Encore: Crypto Wars | The Great Slow Motion Swindle | 3

0:00This series originally aired in 2021. One, three, one.

0:32along the highways below, and huge ships float down the famous canal. Roger Ver, the BitInstant investor and cryptocurrency champion known as the Bitcoin Jesus, slips away from the party to join Shrem outside. Amazing, isn't it? Panama, the real land of the free. None of that anti-money laundering compliance crap. You can make a decision without worrying about getting locked up. Veer spots the glum look on Shrem's face. Something wrong, Charlie? I just checked my emails. The Winklevoss twins are on my case again. They want BitInstant's new site launched within 30 days. And if it doesn't happen, they're going to pull their funding.

1:17Without that money, BitInstant's going to go under. Typical Winklevoss tantrum. They make me feel like dirt, Roger. I mean, they actually called me a child. A child! Can you believe that, man? They tell me I'm doing it all wrong, but it's not like they've ever run a company. Veer wraps an arm around Shrem. Come on, forget about them. They just want you to be their puppet. That's unfair. They want Bitcoin to succeed. They just have a different view of how to do it. From me, or from you? Shrem pulls away from Veer and turns back to look at the city. I don't know. It's not just them. Gareth also emailed me about BTC King.

2:06He's this guy down in Florida. He's one of our biggest customers. But Gareth says I should shut his account because his transactions smack of money laundering. What did you say? I said, money laundering? Cool. I know I shouldn't have been so flippant. After all, Gareth's my co-founder. Come on, Charlie. Come back to the party. Worry about all that stuff tomorrow. Yeah, I guess you're right. The pair returned to the party. But for a bit instant, the good times are about to end. Shrem's failed to attract new investors. The Winklevoss twins are ready to walk, and the company's running out of cash.

2:51But there's an even bigger problem closing in. the law. And it's about to bring Shrem's partying and his company to an abrupt end.

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4:43From Wondery, I'm David Brown, and this is Business Wars.

5:11On the last episode, a banking crisis forced Cyprus to raid its citizens' bank accounts fueling interest in crypto and helping Coinbase launch with a bang. And the Winklevoss twins tried to put Facebook behind them by going big on Bitcoin. But now, the brothers are worried that their bet on BitInstant and its young co-founder Charlie Schramm is about to go down in flames and tank their comeback. This is Episode 3, The Great Slow Motion Swindle.

5:50Summer, 2013, San Francisco. In a busy diner, the Coinbase team slide into a booth to grab dinner before returning to work. The waitress takes their orders and heads for the kitchen. It's been a whirlwind few months for the startup. A year ago, Coinbase was just an idea in CEO Brian Armstrong's smooth-shaven head. Six months ago, it had just opened for business. Now, it looks after tens of thousands of people's Bitcoins. But its team is still small enough to squeeze into one diner booth. As they wait for their food, one employee butts heads with Armstrong. Bitcoin isn't the only cryptocurrency anymore.

6:33There are at least 60 cryptocurrencies out there now. You know, we should add support for them. No, no, no, no. Every one of these cryptocurrencies comes with its own quirks, blockchain, and security issues. Besides, none of them are popular enough to justify the cost of supporting them. Co-founder Fred Ursim wades in. Brian's right. Bitcoin... Sorry, excuse me here. Ursim checks his phone and frowns. It's a security alert. Some customers trying to exceed the Bitcoin withdrawal limit. One of the team grabs his laptop from his bag. I'll check it out. The team waits anxiously as the employee opens his laptop and logs into Coinbase's systems.

7:19Okay, I'm in. Let's see what's going on here. Ah, there you are. What's happening? This guy's trying to get his Bitcoin out. Oh, wait. Hmm. That's weird. What is? It looks like he's using one of our contractor's accounts to add Bitcoin to another account. And now the bastard's trying to withdraw the coins. Well, not anymore. We just need to change the contractor's password and kick him out. Ursum leans forward. Did he get anything? Yeah, a couple hundred Bitcoin. Ursum winces. That's tens of thousands of dollars gone. Damn, how'd he hack us? Armstrong places his hands on the table and looks at the team.

