LETS TALK BITCOIN

Episode 88 Gox, Gox, Gox, Gox, Gox, Gox, Gox

Participants:

Adam B. Levine (AL) Host
Stephanie Murphy (SM) Co-host
Barry Silbert (BS) CEO of SecondMarket
Ron Gross (RG) - Executive Director of the Mastercoin Foundation
Mark Jeftovic (MJ) CEO of EasyDNS
Trace Mayer (TM) Entrepreneur and Bitcoin investor
Joel Dietz (JD) CEO of Evergreen payment system



Today is March 1
st
2014 and this is Episode 88.

This program is intended for informational and educational purposes only.
Cryptocurrency is a new science so do your homework before putting money on the line.

Welcome to Lets Talk Bitcoin, a twice weekly show about the ideas, people and projects
building the digital economy and the future of money. Visit our website at
www.letstalkbitcoin.com for all our past episodes, frequent, original and varied perspectives
and, of course, our Bitcoin addresses where donations are appreciated. [0:31]

AL: My name is Adam B. Levine and today, its all about Gox. This last week saw
foundational member of the Bitcoin infrastructure crumble and fall and what looks like
certain bankruptcy and a years long recovery. We wont know whats really going on until
the folks in Japan open up but everybodys got an opinion on it and thats where we begin
today. [0:54]

Eric Voorhees is a beacon in the world of Bitcoin philosophy and one of the most
outspoken community advocates. We kickoff todays show with Stephanie Murphys
reading of Eric Voorhees letter entitled Some words for my friends
Then Bloomberg News is concerned about the repercussions of Gox on the
community, the currency and the momentum weve built over the last few years.
Recently they interviewed Barry Silbert, founder of Second Market and progenitor of
what claims to be the first Wall Street-backed Bitcoin exchange
Throughout this episode, well hear from members of the community, including
Mastercoin director Ron Gross and legal mind Trace Mayer, EasyDNS CEO Mark
Jeftovic and Ethereum evangelist Joel Dietz. We even here a bit from funny man Jon
Stewart on the right way to break the laws of financial institutions
We end todays show with a collaborative piece, both in its writing and in todays
performance, as we explore the Ghost in the Machine at MtGox, with portions of
an IRC log re-enacted by the newly formed LTB players
First, why bother building towers when they sometimes fall down. Eric Voorhees
explains [2:04]


_____________________________________



Eric Voorhees letter Some words for my friends, read by Stephanie Murphy

SM: Some words for my friends written by Eric Voorhees, read by Stephanie Murphy.

Hello friends

MtGox is gone so lets prepare ourselves. On Tuesday, and for the rest of the week, all hell
will break loose in the media. It will be blamed on MtGox, it will be blamed on Bitcoin, it will
be blamed on the bug and it will, more than anything, be blamed on the lack of regulation.
Pundits and experts of all types will weigh in on the calamity. It will be world news in a
matter of hours. Get ready because it will be an ugly week. [2:54]

For all of you who lost money my heart goes out to you. Some people lost a little, some
lost a fortune. It will make people sick and depressed and full of grief. Personally, I had
over 550 bitcoins in Gox. I will never get any of that back. If misery loves company, then
well be enjoying a grand feast today. I should have known better, of course. I take
responsibility for leaving those funds with an entity that had proven incompetence
repeatedly. I chose to ignore even my own warnings for nothing more than the sake of
convenience. [3:33]

Gox is still at fault, to be sure but I have learned the lesson. I hope it is not such an
expensive lesson for others and, for all you observers, please take a moment to consider it
as well. Be mindful, however, that the wrong lessons are not learned for that would be the
true tragedy indeed. Let me suggest that the lesson is not that Bitcoin is broken. Bitcoin is
fine. Similarly, the lesson is not that security is impossible. Those who know what they are
doing can achieve it and help others to do so. The lesson is not that nobody can be trusted.
There are countless good men and women in this community who are worthy of trust and
some of the very best people Ive ever met. Finally, the lesson is not that we ought to seek
out regulation to save us from the evils and incompetence of man, for the regulators are
men too and wield the very same evil and incompetence only enshrined in an authority
from which it can wreak amplified and far more insidious destruction. Let us not retreat
from our rising platform only to cower back underneath the deranged machinations of
Leviathan. [4:48]

The proper lesson, if I may suggest is this: We are building a new financial order and those
of us building it, investing in it and growing it will pay the price of bringing it to the world.
This is the harsh truth. We are building the channels, the bridges and the towers of
tomorrows finance and we put ourselves at risk in doing so. We are at risk from accidents.
We are at risk from fraud, from corruption and from evil. We are at risk from journalists
seeking headlines and from politicians seeking power and glory. We are at risk from the
very market we are trying to build a market which cares not about our portfolio, our
ambitions or our delicate sympathies. For all these risks, devastation will befall us
repeatedly. Some of us will be discouraged. Some will be ridiculed and insulted. Some will
be tricked or swindled. Some of us will be crushed or caged. We will be set upon by all
manner of antagonists, repeatedly, for a long time. [5:59]

