Digital Gold (14 page)

August 2012

C
harlie Shrem and Erik Voorhees walked along the southern edge of Madison Square Park to Benvenuto Café. They were there to meet Barry Silbert, one of the big names in the New York tech scene. As Charlie walked into the café, he expected to see the sort of brash icon of new money caricatured in movies like
The Social Network
. What he found instead was someone with a boyish face and straight bangs that made him look almost as young as Charlie.

Only thirty-three, Barry Silbert was viewed as a prodigy in the financial industry, having worked at a Wall Street firm, managing bankrupt companies, before leaving to create a financial startup that had made it easier to buy and sell the stock of companies that didn't trade on stock exchanges. The company, SecondMarket, landed Barry on every list of forty under the age of forty.

Barry had already been quietly exploring Bitcoin for months. His interest was not political. He saw Bitcoin's potential to address inefficiencies in the existing ways of moving payments and other elements of the existing banking system. Given the fringe
status of Bitcoin, Barry feared that going public with his interest in the technology could damage the reputation of his company, which was funded by several leading venture capitalists. But behind the scenes, Barry was seeking out anyone who could connect him with interesting virtual-currency investments. He had also spent around $150,000 buying up Bitcoins over the course of 2012.

Charlie and Erik were eager for the meeting because David Azar had proved difficult to pin down since the BitInstant guys agreed to accept his investment after the trip to Vienna earlier in the summer. If nothing else, Barry could advise them on how to handle the situation.

Barry obliged, but he also saw an opportunity for himself. He had already made a few angel investments in Bitcoin companies with his own money—including one in CoinLab, the Seattle company founded by Peter Vessenes—and was eager to expand his portfolio. What's more, he had recently gotten one of the biggest venture capital firms in New York—one of his early investors—excited about Bitcoin.

Within days, Charlie had scheduled a coffee with Barry's big investor, Larry Lenihan, a partner at the billion-dollar firm FirstMark Capital, which had bet on startup stars like Pinterest and Aereo. When they met, Larry was slightly put off by Charlie's untamed energy and hubris, but he liked the idea behind BitInstant enough that he immediately contacted Barry and said he wanted to explore making an investment. In an e-mail to Charlie, he asked when Charlie and Erik could come in to meet his partners: “I'd also like to bounce an idea off you guys about having NYC invest—this could be important. It would be out of Mayor Bloomberg's office and it would provide enormous amounts of credibility for the effort.”

D
AVID
A
ZAR
'
S OPPORTUNITY
to invest in BitInstant was about to disappear when he went with some friends to the Spanish island of Ibiza. While lounging at Blue Marlin, one of the trendy island's most famous beach clubs, David noticed two tall men with waves of glossy brown hair, who would have drawn his attention even if they weren't Tyler and Cameron Winklevoss.

The Winklevoss twins had become a cultural phenomenon owing to their involvement with Mark Zuckerberg when they were all undergraduates at Harvard. Zuckerberg had initially teamed up with the brothers to build a social networking site, but when Zuckerberg went off on his own and created Facebook, the twins sued him, claiming he stole their idea. They eventually won a $65 million settlement and the story inspired the Oscar-winning film
The Social Network
.

Aware that the brothers were tech savvy and wealthy, David seized the opportunity. He sidled up to Cameron and dropped the name of a friend of theirs in New York. David then asked Cameron if he knew anything about virtual currencies. Cameron did not and David's brief description elicited an interested nod. The encounter ended with David promising to follow up.

David caught the brothers at an opportune moment. Recently retired from their rowing careers, which had taken them to the 2008 Beijing summer Olympics, they were using their money from the Facebook settlement to set up their own technology investing firm. Just before they had left for Ibiza, Winklevoss Capital had leased an office a few blocks from the BitInstant offices in Manhattan.

At their family beach house on Long Island the next weekend, Cameron read over the articles David sent along. Both brothers had majored in economics at Harvard and, after just a bit of reading on his laptop, Cameron called his brother over.

