Crypto, Beyond Silk Road

As a former Department of Justice prosecutor, Katie Haun set up the first-ever “cryptocurrency task force” for the U. S. government. She also led the investigations into the Mt. Gox hack and the corrupt agents on the Silk Road task force -- the first cases of the U. S. government using the bitcoin blockchain to fight fraud, not just against criminals but against their own. Haun -- Coinbase board member, Stanford lecturer, and now general partner on a16z crypto -- shares that story in this talk, originally delivered at a16z's annual innovation summit, which features invited speakers from various organizations discussing innovation and the evolution of tech trends. So she further dispels some misconceptions about crypto, sharing use cases beyond speculation around the world, where crypto is being used to address hyperinflation, help the unbanked, ease international remittances, and more.

• 0:21Speaker 0

  Good afternoon, everyone. You know, it's ironic that I get here to be with you this afternoon to tell you why I'm so excited about crypto. And the reason it's so ironic is that the first time I ever heard the word Bitcoin was back in 2012 when I was a federal prosecutor at the US Department of Justice. And I heard the word Bitcoin because I was asked to prepare an investigation and a case against it and to help shut it down. And this was one of the early misconceptions out there about cryptocurrency, that you could shut something down like Bitcoin. That would be like saying, let's go shut down cash or the internet. Not only not possible, but also not desirable.

• 1:07Speaker 0

  And as I learned more about the technology and did my own research, met teams in the space who were building projects and discussed this with colleagues, I learned that a lot of the misconceptions and that a lot of the myths just weren't accurate. And I also at the same time began to realize how profoundly this technology could change the way we do all sorts of things. Fast forward to today, six years later, and I co-lead our crypto fund with my partner Chris Dixon. And I also teach cryptocurrency at Stanford Business School. But all these years later, I'm still debunking some of those same myths. Myths like cryptocurrency is just completely anonymous.

• 1:52Speaker 0

  So really it's only useful for criminals and money launderers. Now, how do I know that's just a myth? Well, I spent over a decade as a federal prosecutor. And during that time, I put murderers, organized criminals, money launderers, hackers, and identity thieves behind bars. In fact, I'm the prosecutor who put some of the earliest Bitcoin criminals in jail. And right now I want to tell you one of those stories. But it has a twist because it involves crypto being used to catch the bad guys. This is a story about a failed murder for hire, the Silk Road marketplace, a pair of corrupt federal agents, and the almost complete and utter destruction of evidence in the case.

• 2:38Speaker 0

  Now, how many of you in this room have heard of the Silk Road? Can I see a show of hands? Oh, well a lot of you, okay. Not everyone, though. Um, for those of you who don't know, the Silk Road was a dark net marketplace where you could buy everything from heroin to fake passports and pretty much everything in between. Now, was this a criminal enterprise? Or was this a libertarian paradise? Depends on your viewpoint. But the one thing that we can all agree on is that anonymizing technologies, things like Tor, the onion router, or pseudonymous technologies, things like Bitcoin, were making it really hard for the government to find out who was running the Silk Road, who was the mastermind behind the Silk Road.

• 3:27Speaker 0

  But the government was sure gonna try and find out. In fact, two federal task forces were back on the East Coast trying to do just that to find out who was running the Silk Road. Where in the world were they located? And up on your screen, you see one of these task forces that was comprised of things like you've all heard of the FBI, the Marshalls, the DEA, and a whole other host of alphabet soup of agencies. And this task force was trying to find out who is running the Silk Road, but all they knew at the time was that person or persons went by the moniker DPR, short for Dread Pirate Roberts, taken from the movie The Princess Bride. They had no idea who he or she was.

• 4:13Speaker 0

  But as I mentioned, these task forces were determined to find out, and they had a secret weapon. They had an undercover federal agent. Nob was his cover name. And Knobb's cover was that he was a drug lord with connections to the criminal underworld. And Knobb's mission was to befriend DPR in an effort to identify him, him or her, and find out where DPR was. In fact, up on your screen here, this was the verification photo that Nob provided to DPR in an effort to prove he was the real deal, a real criminal. And funny enough, it worked. Nobb and DPR became online confidants, and they chatted online daily by encrypted messaging applications for years. And during these chats, Nob got a lot of details that were really important to the government in locating and identifying DPR.