So why do we do it? Why do we build these towers that fall down upon us? Why do we toil
and strain and risk our precious time which is the only real wealth we possess? Because the
world needs what were building. It needs it desperately. If that matters to you, as it does
to me, then hold to that thought. Youll see through the smoke and your wounds will heal.
So, shake it off brothers, for this wont be the last calamity endured before the win.
Tonight, my heart is with you all. Tomorrow, my head is down, my eyes are open and I am
building toward peace and freedom. [6:50]

Eric Voorhees


__________________________________________


Bloomberg News

Male news reporter (MN): Bitcoin is in need of damage control, yet again. US prosecutors
are investigating possible criminal violations by Tokyo-based Bitcoin exchange MtGox. This,
after Gox went offline earlier this week, without returning about $400m worth of clients
funds. MtGox CEO, Mark Karpeles tried to quell the masses this morning, publishing on the
site I would like to reassure everyone that Im still in Japan and working very hard to find a
solution to our recent issues but no word on where that $400m is, which probably, a lot of
people would like to know.

Female news reporter (FN): (?? Especially) ...

MN: Exactly, right. [7:42]

FN: You have one dollar. [7:43]

MN: I dont know where the $400m is but Bitcoin does have a lot of size investors betting
on its future. Venture capitalists like Marc Andreessen, Fred Wilson, the Winklevoss twins (I
dont know what size they are I guess theyre very tall) *7:56+

FN: Theyre tall. *7:57+

MN: Tim Draper, a lot of big names but maybe the most important, the CEO of Second
Market Barry Silbert is planning on launching the first ever American Bitcoin exchange.
Thats maybe just what Bitcoin needs for legitimacy and Barry joins us now. First of all,
thanks for coming in. [8:12]

BS: Good to see you. [8:13]

MN: Secondly, I thought it was interesting the timing of your announcement, youre going
to start your own Bitcoin exchange right when MtGox takes its tweets offline and shuts
down its website and Mark Karpeles buys an ounce of weed and hides in his apartment.
Who knows what hes doing in there, right? [8:31]

BS: It was not entirely coincidental. We were planning on making this effort public
probably next week but when we started hearing the rumors, we decided why not try to
counter-balance this storm that we saw coming. [8:44]

MN: The bad news or some good news? [8:46]

FN: So, hows it going to work? *8:46+

BS: Were setting it up in, actually, a very interesting way. Were actually looking at the
New York Stock Exchange model as the model where you have a bunch of member firms, all
regulated, who tap into this one exchange and were doing it in really close collaboration
with a number of banks and the regulators as well. [9:02]

FN: OK, so this is whats interesting because this is what I said to you earlier. You need to
have some regulation in this market in order for people to trust it. You made the point, and
you may make it again... [9:11]

MN: Well, Im not a huge fan... of regulation. {9:12]

FN: ...that Bitcoin... part of its appeal is the fact that its not regulated. How can you have a
currency thats not regulated, especially when it could be victim to situations like weve
seen with MtGox? [9:24]

MN: My question is how much of the currency itself... you cant really regulate it. Someone
told me this morning - they should shut it down. Well, how? Turn off the internet? They
would regulate, obviously, the businesses that touch the currency, like your exchange.
[9:35]

BS: Yeah. [9:36]

FN: Wouldnt you feel better? I would feel better if I were investing in Bitcoin to know that
you were working with banks that were regulated by a government entity. [9:44]

BS: Two key activities that I think need to be regulated. One is the exchanges, so if youre
buying or selling Bitcoin and then, any companies that hold customer funds, like a bank, you
should be regulated. I dont think merchants who accept Bitcoin should be regulated,
miners, merchant processors none of them should be regulated but the banks of Bitcoin
and the exchanges. [10:02]

MN: The interesting thing here is that you have started an exchange before that had a lot of
critics of a completely kind of a new asset class to be traded on the exchange and you were
very successful with SecondMarket... [10:15]

BS: Yeah and we did it in a regulated way. If you work with the regulators in a very
transparent... [10:20]

MN: ...but with a fight first, right? When you first said were going to start trading pre-
IPO shares of Facebook, I think I recall Facebook not being totally cool with that to begin
with. [10:30]

BS: Oh no. What I think... you could describe it as a fight but it was really the industry
trying to come to terms with the idea that an IPO is not the only and best way to get
liquidity but, over time, whats actually happened is, its become very, very common for all
these tech companies to use SecondMarket to provide liquidity for their stakeholders and
so, in this new exchange business, we decided up front, lets work with the Bitcoin industry,
lets work with the banks and lets involve the regulators on day one of the creation of this
exchange. [10:57]

FN: This, you think, theoretically solves that liquidity issue, right? Because its tough, right?
If you want to take your Bitcoin out, MtGox aside, its challenging. *11:09+

BS: Two big issues that this is going to solve for. Number one is you have a very fragmented
exchanged business and so if you actually want to sell a large amount of Bitcoin or buy a lot
of Bitcoin, youre going to move the market. *11:18+

MN: I buy and sell Bitcoin down on 40 Broad Street, right? With a bunch of guys that are
buying and selling Bitcoin. [11:24]

