Monday, March 10, 2014

Bitcoin: The Worst Case Scenario

It's time for libertarian Bitcoin fanboys to take off their cheerleader outfits, throw away the pom-poms and realize that the great vulnerability of Bitcoin is that it can be easily tracked by government. So easily tracked that it has likely resulted in an important sector of the Bitcoin community becoming vulnerable to government prosecution.

We have already seen the arrest of Ross Ubricht, alleged-founder of Silk Road and Charlie Shrem, the co-founder of BitInstant. It is difficult to know what is true and not true about the charges against Ulbricht and Shrem, since we are for the most part only hearing the government's side. Further, many of the charges, wouldn't even exist as crimes in a libertarian society, that said, it is clear the federal government is going after these two men with ferocity.

That's bad enough for the Bitcoin community but, all indications are that it is unlikely to stop there. For whatever reason, Roger Ver (aka, Bitcoin Jesus), is hiding out in the Caribbean and said to a reporter:
I don’t think I am likely to be assassinated, but I worry about being sent to federal prison for some sort of made up charge for a crime where there is no victim.
Reports are now emerging that Mt.Gox CEO Mark Karpeles may have taken some bitcoins for himself that he had reported stolen by hackers and that the balances involved were larger than Karpeles reported in bankruptcy statements. From Techcrunch:
Anonymous hackers have defaced Mt.Gox CEO Mark Karpeles’ blog and have uploaded a data dump of customer data that, according to users with accounts on the site, is accurate. A Reddit user created an Excel spreadsheet [mirror] of anonymized user accounts with balances, and many current Mt.Gox users have found their balances present.
The text of the post reads [NSFW]:
First and foremost, this is not Mark Karpeles. Fuck that bitch-titted motherfucker.
It’s time that MTGOX got the bitcoin communities wrath instead of Bitcoin Community getting Goxed. This release would have been sooner, but in spirit of responsible disclosure and making sure all of ducks were in a row, it took a few days longer than would have liked to verify the data.
Above you will finding download link and a mirror used without asking from Mark Karpeles very own
Included in this download you will find relevant database dumps, csv exports, specialized tools, and some highlighted summaries compiled from data. Keeping in line with fucking Gox alone, no user database dumps have been included.
Repost and share this info before it’s gone. Lots of people, including us, lost money and coins. Upvote this post.
We stole no bitcoins. There were none to steal. If you want to donate, you can keep us full of pizzas and beers by sending coins here, 1859rayqN1X7DYjD1BrAHm4vaQxoUhhzsN .
Balance SUM for ALL USERS by currency.
Currency: AUD Balance: 924,124.65121
Currency: BTC Balance: 951,116.21905382 <– That fat fuck has been lying!!
Currency: CAD Balance: 320,184.36558
Currency: CHF Balance: 99,487.07308
Currency: CNY Balance: 297,775.78994
Currency: DKK Balance: 112,264.56207
Currency: EUR Balance: 5,634,625.59531
Currency: GBP Balance: 921,892.96793
Currency: HKD Balance: 740,519.14894
Currency: JPY Balance: 384,885,150.13700
Currency: NOK Balance: 91,346.00305
Currency: NZD Balance: 58,224.95320
Currency: PLN Balance: 1,645,194.67364
Currency: RUB Balance: 551,162.54477
Currency: SEK Balance: 15,335.84383
Currency: SGD Balance: 43,193.59706
Currency: THB Balance: 666,464.33497
Currency: USD Balance: 30,611,805.67481
Total BTC Deposits: 19,065,241.307202
Total BTC Withdrawl: 18,563,466.149383
BTC Difference: 501,775.157819
The most important number, obviously, is the 951,116.21905382 balance. As you recall, Mt.Gox filed for bankruptcy while stating a 850,000 BTC loss. This would suggest Karpeles’ estimates were off by a large margin. Whether all of this is accurate or not is an entirely different manner. What the leak does show us is how easy it was to grab nearly all of Mt.Gox’s user data as well as how hardened Karpeles’ blog was. Furthermore, the files contain the app Mt.Gox admins used to manage transfers.