• 5:07Speaker 0

  Things like what time zone was DPR typically logged in? What did he or she eat for dinner? What was the favorite music? These kind of innocuous tidbits really helped the government find out who DPR really was. And if you've read through some of the journals that DPR was keeping during this time, you'll see the two became quite close. Now, 2013 was not a good year for the Silk Road. A couple bad things started happening. The first bad thing was that DPR started getting extorted by a person who went by the moniker, death from above. And death from above was threatening DPR, saying, unless you pay me hundreds of thousands of dollars, I'm gonna reveal your identity to law enforcement.

• 5:54Speaker 0

  And it wasn't just death from above. Another person who went by the moniker, French made. French made was selling DPR information into the government's investigation for hundreds of thousands of dollars of Bitcoin. And French Maid was predicting that the end was near for the Silk Road, and the feds were closing in. And amidst all this, something else really bad happened. And that is that overnight 21,000 Bitcoin, worth today about 150 million dollars, went missing from Silk Road vendor accounts overnight. And this caused a lot of pressure for DPR because a lot of those vendors were not very happy. So DPR had no choice but to launch an internal investigation.

• 6:39Speaker 0

  Who stole this 150 million dollars from Silk Road vendor accounts? So he launched an internal investigation, and he quickly concluded, or one of his right-hand men, Curtis Green was to blame. And he suspected Curtis Green because Curtis Green's password computer username and credentials had been used to reset Silk Road vendor accounts. Now Curtis Green by day was a grandfather in Utah. But by night, he was an administrator for the Silk Road. DPR put out a hit on Curtis Green. Ironically turning to Knob to do that hit. Remember, Knob is an undercover federal agent. And DPR paid Knob 80,000 to torture and kill Curtis Green. Now, of course, DPR didn't know at the time that Knob was a federal agent.

• 7:28Speaker 0

  But he also didn't know at the time that Curtis Green had already been arrested by that same federal Silk Road Task Force. And that as part of his arrest, he had decided to flip and turn state's witness and cooperate with the feds. And as part of that cooperation, Curtis Green had turned over his laptop username and credentials to the federal agent task force, including to Knob. Now, when the feds learned of this 150 million dollar theft, and remember they knew about it because Knob had been hired to do this hit, they confronted Curtis Green. They told him, you're not gonna make a very good cooperating witness if you don't come clean on this. But Curtis Green was insistent.

• 8:14Speaker 0

  He'd done nothing wrong. He pointed out he'd even turned over his computer passwords and credentials to that federal agent task force. So Knob and his fellow federal agents went about staging Green's torture and murder. They provided DPR photos like the one here. They also told Curtis Green not to ever leave his house again. Now eventually, the government discovered that DPR was none other than Ross Ulbricht, who was living in San Francisco and running the Silk Road from San Francisco. But it wasn't enough that they knew that he was Ross Ulbricht. They needed to catch him in the act of running the Silk Road. And the reasons were twofold. One, they didn't want Ross Ulbrick to later claim he'd been framed.

• 9:03Speaker 0

  And two, they didn't want him to be able to flip a kill switch and to destroy valuable evidence. So the FBI set up a surveillance team and they followed Ross Ulbricht to the Glen Park Library. And they noticed that he was running the Silk Road from the Glen Park Library every day in the science fiction section. So they had two undercover agents, a man and a woman, stage a lover's quarrel, and it captured Rosselbrick's attention, distracted him long enough that another federal agent swooped in, got his computer, and the rest was kind of history. Ross Ulbricht was arrested, he was extradited to New York, and he went to trial. What's little known is that he turned down a plea deal and he went to trial and he was sentenced by a judge to life in prison.