BS: Well, youre big money and so when you start dropping the million dollars on Bitcoin,
youll move the market and so it solves that problem because it brings all liquidity into one
exchange (??) [11:32]

FN: Does it do anything to solve volatility? [11:33]

BS: It does because, actually, the way that were going to do this is were looking at the gold
market and we want to slow down the price discovery process and maybe run, really, just a
once or twice a day auction where the spot price gets set and then it doesnt change for
another day. The whole idea is to slow down the inter-day volatility so that means when
you go to buy a cup of coffee, the price of the cup of coffee is not 5% higher or lower
depending on the exact minute that you got to the coffee shop. [11:55]

FN: Barry, does it have to be Bitcoin? Could you not do this with some other
cryptocurrency? [11:59]

BS: Well set this up in a way where any digital currency... if the members of the exchange
want to make a market at it, they could be on the exchange. Honestly, I think Bitcoin is the
winner and the focus, really at least at the outset, is going to be focusing on Bitcoin to dollar
exchanging. [12:14]

MN: You will be able to trade other digital currencies. Will you be able to trade Bitcoin in
and out of yen and euro? [12:20]

BS: Again, as a member-based exchange, the members decide. All the regulated entities...
[12:25]

MN: A lot like the Bitcoin protocol to begin with, right? Its kind of a democratic process?
[12:29]

BS: Try to be, try to be. [12:30]

FN: Whats the appeal here? Why do you need Bitcoin, if you could use PayPal or some
other mobile payment system? [12:36]

BS: I think Bitcoin is, potentially, going to transform the way that money moves round the
world, the way that people think about money and people talk about the remittance
business being disrupted, people talk about the payments space being disrupted and I,
personally, think that Bitcoin is becoming a fantastic alternative to gold. There is a lot of
interest in Bitcoin as a store of value because it has a lot of the attributes of gold. What it
has that gold doesnt, is it actually has utility. You can now go buy, as you know, beer. You
could go buy a house. [13:04]

MN: I spent two weeks only spending Bitcoin, so I didnt use dollars for two weeks. It
wasnt incredibly easy and I didnt pay rent and phone bills and stuff. *13:10+

FN: You did buy me some pizza though. [13:11]

MN: I bought the whole office pizza. I bought Tom Keene some Genesee Cream Ale in cans.
[13:16]

BS: Its becoming... 50,000 merchants... *13:19+

MN: I bought a plane ticket. [13:20]

BS: Right. [13:21]

MN: I bought video games at GameStop. I bought stuff at Whole Foods. You can buy
Victorias Secret stuff with Bitcoin if you were so inclined. [13:30]

BS: What the banks are telling us is they now think that digital currency is not going away.
Regulators feel the same way and that banks understand that exchanging money for digital
currency and vice versa is a service that theyre going to have to provide for their customers.
[13:43]

MN: I think its also key to think about some payments that we dont consider today, like
machine to machine payments which youre going to have to deal with, at some point, as
more and more things become automated. Think about driverless cars filling up at people
less gas stations. [13:55]

FN: Whats interesting here is that now people like yourself are coming out and saying We
would embrace some regulation here. [14:02]

BS: Of course. Absolutely. Regulation done properly is not bad and the only way that
Bitcoin will be successful is if the Bitcoin industry works with the existing financial space and
the only way to do that is in a regulated way. [14:14]

MN: By the way, Senator Joe Manchin from West Virginia came out and called for, sort of,
a crackdown on Bitcoin in the letter that he wrote to regulators, including Janet Yellen. You
dont always think of Democrats from West Virginia as the economic giants of our society
but hes a very smart man, an honorable man Im sure. What do you think about his
comments? [14:36]

BS: From what I read, its similar to what Senator Schumer said a few years ago and I think if
you read Senator Schumers recent comments, hes come to appreciate the possibility of
Bitcoin. Senator Carper, as well, has come out very positive about the possibilities for
Bitcoin, again, if theres proper regulations in place. *14:53+

FN: Whats it do to Western Union in the long run? *14:55+

BS: Western Union is going to have to incorporate Bitcoin into the business. Actually, I
would hope that Western Union would be one of the founding members of this exchange.
We want to see the Western Unions, we want to see the PayPals, the banks and the Bitcoin
companies. [15:06]

FN: Youre going to reduce their margins though. [15:07]

BS: Its going to happen either way. Its going to happen either way. *15:10+

MN: Also, you could see for example, transaction costs go down so transactions rise.
Listen, we could talk about it all day, especially I. [15:18]

FN: I know. [15:18]

MN: I could talk about it all day. Thanks for coming in, I really appreciate it Barry. [15:21]

FN: Alright, good stuff. [15:22]


______________________________________________


AL: Now, we hear from Ron Gross, Executive Director of the Mastercoin Foundation.
[15:37]