8:13Guys, I doubt it's a hack. He probably tricked our contractor into divulging their account details. Either that or he hacked the contractor's computer. The team stares at the table. Coinbase has just been robbed. Armstrong frowns. It's an expensive loss, but a fraction of what Coinbase could have lost if a more sophisticated hacker had breached its defenses. You know, people trust us with their Bitcoin, and that makes us a target. Guys, I think this proves it. If we got hacked for real, it could be the end of us. We need to tighten security. But as the Coinbase team scrambles to fortify the defenses, BitInstant discovers its success is a castle made from sand.

9:07July 2013, BitInstant's office, Manhattan. Charlie Schramm leans back into his black leather office chair, holding his landline phone to his ear. He's on an emergency call with BitInstant's lawyer, and he doesn't like the advice he's getting. Mr. Schramm, under the law, any company that transfers money on behalf of its customers is a money transmitter. But these money transmission laws predate Bitcoin. The lawmakers are only thinking about dollars, not digital currency. I'm thinking maybe they don't apply to Bitcoin. That is an unlikely scenario, Mr. Schramm. The reality is now that BitInstant has lost its partnership deal with Obopay, BitInstant is operating outside the law.

9:53Shrem grinds his teeth. Obopay is the payments firm that was supposed to cure all of BitInstant's regulatory headaches. To go nationwide, BitInstant needs a money transmitter license for every state it operates in. But getting licensed in all 50 states is expensive and time-consuming. So Bid Instant took a shortcut. It cut a deal to piggyback on Obopay's existing nationwide licenses. It seemed perfect. Right up until Obopay canceled the partnership. Well, so what if we haven't got licenses in every state? It's not insurmountable. We can get a new partner or our own licenses. Yes, and in the meantime, you take the site offline.

10:40What? Mr. Schramm, you must take the site down. I'm your attorney, and we cannot represent you if you don't. That's ridiculous. There's no precedent. No court has ever said these laws apply to Bitcoin. Look, I am certain that a court would rule you're in violation of money transmission laws. I'm telling you, shut the site. It will destroy us. It will buy you time to get licensed. It's not just the company that's in jeopardy here. You will be too. Unlicensed money transmitting carries a sentence of up to five years in prison. Look, I've given you my best advice. Take it or leave it. A week later, Shrem takes Bid Instant offline.

11:31In public, he promises that it will return, but it won't. Shrem and the Winklevoss twins are no longer talking. The company's coffers are bare, and there's no staff left to resurrect the site. Three months ago, BitInstant was America's top Bitcoin startup. Now, it's history. But its collapse is only the start of a wave of failure that's about to shred Bitcoin's already fragile credibility.

12:08October 2013, San Francisco. Ross Ulbricht strolls down Diamond Street with his brown laptop bag slung over his shoulder. It's almost three years since he started Silk Road. Now, it's the leading online marketplace for contraband. And Ulbricht is filthy rich. But that success also requires him to lead a double life. The people he rents his apartment with have no idea what he does. He also broke up with Julia over the site. Although, now that he's told her he sold the site, they're patching things up. But some days, he just wants to scream at people in the street. To tell them that he is the man behind Silk Road.

12:57That he is the criminal mastermind known to the world as Dread Pirate Roberts. But he won't. Instead, he'll keep pretending he's just another guy. Ulbricht heads to Bellow Coffee. He's got work to do, and it's got better Wi-Fi than his apartment. But the place is packed, so he goes next door to the library. He finds a round table near the romance section, opens his laptop, and connects to the library's Wi-Fi. He opens the encrypted chat program he uses to communicate with the staff who help him run Silk Road. A message pops up. Hey, can you check the customer support request I flagged in the system?

13:42Ulbricht's shoulders sag. Crime isn't as glamorous as he imagined. He spends most of his days handling customer complaints. Ulbricht types a reply. Sure, let me log in. Ulbricht opens a new window. and logs into the back end of Silk Road. Now, he has full access and total control over the site. A woman who's been browsing the romance novel sits down at Ulbricht's table, directly across from him. Ulbricht eyes her warily over his laptop. She ignores him and opens her book. Ulbricht figures she's not a threat and gets back to work. Okay, I'm logged in. Which ticket is it? Suddenly, a voice rips through the library.

