice guy with a good
family and a good heart, but on the other side there are so many questions I have
unanswered. I dont know who else to answer them. It just screams fraud and negligence
and ignorance but theres no one else to really pin this on because who else was physically
in control of all this? [1:12:25]

AL: Charlie, youve been in contact with Mark and I think that thats something that is not
true about most people. Are you able to ask him if this document is real because it seems
like thats really the thing that we need to know? *1:12:36+

CS: The thing is with Mark is I have his ear and the reason I have his ear is because I dont
challenge him, I dont confront him but Im trying to just tread very, very lightly. I feel like...
[1:12:48]

AL: Could you just link and ask? [1:12:50]

CS: I feel like if you read the logs of the chats that Ive had with him in the past four hours,
you will come to the conclusion and say to yourself, Charlie, he did admit that this was real.
Thats why Im inclined to admit that its real. Ive asked him things like whats the deal with
this document and he says It was circulated between me and some other... you know, like
he didnt outright say it is real, but he didnt say that he... [1:13:13]

AL: He didnt say it was not real? *1:13:15+

CS: Yeah. He admitted that he knew of its existence before the leak. [1:13:18]

AL: OK. That pretty much is a confirmation. OK, well thats really interesting. It sounds like
were not going to get all the answers that we want tonight but there are definitely some
questions that have been raised here, more important than anything else I think. How
exactly did they lose the majority of the bitcoins that were under their care? [1:13:35]

CS: You need a blockchain and someone to really analyse it and you need MtGox to
cooperate with them because MtGox can open up their books. You dont just walk away
with a $200m theft. [1:13:49]

AL: $200m at these depressed prices too. One of the interesting things is this call for
regulation that some people have said might come out of this. This could be the rebirth of
the coin taint proposal too. I mean, if you think about it, this is the exact sort of situation
that would necessitate the kneejerk reaction that makes that make sense in a wrong sort of
way. [1:14:13]

CS: The coin taint proposal is that the coin taint proposal that the Coin Validation
company has been proposing is saying Lets outright ban certain Bitcoin transactions and
lets outright make it public which ones are green and which ones are red. I dont think
thats the way to go about it. I think it needs to be in the background. I think that that
process needs to be a constant communication between all the Bitcoin companies, with law
enforcement, to actively be working on bringing down bad actors within the Bitcoin space.
[1:14:47]

DP: With the Coin Validation thing, the coin taint concept, I would just remind everyone
that Bitcoin was built to be decentralized for a reason. We dont like the central authorities
that normally tell us who we can and cannot do business with so why would you ever take a
system that was built to defeat that and then allow someone to tell you who you can and
cannot do transactions with? Youre taking something that was built to be better and
turning it into the same thing you already have. [1:15:17]

AL: Well, lots of questions and not too many answers. I think thats it for tonight. Thanks
for joining me on this special episode of Lets Talk Bitcoin. Charlie Shrem and David Perry,
thanks again. [1:15:26]


____________________________________________


CREDITS:

Thanks for listening to Episode 87 of Lets Talk Bitcoin.

Brooklyn Captive was produced by Adam B. Levine and edited by Denise Levine,
with Stephanie Murphy, Andreas M. Antonopoulos, Adam B. Levine and Charlie
Shrem
The Venerable MtGox was produced by Adam B. Levine and edited by Denise
Levine, with Charlie Shrem, Adam B. Levine and David Perry
Music for this episode was provided by Jared Rubens and General Fuzz

Questions or comments? Email adam@letstalkbitcoin.com.

Have a good one! [1:15:53]