RG: Weve pretty much grown accustomed to all these kinds of things happening in the
Bitcoin space and Gox wasnt the first to lose users funds and it was Gox specifically... weve
pretty much seen the writing on the wall for some time now. Me, personally, and everyone
at the Mastercoin team are very sorry for the users who lost their funds. Bitcoin, as the
saying goes, with great power comes great responsibility. People need to learn to be
responsible for their money and really keep it, either with themselves or with reputable
companies. MtGox has obviously shown itself, for the last year, to not be such a company.
Protocols like Mastercoin, really integrate and solve a problem that is very embedded in this
unregulated space thats providing services that dont require any trust from third parties.
[16:34]

There are tradeoffs and there will always be a need, in our view, for centralized exchanges
that can provide high frequency trading, they can provide some better integration with
multiple... for different purpose but as we keep getting reminded, there is a need for some
other complimentary players here or complimentary protocols here, maybe for trading
larger blocks without any trust in the system. Were seeing all of this as pieces of one
singular whole and were happy to really believe in that revolution. I dont know if its the
right time to plug this but we have the wallets coming online. We have a few of them up at
www.Mastercoinwallets.org and well be happy if anyone checks that out. There are
bounties out there for people to come and test that and play with the wallets. Were
hoping to see, in 2014, the Bitcoin community and eco-system continue to mature and grow
and just learn, all of us, from this experience and just be better and lead together. [17:45]


______________________________________________


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st
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______________________________________________



MJ: Im Mark Jeftovic and Im the CEO of EasyDNS and the webmaster of www.wealth.net.
The MtGox implosion could be the ultimate triumph of unregulated free markets. Yes, you
heard that correctly. How could the destruction of the single largest Bitcoin economy be
good for Bitcoin and good for free markets? How can a market value of anywhere between
20-30% of the dollar value of the entire Bitcoin economy going up in smoke, prove finally,
beyond a shadow of a doubt, that purely free markets, unregulated from government
intervention are superior in all ways to government regulated, centrally planned
economies? Our starting point, because people will go here almost immediately is the
utterly baseless assertion that, had only Bitcoin been regulated, this sort of thing would
have never happened. We know this is false because financial panics, scandals and
meltdowns occur with alarmingly increasing frequency amongst the government regulated
equities, bonds, currencies and derivatives markets; some of these markets being the most
regulated in the world. [20:08]

Over $7 trillion of wealth vaporized during the global financial crisis of 2008/09 and the
policy response to that was to create an almost identical textbook setup for yet another
crisis using sovereign debt for interest rate markets which could hit any time. When will
Paul Krugman unveil a template for the Bitcoin bailout? Im just kidding, of course. One of
the Twitter search suggestions for Bitcoin is Bitcoin bailout and most of those tweets are
referring to the deal book article on the New York Times about no bailout for Bitcoin
holders. Some of the snarkier, pro-regulatory fanboys are chiding Dont you wish you had
a government regulating it now? Well, no I dont. Im glad theres no government
regulation of Bitcoin. I hope there continues not to be. When I railed at the policy response
to the GFC in 09, people asked me But whats the alternative? To which I replied that if all
banks who were insolvent were allowed to fail, there would have been an enormous
amount of pain for a short amount of time. I also went on to say that the shenanigans that
created that mess, would never be attempted again for about 100 years. [21:22]

That is the reason you dont want government regulations and bailouts. David Stockman
came out in his book, The Great Deformation and said pretty much the same thing. More
importantly, what Stockman observes about financial meltdowns in general is that left to
their own devices, they are largely contained to the participating stakeholders and they do
not jeopardize the wider economy. Yes, there will be pain but then the failure will be
liquidated into stronger hands. The people who got burnt will be wiser for it and life will go
on. When you let things run their course, you force the responsibility onto the stakeholders
to do their homework and keep their eyes open. MtGox had been flashing bright red
warning signals for over a year. I cant understand why anybody still had money in there but
when everybody moves past this, were all going to hold our Bitcoin service providers to a
higher level of accountability and transparency and thats a good thing. This episode will
not kill Bitcoin, unless, of course, the regulators step in and try to fix everything. [22:27]


__________________________________________


AL: Heres something from funny man Jon Stewart. [22:40]


JS: (Laughter) (Applause) Wait! Wait! Wait! It started out as a place to trade magic cards.
So did my basement. (Laughter) Does that mean my basement is now a currency
exchange? (Laughter) How did this happen? Its not like money that doesnt really exist
can just disappear, right? [22:59]

(Question/answer recording played regarding MtGox)

Q: Do you think theres been fraud here? *23:00+

A: I think theres a pretty strong likelihood of that. I think a lot of us have suspected that
for quite some time and the fact that theyre not talking very openly about whats going on.
They deleted all the tweets from their Twitter account yesterday. [23:12]

JS: Ooooh! They deleted the tweets. Thatll solve it. (Laughter) Listen, Bitcoin exchange,
youve got a lot to learn about being a financial player. You dont just commit brazen fraud
in one fell swoop. You institutionalize and normalize systemic fraud which brings us to our
new segment Show Me the Money! so I can take it and put it in a place where you can no
longer find it. (Laughter) Check out how a professionally corrupt financial institution does
business.

(News reports recordings on Bank Suisse and Goldman Sachs played in italics)

Banking giant, Credit Suisse, helped thousands of wealthy Americans hide billions of dollars
from the IRS overseas.

