THE DIGITAL GOLD RUSH
The week of January 11, 2015
Patrick Byrne

Me IRL: Patrick Byrne

By Aaron Sankin

For the first few years after Bitcoin’s creation in 2009, it wasn’t really accepted anywhere. Blogging platform WordPress was the first major company to take the plunge in 2012, and a few other tech firms, most notably dating site OkCupid, followed suit the following year.

But Overstock.com’s announcement in 2013 that it would begin taking Bitcoin early the following year truly marked a new era in the history of digital currencies. It’s acceptance of Bitcoin was fundamentally different to that of other companies simply due to the breadth of products it sells. Overstock began life in the midst of the late-1990s dot-com bust, buying up the inventories of failed ecommerce companies and then selling those items to the public at bargain basement prices. In the years since, Overstock has expended to sell a whole host of new, used, and surplus merchandise.

Overstock’s decision was important for Bitcoin’s development because Overstock functions a lot like Amazon in that it pretty much sells everything. Need linens for your bed? An electric razor for your face? Made-to-order biscotti? Thanks to Overstock, cryptocurrency aficionados could finally buy it all with Bitcoin from a single website.

It’s hardly a surprise that Overstock would be among the first big, billion-dollar companies to embrace Bitcoin. The move was the brainchild of the firm’s iconoclastic, libertarian CEO Patrick Byrne, who is so invested in weaving Bitcoin into the very fabric of his company that he wants his employees to be able to collect their annual bonuses in the virtual currency.

For Byrne, one of the Bitcoin’s highest-profile and most consistent boosters, cryptocurrencies aren’t just another way to make money. They’re a mechanism from transforming virtually every aspect of society, from freeing American commerce from what he sees as a governmental stranglehold to serving as the lynchpin in his 15-year quest to root the Mafia—yes, that Mafia—out of Wall Street.

Thanks to Overstock, cryptocurrency aficionados could finally buy it all with Bitcoin from a single website.

What was your first Internet screen name?

It was “Hannibal” on a site called FuckedCompany.com. [Fucked Company gleefully tracked the trials and tribulations of sinking tech firms and allowed people to post anonymously about their experiences inside these failing companies]. In the early days of Overstock, there were users on the site whose companies that were going bankrupt, and I would go on there and reach out to them to try to buy their inventory.

What was your first exposure to the concept of cryptocurrencies?

I did my graduate work at Stanford. Twenty-five years ago, I was studying the math that was underlying cryptography. About three or four years ago, when I first read about Bitcoin, I recognized that it was based on those principles I used to know, like the Byzantine General’s Problem, for which Bitcoin is the solution. When a journalist mentioned it to me [during an interview], I mentioned something positive back. Before I knew it … [my statement] showed up in blogs around the world. That’s when I became tuned into this mass subculture where there was a crypto movement brewing.

What about that movement did you find exciting?

For me, it’s political. People forget that government doesn’t come down out of a burning bush; it doesn’t come down from on high. It’s this corporation that we set up to achieve certain functions. We’re supposed to limit it, but centralized institutions have a way of growing—both in bureaucratic cost and in authoritarianism. That’s how republics turn into oligarchies.

You have to chose between institutions that are peer-to-peer, where you have to trust the other party, but you can’t really trust people you don’t know. Or you have centralized institutions, and all people have to do is trust the institution. That’s always been the choice. The problem with that is the centralized institutions are not worthy of trust. It’s just inevitable that they become captured by private interests. It was the one problem that concerned our founding fathers more than any other. They thought they had solved all the defects of democracy except that one. It’s what always broke down democracies in the classical age—the tendency for things to get captured. Either in true direct democracy, which means you get demagogues, which turn into tyrants. Or you have indirect democracy, mediated by some class like senators, and then the senators become the aristocracy, and they end up with their own authority figure, who becomes a tyrant. No matter what you do you end up with a tyrant. The Founding Fathers were aware of this, Federalist Paper #10 goes into this.

This is what’s exciting about the crypto movement: It lets you cut that Gordian Knot. You can have a peer-to-peer system that’s solved the problem of trust. It’s a massive historical innovation. The technology lets us decentralize institutions and go back to peer-to-peer.

This decision was made still relatively early in the process of the general public’s understanding of Bitcoin. What kind of selling did you have to do internally to get people at Overstock onboard with the idea?