14:29I hate you! Get away from me! Ulbricht turns to see a man threatening a woman with his fist. Then, out of the corner of his eye, he sees something move. He turns back just in time to see the woman with the romance novel grab his laptop and start pulling it away. Ulbricht tries to snatch back the laptop, but the couple who were fighting a moment ago grab him. And now they're yelling at him. FBI! They slam Ulbricht's body against the beige formica table. He feels his hands being yanked behind his back. Cold metal touches his wrists. Then, the sound of handcuffs being clicked shut signals the end of his life as a free man.

15:13It's also the end for Silk Road. Having seized Ulbricht's laptop while it was logged in, the FBI now have full control over the site and details of every customer and vendor who ever used it. It's a goldmine of leads that law enforcers the world over will soon be chasing down.

15:42January 2014, JFK Airport, New York. Charlie Schramm rubs his eyes as the passport control line inches forward. He and his girlfriend Courtney have just flown in from Amsterdam, and he's feeling good. BitInstant might be dead, but he's still a draw at Bitcoin conferences, and at just 24, he's young enough to start over. The immigration officer beckons them over. Welcome back. Schramm hands over their passports. The officer flips open the cover and stares intently at Shrem's passport. Something wrong? The officer says nothing, he just keeps staring, like he's stalling for time. Shrem feels Courtney's fingernails dig into his arm.

16:31Charlie? Shrem turns to see dozens of agents with badges hanging off their belts swarming towards them. Charlie, Shrem? Yeah, what? You need to come with us. The agent leads him away. Another agent moves to stop Courtney from following. Charlie? Charlie? Where are you taking him? Hey, tell me what's going on. Tell me. A door in the wall behind the immigration booths opens. The agents lead Shrem through the door into a small room. What is this place? Secondary screening. Arms forward, please. Shrem sticks his arms out and the agent snaps on handcuffs. Charlie Schramm, you are under arrest for conspiracy to commit money laundering, operating an unlicensed money-transmitting business, and failing to file suspicious activity reports.

17:21You have the right to remain silent. But wait, but I don't even understand the charges. Wait a minute, I want a lawyer. Just a few questions first. No, no, a lawyer. Yeah, I want a lawyer right now. Fine, fine, we'll book you at the center downtown. You can wait there for your lawyer. Let's go.

17:45Eight hours later, the Drug Enforcement Administration Booking Center in Manhattan. Shrem stands in his jail cell and stares out at Courtney through the metal bars. Courtney's trying to hold it together, but Shrem can see from her red, raw eyes that she doesn't have good news. The lawyers shouldn't be long. Have they said anything? It's been hours. I still don't understand why I'm here. Not much, but it's something to do with Bobby Fiella. Who's that? I never heard of him. Online, he's known as BTC King. Shrem staggers back. He gets it now. BTC King is the BitInstant customer who bought around$1 million of Bitcoin.

18:33He then resold that Bitcoin to people who wanted to buy drugs on Silk Road. Shrem knew what BTC King was doing, but instead of reporting it, he helped BTC King get all the Bitcoin he needed. The FBI must have discovered BTC King after seizing control of Silk Road. And after they found BTC King, the evidence led investigators straight to Shrem and BitInstant. Courtney, how long... Do you know how long I could get? Courtney tries not to start crying again. The lawyer says, he says up to 25 years. Oh, Charlie, what are we going to do? Shram feels warm tears rolling down his face. He should have listened.

19:23To the lawyers, to the Winklevoss twins. But it's too late. Shram will eventually get two years in prison. But his high-profile arrest is another blow for Bitcoin. After BitInstant's sudden death and Silk Road's fall, Shrem's crimes further damage Bitcoin's battered reputation. Bitcoin was billed as the future of money, but it increasingly looks like no more than a tool for criminals who want to move their ill-gotten loot around in the shadows. And the worst is yet to come. because the world's foremost cryptocurrency exchange is about to go down in flames and leave thousands of Bitcoin owners ruined.