A wealthy customer hiding $250m in pantyhose, wrapped around her body. [23:50]

JS: (Laughter) ***** Swiss! Because you see, MtGox, your brazen Bitcoin fraud means that
you will spend your days hunted down by every international high tech law enforcement
agency known to man. Meanwhile, if you would have institutionalized your corruption, this
would be the penalty youd face. *24:07+

Credit Suisses management team regrets, very deeply, that despite the industry leading
compliance measures we put in place, we had some Swiss-based private bankers who
appear to have violated US law. [24:19]

JS: It turns out you did not want this money hidden from your tax laws. (Laughter) So,
sorry. (Laughter) I have brought you multi-colored Swatches Swatch for you, Swatch for
you, so were good now. (Laughter) Once you get in and make yourself a cornerstone of
the financial marketplace, there is no limit to what you may accomplish/perpetrate. [24:51]

First of all, how Goldman Sachs come to own uranium? [24:54]

(Laughter)


____________________________________________



TM: This is Trace Mayer, early seed round investor in both BitPay and the Armory wallet. I
think a big takeaway that we can get from this whole MtGox debacle... and really, anybody
who has been around Bitcoin a significant amount of time, they should have had either
direct experience with things like this before or this is the first experience... but the big deal
here is who holds the private keys to your money? If you dont hold the private keys
yourself, then thats a big deal because you have to trust somebody else. Not only do we
have exchange rate risk with Bitcoin, relative to the dollar, but we have performance risk,
whether somebody will actually perform their contract. MtGox isnt the first example of this
where there has been a performance risk failure. There has been MyBitcoin years ago,
theres Bitcoinica, Sheep Market ran off with about $100m worth of Bitcoin and Silk Road 2
ran off with $2.7m worth of Bitcoin. [26:00]

When youre trusting people with your private keys, thats a big deal and thats one of the
reasons that Ive funded the development of the Armory wallet was so that individuals could
hold the private keys to their own bitcoins. I think thats a very important thing. Its not just
in the Bitcoin community. With Bitcoin, were really creating a whole new form of property
rights. Property rights that arent defined by legal code but property rights that are defined
by mathematical code. For example, HSBC recently denied people the withdrawal of
physical cash from their bank accounts. Thats an example where we see HSBC holding the
private keys of the British pounds and the physical cash and somebody else holding the legal
keys, or the ownership to those pounds but there is a difference in how they want those
private keys administered. [26:54]

With this whole MtGox debacle, were really finding out that he who has the private keys,
makes the rules because there is not really any recourse. If you sent your bitcoins over to
MtGox and they lost them or they absconded with them, and there is really no way to tell
whether they were legitimately hacked by some nefarious third party or whether they just
absconded with the bitcoins themselves, there is no way to prove either way, then you
trusted them with your private keys. There is going to be abuses of this trust and whether
theyre regulated or not doesnt really make a difference. Bernie Madoff, people entrusted
him with billions and billions of dollars of assets and private keys and he ran off with it. This
is not something new. I think what we have to do as a community, in order to move
forward from this, is: One take responsibility for our own private keys and use something
like Armory etc. Two we can build systems or processes into place where we can regulate
ourselves much more efficiently. For example, exchanges could segregate customers
bitcoins and then publish balances or something, depending on what would make the most
sense there. [28:13]

Really, where we need to go is we need to build out systems where we just dont have to
trust anybody and thats what I think the big vision of Satoshi is, is to decentralize trust as
much as possible. Not having these central points of failure, like MtGox, where the US Feds
can seize $5m of their customers funds, where MtGox cant get hacked and lose their
bitcoins or abscond with the bitcoins where we just dont have to trust. I think that
building out the Bitcoin protocol more, in terms of multi-signature and escrow solutions etc
is somewhere to go and also just putting on our big boy pants and putting our bitcoins in our
Armory where we hold the private keys and we know that nobody else holds those private
keys because really, you dont hold or own any bitcoins unless you solely hold the private
keys. Thats really kind of the message or statement Id like to get out is individuals taking
that personal financial responsibility for the security of their own private keys to their
wealth. [29:24]


________________________________________


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_______________________________________________



JD: Im Joel Dietz and Im CEO of Evergreen, www.Greenz.io. Im very passionate about the
Ethereum project and other improvements that are going on right now in the decentralized
application layer. I think now that were seeing the fallout from Gox and these parties that
have not been particularly responsible with the funds they were entrusted with, it just
reemphasizes the need, not necessarily for external regulation I think there will be a lot of
call for that obviously and thats sort of the trap thats being used by many companies like
Coinbase and Circle. Theyve gone in and integrated very carefully with the existing banking
system. Im not opposed to that but I think that really, the ultimate growth and need in the
market, at this moment, is for trust networks that really build in reputational systems that
can validate things without the need for existing proxy services, including governments and
the legal system. [31:54]