I am the CEO, founder and majority shareholder, so when I want to [do something], I don’t have to rely on convincing. I usually do rely on convincing. But once in a while, when an idea is so obvious, I make it clear that it’s not a matter of convincing. I generally try to do everything very consensually, but this was one of those rare times where I just made the decision. I don’t recall people pushing back, everyone got the logic pretty quickly. As soon as we went live and got worldwide attention, everybody understood that it had been a good call.

Byrne is so invested in weaving Bitcoin into the very fabric of his company that he wants his employees to be able to collect their annual bonuses in the virtual currency.

Can you tell me a little bit about the public reaction to your announcement? Was it what you expected or were you surprised by it?

It was a global reaction with publicity coming from all around the world. Now I do have to say the sales have been disappointing. I thought that we would do $6-8 million last year, but I was counting on a lot of international sales. We ended up with not a lot of international sales at all. We had $3 million of domestic, but not much international. I was disappointed, but it’s still early days.

What do you think is behind those slower than expected sales?

I think that people just don’t get it yet. People still think of it as a stock with the price bouncing around all over. They’re not seeing it as I see it—as a technology. It’s not about what the price is day-to-day.

What do you think was stopping other companies from accepting Bitcoin before Overstock did? Do you see those forces still being at play now in making companies reticent to embrace Bitcoin?

Well, companies couldn’t even consider [accepting Bitcoin] until November [of 2013] when there was a Senate hearing and Treasury officials basically said there’s nothing illegal about it. Once they said that, it kind of opened the doors. After that, we were there in five weeks and someone else was a month or two behind us.

You’ve been extremely critical of Wall Street—even going as far as creating your investigative news organization focused on going after financial industry corruption, Deep Capture. Can you talk about some of the issues you have with the ways that Wall Street functions?

My general theory is that elements of organized crime have entered our financial system, particularly in the settlement system. They figured out about 15 years ago that you can rig the market in various ways if you rig the settlement. It may seem strange to think about organized crime in the financial industry, but I suggest you [read about] Operation Uptick, the largest FBI sweep of mafia in history, which occurred all over Wall Street just over 12 years ago. The director of National Intelligence, Admiral Dennis Blair, in 2009 came out with an urgent warning saying that transnational organized crime is in our financial system. Barack Obama once signed an executive order dealing with this subject. Organized crime syndicates of the Italian, Russian, and Albanian varieties—that’s what Deep Capture explores, all of the links from Wall Street to organized crime.

“This is what’s exciting about the crypto movement: It lets you cut that Gordian Knot.”

For people who may not know know what the settlement system is, can you explain how this affects them?

If you have an E-Trade account and you go buy 100 shares of IBM, you’d think that you have some property rights over those 100 shares, but you really don’t. You have some contractual rights, called a share entitlement, against a company that has contractual rights, against a company that has contractual rights, against somebody that has the property rights. It’s a very convoluted system and, on most days, it doesn’t make a difference. Under stress, it will crack. I think it’s a point of great vulnerability in our national markets.

The key point is that you don’t owe them what you think you owe them. There are explicit rules. If E-Trade went under, and it turned out they had 1,000 shares and they told five of their clients that they each owned 1,000 shares, it would turn out that each person only actually had about one-fifth of what they own. It’s explicitly written into the rules for a reason. The system has been all set up that way.

At these different nodes, people cheat all the time. That’s what we started discovering about a decade ago. Within these different nodes, there’s a massive amount of fractional-reserve banking without a reserve requirement. We have a lawsuit against some people on Wall Street [going right now] because we want to expose it. They may tell you that you’ve got 100 shares, but they’re telling three other people that they’ve also got those same hundred shares.

How would the use of cryptocurrency-based system change that?

What crypto does is unleash a decentralized settlement system. … You actually have real property rights in your coin and those property rights transfer when you transfer the coin. So there’s not just a whole daisy chain of contractual rights stacked on top of the actual property rights.

Are there other applications of the technology that you’ve seen that are particularly exciting?

I think there are hundreds of applications that are going to change how commerce is done, how letters and credits are done, how contracts are done. It may disintermediate the entire legal class, lawyers and judges, because what if you have smart contracts that are embedded in transparent open-source code that both parties can check before a transaction? You can convert derivatives … into smart contracts embedded into some coin, that looks at some facts and determines on a preordained day if you get paid or I get paid. We don’t even need to know each other. There are no brokers. There’s no one to argue about the contract with because its all transparent and open source. What do you need judges for? What do you need a legal system for? What do you need a land titling system for?

Illustrated by J. Longo