“You've got to come over here and check this out,” Cameron said to Tyler.

Tyler always played the right-handed, rational check to his more dreamy, left-handed brother. But as Tyler began reading, he saw what his brother was talking about. Both realized this was either a scam or a big deal—but worth exploring. When they got David on the phone, he told the twins about the company he was preparing to invest in and offered to connect them with the guys at BitInstant, with the clear implication that the brothers might want to invest in it as well.

Two days later, Cameron arrived at BitInstant's headquarters on Twenty-third Street and folded his big frame into Charlie's office. The conversation with Charlie and Erik about how the blockchain worked and how Bitcoin was different from previous digital currencies that had not taken off—like Facebook credits—lasted for almost two hours. Charlie came across as something of a Tasmanian devil, with energy shooting in all directions, not always in an ordered fashion. But for every skeptical question the twins asked, Erik had a well-thought-out answer. Cameron was particularly impressed by Erik's decision to take his entire salary from BitInstant in Bitcoin and to keep his savings in the virtual currency. Within a few days, the twins let David know that they were prepared to invest alongside him and set up a dinner to work out the terms. With Charlie and Erik, they opened up a jokey banter by e-mail as the twins went back and forth about the basics of Bitcoin and the nature of money.

Cameron: “Money does have some intrinsic value, for example if you were freezing on top of a mountain and all you had was cash you could burn it to keep warm a la Cliffhanger.”

Charlie: “Anything is valued differently in different circumstance. . . . A dollar bill to a coke head is worth more than a dollar bill to you and I.”

Cameron: “What about a dollar bill to a stripper?”

Charlie and Erik were now back in the enviable but awkward position of being courted by two different investing groups.

Each member of the BitInstant team weighed in. Roger was not excited about the Winklevoss twins. He thought that they were free riders, who had gotten rich thanks to the legal system, rather than by inventing something real. He also worried about the terms of the deal that David and the twins were offering, which provided much less flexibility and gave David more control than most startup investors have.

Roger was still a libertarian, but he was a practical one, and he understood the value of money from established venture capitalists like Barry Silbert and FirstMark Capital and especially the value of getting some buy-in from the City of New York.

“This is one of the most interesting investors possible because I suspect it would give us a great deal of added protection against future trouble with regulators / financial police,” Roger wrote from Tokyo, advocating for Barry and FirstMark over David Azar and the twins.

Barry was already taking Charlie and Erik under his wing and trying to soften some of their rough edges. He cautioned Charlie to stop making comments in his e-mails about his drinking and carousing. After taking the BitInstant guys to an industry party he wrote a laundry list of their social faux pas that they needed to work on:

Take it easy with name dropping . . . Larry would not appreciate it if he knew you were telling people he was buying Bitcoins.

Charlie—your defense of Bitcoin to Brian at Tribeca came across as very aggressive. Be patient, LISTEN and try to disarm each one of their arguments.

Do your best to keep your phones in your pocket. It is anti-social—borderline rude—to be doing emails, twitter, etc. during dinner.

Charlie didn't love the paternalistic guidance. But more important, when Charlie considered which investment to take, David had something that Barry could never match: he was part of Charlie's tight-knit Syrian Jewish community. On hearing that BitInstant was thinking about taking an investment from Barry Silbert, David exploded, accusing Charlie of disloyalty. Members of the Syrian Jewish community generally viewed themselves as having more responsibility to each other than to the outside world. This was an insular community in which even marrying a Jew from Europe or Turkey was considered intermarriage. Charlie was terrified that he would become a persona non grata in his neighborhood if he backed out of his deal.

In addition, David's partners, the Winklevoss twins, had a glamour that was hard for him to resist. To someone who had always been the last one picked for dodgeball, the tall blond Olympians promised not just money, but a life in which he could no longer be ignored.