I think those things (?? get used to) to a certain point but the real growth and this is why
the smart contract ability of Ethereum is so important and potentially revolutionary is that it
allows people to have the complete freedom to design these systems from scratch and
evolve them incrementally and experimentally. Were already seeing in the Ethereum
umbrella a lot of fascinating discussions of how to build a robust web of trust for the future
that doesnt force, necessarily... real name verification doesnt force you to use your
Facebook account but still allows a very high degree of trust within certain networks. I think
thats really the direction all the governance is moving in, in the sense that, in the past all
government has essentially been opt-out. Youre forced into a particular political context,
youre born into a particular municipality, or locality, or ethnicity and you are associated
with those people, by default and you dont really necessarily have the option of
disassociating or associating... this isnt really, at this moment by any means, a replacement
for that but youre increasing this possibility by having this meta-layer that you build on top
of existing infrastructure that provides an additional layer of services and can be more
robust than the layer thats below that. [33:20]

When you see all this corruption and things that have very obviously and clearly been
happening in the mainstream banking system and, to a certain degree, also are polluting the
Bitcoin system at this moment, there is just this incredible possibility of building something
that is newer, better, more resilient and basically provides all the services you expect in a
more efficient way. So much of this cost that people are paying right now on top of things,
and this is dramatically clear in this case, are on top of this pollution thats already in the
system and youre basically, either paying to clean up the pollution or youre paying to keep
it at bay, or all these sort of things. The better the system is that is designed to prevent that
from entering in the first place, essentially, the more positive benefit there is to everyone
who is doing business in the system. Additionally, I think there is a need both for centralized
systems and decentralized systems. I dont think there is one model that is the solution. I
think the distributed nature of the blockchain is really the most resilient solution and I think
thats why its a solution thats come along first because otherwise, as weve seen with past
contenders who were trying to provide digital currencies, they were just shut down because
they had a centralized point of failure and Bitcoin does not have that. Thats true of,
basically, all of the cryptocurrencies that exist. They are vulnerable to certain things like a
51% but they are extraordinarily resilient compared to most centralized systems. [34:53]

At the same point, there are a lot of... when it comes to usability, ease of use and transfer
mechanisms, there are a lot of cases where centralized systems, partially because they deal
with large amounts of flow, can actually optimize and take, essentially, a small amount of
resources through a large number of transactions and then use that to build infrastructure
and guarantee a certain experience on top of that infrastructure which you cant get across
a large body. I think were finding that, right now, even within the Bitcoin thing, which I
personally find troubling largely because the... I dont criticize the people... the heads of
Kraken, and Circle, and Coinbase, and Bitstamp, and whatever, Bobby Lee from BTC China,
for coming out and making this joint statement but it kind of has this eerie centralized... we
are the top tier of the Bitcoin world and we are integrating with government. To me, it
destroys a lot of the value that you see in something like Bitcoin where the distributed
nature is really what gives it its strength and if youre just saying We are an organ of the
government and were closely tied in with the existing infrastructure, then what is the point
of using this at all. This is what some of these people really want it to be, I think, that they
just want it to be a new PayPal that gives you a slight benefit, a slightly lower fee for
transferring funds. [36:31]

I think the real potential for these networks is so much larger than that. Im very, very
excited about the second generation of the Bitcoin stuff and I really wish that it was here
now. I wish that Mastercoin was fully released. I wish that ProtoShares, Nxt were farther
along than they are and I really wish Ethereum had all the stuff fully ready to go because
there are just so many things that you can do along this. Its going to be experimental, like I
said before, but we have that possibility right now of building that trust layer in a way that is
totally opt-in, so its not forced. Thats one of the awesome things about it too is that, with
something like Ethereum, its not like the protocol has a single version of this. It can have
multiple competing versions of this. Obviously, there will be a network effect from the
people that get stuff up and running more quickly and more robust early on and that can
scale. You just dont have that option right now and then you kind of have this fallout, the
massive fallout that I think were going to have and its going to very severely impact the
reputation of Bitcoin and the whole Bitcoin community and be a massive setback. I dont
know, fundamentally, I agree with the Eric Voorhees statement about that there is a natural
process that when you build towers, some of them will fall over but I think there is also a
need to chose stronger materials in the construction of those towers and maybe even
appoint guardians to protect them so that youre not liable when these sort of little floods...
its sort of the whole classic Do you build your castle on the sand or do you build it on
something that has a strong foundation? Finding that sort of foundation to build it on so
that it doesnt become something that rises up to $10bn and then rushes out, is
extraordinarily important for the long term viability of all of this stuff. Those are my
thoughts and thank you. [38:29]


___________________________________________


AL: The Ghost in the Machine at MtGox originally published February 27
th
2014, written
by Adam B. Levine and Napoleon Cole, with assistance from Ben Davenport, Martin
Harrigan, Charlie Shrem and the MtGox Statement IRC channel.

Disclaimer: This is a working theory and, as such, is highly speculative. While we present
our findings to you for novelty and add this information to the community conversation,
the only real truth in this situation can come from MtGox.