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21:51It's February 2014, and Tokyo is being pelted with sleet. At a crosswalk, Mark Karpelis shields himself from the freezing downpour with his umbrella and waits for the walk signal. The traffic stops and Karpelis plods towards the office tower that houses his company, the Bitcoin exchange, Mt. Gox. He looks like a man with time to kill, but he's anything but. Because right now, Mt. Gox is in a tailspin, and it's taking customers down with it. Karpelis sees a man in a beanie hat outside the office entrance. He's holding a sign. It reads, Mount Gox, where is our money? Karpelis lowers his head and tries to scurry past.

22:40The man blocks the way. Where's the money, Mark? What's happening at Mount Gox? He's not the only one wanting answers. Mount Gox went offline last week, leaving thousands of customers unable to access the dollars and bitcoins they've deposited with the exchange. The problem started when Mt. Gox failed to comply with federal regulations, and Homeland Security seized its U.S. funds. That spooked the Japanese bank where Mt. Gox has its main account. Now, that bank has halted Mt. Gox's ability to send and receive dollars. With Mt. Gox paralyzed, customers scrambled to get their money out by swapping the dollars trapped in Mt.

23:24Gox into easier-to-move bitcoins. And that's when Carpellis discovered that Mt. Gox's stash of nearly 800 ,000 bitcoins was missing. Mark, I want answers. Please, I have to get inside. Not until I get answers. Carpellis swerves past the protester and hurries inside. Run all you like, Mark, but I'm not leaving until you tell me where my bitcoins are. But Karpelis doesn't know where the bitcoins are. His record-keeping is so poor that he can't work out how he lost 6 % of the world's bitcoins. But it's no accident. When Mt. Gox got hacked in 2011, Karpelis assumed it was a smash-and-grab raid. The hacker got in, stuffed his virtual pockets with bitcoin, and rode off into the digital sunset.

24:22But that heist never really ended. Before leaving, the hacker installed automated trading bots inside Mt. Gox's systems. And ever since, those bots have been quietly smuggling Bitcoin out. It's one of the biggest and slowest heists in history. And with$450 million of Bitcoin gone, Mt. Gox is now insolvent.

24:53The February 2014 collapse of Mt. Gox tanks the price of Bitcoin, burns thousands of investors, and adds Karpelis to the growing list of crypto businessmen facing criminal proceedings. The critics who dismissed Bitcoin as being nothing but hype feel vindicated. In six months, the price of Bitcoin has gone from more than$1 ,000 to less than$500. The digital cash that promised to disrupt finance is now a joke associated with criminals, kooks, and ruined investors. But as the first wave of Bitcoin ventures crash and burn, Coinbase smells an opportunity.

25:42Late 2014, in the office of a Silicon Valley venture capitalist, Coinbase co-founder Fred Ursham moves to another slide from his presentation deck. Coinbase is the most trusted company in Bitcoin. In the past year, we've gone from 600 ,000 customers to 1.6 million. And we are now preparing to launch the service that will power our next growth surge. We call it the Coinbase Exchange, an exchange based here in the United States, not somewhere like Russia or Slovenia, an exchange people can trust with their money, unlike Mt. Gox. One of the venture capitalists interrupts. Don't customers already buy and sell Bitcoin on your platform?

26:24Yes, but to grow beyond mom-and-pop investors and attract professional traders and hedge funds, we need a proper exchange, one that doesn't run from regulation. Another venture capitalist peers at Ersim over her glasses. And Coinbase runs towards regulation. No one likes paperwork, but by embracing regulation, we will win customer trust. The average person wants to put their money somewhere safe. So Coinbase wants to be what? The straight shooter in the crypto wild west? Exactly. Yes. Go back to your first slide. Ersam flicks back to the opening slide, spelling out the uses of Bitcoin. That first bullet point.

27:09It says Bitcoin is immune to country-specific sanctions. Well, Bitcoin isn't impeded by national borders. That's what I'm saying. So it's a tool for busting sanctions. Coinbase doesn't let people in countries like Iran open accounts, okay? We have strict checks. Breaking sanctions is not something we approve of. So why are you pushing Bitcoin's ability to dodge sanctions as your first bullet point? No need to answer. We will not be investing in anything where that's the selling point. Bitcoin is just too spicy for us. But while some Silicon Valley investors remain leery of Bitcoin, others are willing to invest.