Then there was the danger of turning down David's money for a deal with FirstMark that was only in the initial stages. Charlie wrote to Barry:

Is it worth risking a good deal I have now to see if a deal may or may not happen? I mean, everything up until now with Larry has just been talk. I've been farther with other VC's who flaked on me last minute. This deal I have now has been in the works since June, 4 months and Im tired!!

Barry pushed back hard:

This is your company and you gotta do what you gotta do, but just want to throw in my two cents. It would be game changing for your business and the Bitcoin industry for FirstMark capital to make an investment in BitInstant.

From Tokyo, Roger struck up a back-channel conversation with Barry, both to explain what was holding Charlie back, and to see if Barry could make an offer that would put some of Charlie's concerns to rest:

Charlie currently feels some cultural pressure to close the other deal, but if your offer is better, he will have every reason to not accept it and won't have any ramifications from his social circle.

Barry agreed to put up a $75,000 convertible note in order to create a bit of breathing room while he and FirstMark worked on a more formal offer. Roger quickly wrote to Charlie: “I don't want to burn any bridges, but I don't think we should feel bad asking David to wait an extra two weeks. He has already demonstrated that he is not in a hurry by taking months and months to put together a deal.”

Charlie did hold off, but he eventually resolved the issue between David and the twins on one side and Barry and FirstMark on the other by getting David to soften up some investment terms that had turned Roger off. Charlie also convinced Erik that David's experience in the check-cashing business would immediately help BitInstant deal with regulatory issues it could face as lawmakers looked to rein in virtual currencies. To close the deal with David, Charlie offered Erik a 2 percent stake in BitInstant. They finalized everything sitting on the porch of David's lawyer in the Syrian Jewish section of Brooklyn. The agreement gave Maguire
Ventures, the investment entity created by David and the Winklevoss twins, 22 percent of BitInstant for $880,000. Charlie kept 29 percent of the company and Roger kept 15 percent, with the rest being split among the other employees.

By the time the final contract was signed, Charlie was already reaping the most immediate benefit of the deal: he was serving as a personal Bitcoin guide for the Winklevoss twins. He began buying them coins and helped them use Bitcoin to pay a Ukrainian programmer for work on the Winklevoss Capital website. Charlie and Erik also set up a time to sit down with the twins and give them a more in-depth Bitcoin tutorial at their offices.

Charlie and Erik deliberately scheduled the meeting on a Saturday evening, when the conversation might bleed into a night of partying with the brothers, and the twins didn't disappoint them. After a session on Bitcoin, leavened with alcohol, Cameron invited Charlie and Erik to join him for a night out. Girls the twins knew showed up and the crew headed to a party in a loft downtown, followed by a visit to a speakeasy. Charlie got so drunk on shots of rum that he threw up on his shoes in the middle of the bar. He still managed to end up back at Cameron's apartment with a girl—though Charlie ruefully reported that it didn't go anywhere.

“What a night,” Cameron wrote to Charlie and Erik the next morning. “I trust u guys made it home in one piece.”

“That was a blast,” Erik wrote back. “I had to peace out before I drowned in liquor.”

It wasn't just Charlie and Erik who found all of this thrilling. For the twins, despite their past successes, investing in Bitcoin at this point still felt like getting in on the ground floor of something huge, before anybody else had even heard about it.

But before they had a chance to savor it, the first signs of trouble appeared. In early November, a hacker attacked the BitInstant site, forcing it down several times. The hacker demanded a 10,000
Bitcoin ransom, keeping Charlie's small team of programmers working around the clock. At about the same time, BitInstant's longtime bank, Citi, began asking hard questions after months of not paying much attention to the account. This forced BitInstant to temporarily stop taking in new money through its bank account. A little more than a week after the investment was made official, David Azar snapped at Charlie: “I didn't sign up for this.”

As David took ownership of the company, he questioned why the business wasn't growing faster. At the same time, he declined to hand over the first tranche of money. He demanded a full audit of BitInstant that was taking much longer than expected. He would shoot off brief e-mails like machine-gun fire, asking new questions before he got answers to the previous ones.