Yesterday, we published an alternative theory of where the coins went in the MtGox
calamity but what if the coins werent really stolen at all. What if the perpetually bumbling
exchange simply lost the keys and didnt have the heart to tell anyone? This idea caught fire
overnight and today, we pick up yesterdays thread with a few more facts and a bunch more
speculation inferred from it. This isnt the first time embattled exchange MtGox has had
solvency concerns levelled against it. In 2011, 424,242.42424242 coins were moved from an
address under the exchanges control to another address under the exchanges control.
This exercise is the digital equivalent of moving $100 from one pants pocket to the other,
standing in front of a crowd. You proved you had control of the money without exposing it
to any risk. In 2011, this served as an official proof of solvency and succeeded in quelling
the concerns at the time. When analysed in todays light, this same proof now raises more
questions than it answers. Earlier this week, a leaked crisis strategy brief prepared by an
outside firm for MtGox revealed the exchange had only 2,000 bitcoins in its spending or hot
wallet with no cold or offline funds at all. After much analysis, consultation and
consideration, we feel there is strong circumstantial evidence that MtGox should, in fact,
currently control at least 90,000 bitcoins in two, yet unspent, accounts. Bitcoins nascent
blockchain forensic is a new science that is a literal follow the money sort of operation.
We begin our journey in June 2011, when concerns about Gox reach a head and CEO Mark
Karpeles, MagicalTux, agreed to take action as a demonstration that he controlled a non-
trivial amount of coins and so, was solvent. [40:50]

MtGox Statement IRC channel

<go1dfish> MagicalTux: 432109.87654321 is that pattern random, or was it chosen
deliberately?
<go1dfish> by pattern, I mean the fact that it looks like a countdown
<sharkasgo> deliberate so it would be easy to search for
<MagicalTux> go1dfish: it's deliberate
<MagicalTux> want me to do it again? :)
<go1dfish> MagicalTux: yes, if you could send like a tiny amount to an address someone
throws out
<go1dfish> that would do a huge amount to restore confidence
<MagicalTux> I broke out the 432109.87654321 already
<MagicalTux> but I'll make a new one
<UberCookies> I wonder if I've reclaimed my account correctly...
<xelister> do .424242
<MagicalTux> xelister: 424242.42424242 ?
<xelister> yeap
<go1dfish> just need to see a transaction happen from an account with a huge balance with
an amount listed here to an address listed here
<MagicalTux> connecting the offline storage and decrypting on a firewalled system
<go1dfish> 1AbTRVrRYGri1sZvqHBadnXaCHkuXJtV5N
<MagicalTux> I'll make the transaction and push it manually
<notallhere> this would completely restore a lot of peoples faith
<go1dfish> MagicalTux: post an address and I'll send you an amount
<Ooofo> MagicalTux, to get the "free month of trading" thing, will that be automatically
done based on rolled back trades or do we have to apply somehow?
<MagicalTux> Ooofo: it'll be automatic
<Ooofo> awesome
<MagicalTux> I got all the data of all the affected users here
<MagicalTux> go1dfish: no, not practical
<go1dfish> ok
<MagicalTux> go1dfish: I'll send 424242.42424242 bitcoins from a bunch of 50kBTC
addresses (and maybe on 42kBTC) to one
<MagicalTux> well, two actually
<MagicalTux> one will get the 424k, the other one will get the change
<go1dfish> ok, yeah all transactions get split that way as I understand it
<MagicalTux> ready guys? Don't come after me claiming we have no coins after that
<MagicalTux> hopefully I'll be able to work without getting too much disturbed
<go1dfish> yeah, ready
<nanotube> MagicalTux: wasn't your last tx 432K btc? lost 8k?
<geist_> no
<geist_> thats just the amount someone suggested
<geist_> (the 424242)
<nanotube> ah
<MagicalTux> 42 is the answer
<go1dfish> to everything
<sixEch0> 42 is my password!
<noagendamarket> lol
<nanotube> hehe ic
<go1dfish> 42 is the solution to every block too
<mabus> wait what's going on, is he proving he has our bitcoins still?
<go1dfish> shit I just ruined the economy
<mabus> what does this help
<geist_> theres a lot of people crying wolf saying Gox doesnt have their BTC anymore
<wumpus> don't send them to the bitcoin eater please :)
<go1dfish> mabus: tux is shuffling large numbers of bitcoins to show they are still under his
control
<MagicalTux> anyway, going to send to 1eHhgW6vquBY... the 424242.42424242 BTC...
Voila! [44:27]

And he did! On the blockchain we can see that this very unique transaction with a
timestamp that corresponds almost exactly to the IRC conversation, which brings me to the
timeline. [44:38]

The Timeline
2011-06-23 06:50:15
The 424,242.42424242 transaction:
https://blockchain.info/tx/3a1b9e330d32fef1ee42f8e86420d2be978bbe0dc5862f17da9027
cf9e11f8c4 is made.
MagicalTux (Mark Karpeles) makes the 424,000 transaction at approximately the same time,
and on the same date as the IRC log is posted to pastebin. http://pastebin.com/d7vp06hL.
At this point we believe that MtGox has control of the coins. [45:02]