Here is The Verge on what it may mean if the hackers are telling the truth:

Tokyo-based Bitcoin exchange Mt. Gox lost $400 million worth of bitcoins in February. Its management said the amount was stolen after hackers exploited a transaction bug to divert the funds, but some of Mt. Gox's users are not so sure, suggesting instead that the exchange's owners pocketed the cash. Now, facing silence from those owners about the fate of the money and the methods by which 6 percent of all of the Bitcoin in the world could have been stolen, a group of hackers claims it has broken into the bankrupted Bitcoin exchange's network to get answers.
Forbes reports that the group gained access to the personal blog and Reddit account of Mark Karpeles, Mt. Gox's CEO. The hackers used the platforms to post a message that claimed Karpeles still had access to some of the bitcoins that he'd reported stolen. In support of the claim, they uploaded a series of files that included a spreadsheet of more than a million trades, Karpeles' home addresses, and a screenshot purportedly confirming the hackers' access to the data.
Also included as part of the 716MB file was a file that appears to show the exchange's balances in 18 currencies. The hackers point to this file — which reportedly shows a balance of 951,116 bitcoins — as evidence that Mt. Gox is misrepresenting the current situation. A note in the file from the hackers reportedly reads "That fat fuck has been lying!!"
Most disconcerting is a Bitcoin whistleblower,Two-Bit Idiot,  who posted on Friday that key members of the Bitcoin Foundation were given special access to their funds at Mt Gox, and trading privileges, while everyone else at Mt Gox had their accounts frozen. TBI wrote:
There is evidence that Bitcoin Foundation board members may have had direct access to Mark Karpeles which allowed them to personally deposit and withdraw funds from Mt. Gox, despite persistent delays for other customers...By Monday, I expect that either [the two key Bitcoin Foudation members] resign gracefully from the board of the Bitcoin Foundation...Otherwise, by Monday at 3pm ET / 12pm PT, I will post my full expose of the unprofessionalism and negligence of the Bitcoin Foundation. ...I hope to eat my article, keep the documents that I have to myself (and likely prosecutors as I am likely to be subpoenaed)
Over Sunday, TBI tried to put the genie back in the bottle:
 I'm not going to bury the lead; I am not publishing the article tomorrow that I said I was going to on Friday.

In fact, I never intended to (not yet anyway), and I certainly never intended to loop in the main-stream media so that they could pile on to our fledgling community.  I simply hoped that a deadline would pressure Jon and Peter to resign quickly (and appropriately).

While my accusations on Friday were 100% truthful, I now see that I have overplayed my hand.  Rather than go all-in with a losing hand, I'm mucking my cards.  I never anticipated this degree of backlash from within the community.  As such, any further efforts to publicly push for resignations are not well-focused, and I plan to turn down the rhetoric.

On the other hand, I'll reiterate that while my hyperbolic tone was poor and regrettable, I continue to believe that the Bitcoin Foundation in its current incarnation is significantly damaged...

Bottom line, there is a lot going on around Bitcoin, some of it, from a libertarian perspective is no problem, some of it is edgy and some of it may be criminal in any society, libertarian or otherwise. But, no doubt, prosecutors will view things in a much harsher manner than I do. And sadly, worst case scenario, unless very extraordinary measures were taken by a Bitcoin user, any Bitcoin user,conducting any illegal activity, could be snared as the government follows up on the multitude of leads it now has. A small fry might not be worth going after, but that blockchain makes it very easy to track transactions. If the operators can be identified and  tracked behind transactions to illegal dealings,  then it will be very easy for the government to cast a very large net and nab many who thought they were operating anonymously.


  1. Wow. EPJ is sounding like a Keynesian backwater these days.

    1. Seconded. Been going on too long on this subject if you ask me.

  2. +1
    I think RW is just pissed off that he has been missing the boat on the whole concept. So now he has made it a personal prerogative to seek out bitcoin "dirt" as fodder for his Shaddenfreude.

    1. Wenzel recommended to his EPJ Daily Alert subscribers to buy some bitcoin when it was around $14 (or maybe $40, i don't specifically recall) as a pure spec, risk play (for those risk loving investors) ... he also sent out a blast in Nov 2013 (ish) to sell ...

      I think your perspective on this is off 100%

  3. I appreciate Mr. Wenzel’s interest and updates on Bitcoin (and other crypto payment schemes) EPJ seems to be one of the few outlets that does not act like a sell side Wall Street salesman. I was at a recent Bitcoin Event in Texas and indeed Two-Bit said he was on a mission to have Bitcoin Board members step down. Ross Ulbricht’s mom was there raising awareness (and bitcoin donations) for her son. I learned that schemes like Dogecoin can be inflationary, as there appears to be no limit on issue. A key reason Bitcoin and alternative digital payment methods/currencies have drawn interest is threefold: A) Global fiat currencies are effectively being shredded (by central bank unbridled issuance) in terms of purchasing power (or future purchasing power); B) Online payment systems make sense, this is but another method; C) Young out of work college grads are desperate to come up with the next Internet era, which while Bitcoin (and emerging online payment systems) is important, it is not close to such magnitude.
    So at least for this reader, I do not believe the topic is over covered, and hope more ‘insightful content’ continues to grace EPJ.