2011-07-18 13:45:29
Three weeks later on July 18th, 2011 those same coins are part of a transaction that breaks
them into two separate outputs.
https://blockchain.info/tx/7a2a6f66e87ed4e72d85ba7a82eda1572605c3330c461e171f58d7
ff2763ac63
The coins stay put in their respective addresses until late August, at which point they were
spent in the same block. Subsequent transactions following both amounts eventually lead
to a very large 550,000 BTC transaction that were about to talk about. At this point, we
believe that MtGox still has control of the coins. [45:35]

2011-08-27 02:29:26
A series of transaction are made (largely part of the same block) to break up the two
outputs from July 18th, 2011 into many addresses containing 50,000 BTC each.
These interconnected transactions are contained in the same block on the blockchain which
means they were performed on a local machine that didnt have to wait for even a single
confirmation before being able to send on the funds they had just received. That particular
piece of information came to us from Martin Harrigan who gave us an incredibly large chart
that we couldnt even publish because it was too wide. At this point, we still believe that
MtGox has control of the coins. [46:09]

2011-09-11 15:34:59
A few weeks later, September 11
th
, 2011, at 15.34 UTC, all of the 50,000 BTC addresses are
moved to new 50,000 BTC addresses. At this point, we still believe that MtGox has control of
the coins. [46:23]

2011-11-16 05:59:08
The next movement is in November when all but one of the 50,000 BTC addresses created
on September 11
th
, 2011 are inputs to that large 550,000 Bitcoin transaction with two
outputs: 500,000 & 50,000
https://blockchain.info/tx/29a3efd3ef04f9153d47a990bd7b048a4b2d213daaa5fb8ed670fb
85f13bdbcf
The 50,000 output is still there, sitting unspent.
https://blockchain.info/address/1P3S1grZYmcqYDuaEDVDYobJ5Fx85E9fE9
The unincluded 50,000 BTC is broken into two other outputs of 40,000 & 10,000. The 40,000
output is still there, also unspent.
https://blockchain.info/address/1cXNTyXj4xPGopfYZNY5xfSM1EPJJvBZV
Now, the vast majority of the 500,000 coins are actually moved over several transactions to
known MtGox addresses two days later on the 18th of November.
https://blockchain.info/tx/b269bf1b82dae8a61f7f91dbf7a9d807e30963c1ae00ddd95a8fae
bea6d0a007
Throughout all of this, we believe that these are internal MtGox transactions and that they
retain control of the coins. [47:06]

What we infer from this:
1) The custody of the 424,242.42424242 transaction is reasonably established to be Mark
Karpeles, CEO of MtGox.
2) All subsequent transactions leading to the 550,000 transaction on Nov 11th are
synchronized, suggesting a single controller.
3) The controller of those transactions created two outputs totalling 90,000 that are
unspent since Nov of 2011. That person, which we believe to be the MtGox corporate
entity or Mark Karpeles personally, should still have control of those funds. [47:46]

If MtGox does indeed have control of that 90,000BTC unspent since 2011, it means the
numbers on the MtGox Crisis Strategy draft are flatly wrong and they control considerably
more BTC than the document suggests, or something else is afoot.
We have established through several distinct channels that the MtGox Crisis Strategy draft
was prepared at the request of MtGox by an outside consulting firm (Mandalah Global),
who used financial and BTC balances provided directly by MtGox.
If the MtGox Crisis Strategy draft numbers are accurate, MtGox isnt counting the coins
possibly because they dont control the keys. Mark Karpeles has said that the coins are
unavailable. It is possible that the keys were lost since November 2011, or they are not
physically accessible for some other reason.
One possible obvious explanation of this would be if one or two users were owed and
received these large amounts (one chunk of 40,000 bitcoins and one of 50,000 bitcoins),
then never moved them. While we believe this is possible, it seems highly unlikely.
So, as promised, some follow-the-money and lots of speculation. The only person it
appears who can tell us what really happened is Mark Karpeles. While ours is a minority
report, we believe it provides a more plausible explanation than the originally proffered
750,000BTC were stolen via transaction malleability theory.
This is not to say transaction malleability didnt play a role; rather the losses it caused
catalyzed the discovery within MtGox itself that what had been perceived as the safest of
their safe bitcoins, the ones stored offline for years in large blocks, were in fact trapped
inside a transparent, impermeable vault they no longer had the combination to.
Though MtGoxs self-induced vulnerability to transaction malleability may have played a
role in its downfall, according to what weve seen, we dont think it could be responsible for
the entire Bitcoin loss. What do you think? [49:31]


_____________________________________________


CREDITS:
Thanks for listening to Episode 88 of Lets Talk Bitcoin.
Content for todays show was provided by Stephanie Murphy, Eric Voorhees,
Bloomberg News, Ron Gross, Mark Jeftovic, Trace Mayer, Joel Dietz, Akio Minamoto,
Curtis Fenimore, Emily Vaughn and Tonto Kawalski.
This episode was produced and edited by Adam B. Levine and Denise Levine, with
additional production by Stephanie Murphy
Music for this episode was provided by Jared Rubens and General Fuzz
Any questions or comments? Email adam@letstalkbitcoin.com.

Have a good one! [50:03]