• 9:55Speaker 0

  Despite all of that, some mysteries still remained about the case that the trial didn't answer. First of all, who had been Death from Above extorting Ross Solbricht? And who had been friends? French made selling him information into the government's investigation. And most importantly, who had stolen the 150 million dollars? And by the way, where was it? And in 2014, I was in my office in San Francisco when I got a tip that caused me to look into Knob. The essence of the tip was Knob's moving around a lot of Bitcoin. Now, remember, I was in San Francisco at the time, used to kind of crazies calling me up, telling me about the government conspiracies that were going on.

• 10:41Speaker 0

  So I took this with a grain of salt. But the tipster was pretty insistent. And I looked into it a little further and found that Knob was liquidating hundreds of thousands of dollars of Bitcoin every month. I thought it was probably a poorly backstopped undercover operation. But I looked into it a little further, and I found that Knob was liquidating this to his own personal accounts. And when I subpoenaed some of those entities, what I found was that Nob with his badge was telling them to delete all of the transaction history. So now I was getting suspicious too. Here's where the blockchain comes in. You're gonna hear later this afternoon from some of my colleagues all about crypto networks and blockchain technology.

• 11:31Speaker 0

  But what I want you to understand right now is that the blockchain, for our purposes, is nothing more than a shared global distributed database that keeps track of transactions, in this case Bitcoin transactions. It's public, so anyone can go look at it. It's immutable and permanent, which means that once information about transactions is on the blockchain, it's there for good. It's a digital timestamp in this regard. It's also reliable because information on the blockchain is cryptographically verified. And finally, it's decentralized and secure, which means no one can hack it or erase information once it's on there. So, using the blockchain, working backwards, we went to Knob's accounts and we trace those Bitcoin payments.

• 12:21Speaker 0

  You can see it up on your screen here. Notice the convoluted path on your screen at the bottom are the payments that Knob was liquidating. But they pass through a series of convoluted hops. And what's interesting is where we trace those payments to right back to the Silk Road. It turns out that those payments, when we compared them and the timing to Ross Silbrick's journals of when he had paid French made, turns out that Knob was French made. He'd been selling Ross Ulbricht DPR information into the government's investigation the whole time. But that's not all. He'd also been extorting Ulbricht as death from above, threatening to reveal his identity to law enforcement.

• 13:08Speaker 0

  In short, Nob was a double agent, he'd gone rogue, and he was playing both sides the entire time. Now we still had this other mystery, kind of one of the biggest mysteries of all of who stole the 150 million dollars out of the Silk Road vendor accounts. I know what you're all thinking because we thought it too. It must have been Knob. I mean, he had been there at that proffer session when Curtis Green turned over his passwords and computer and showed the agents how everything worked. Going back to the blockchain and looking at the stolen 21,000 Bitcoin, the 150 million dollars, we saw that the patterns of the theft were very different from French maze and Death from Above's.

• 13:54Speaker 0

  As you can see here, instead of going through a series of convoluted hops, the stolen funds from the Silk Road accounts went straight to one place to Mount Gox. Mount Gox was a cryptocurrency exchange based in Japan. But it too had suffered a series of hacks to the tune of 500 million dollars. And what this meant was that by the time we traced this to Japan and to Mt. Gox, there were no records available for us to go look at. But remember what I told you about the blockchain, that it's immutable and it's permanent. So we were able to trace the flow of funds through the blockchain from Mount Gox to a US financial institution. And where that led was also a surprise.

• 14:40Speaker 0

  Right back to the Silk Road Task Force, but not to Knob, to a secret service agent on that same task force. A secret service agent by the name of Sean Bridges. But Sean Bridges was no ordinary Secret Service agent. He was joint duty assigned to the NSA. He was also the federal government's foremost expert in Tor and anonymizing technologies. Sean Bridges had also been at that proffer session where Curtis had turned over his password and computer and credentials. And that night, Sean Bridges went home using Curtis Green's computer, username, credentials, and password, and drained Silk Road accounts of 21,000 Bitcoin, about 150 million dollars today.

• 15:25Speaker 0

  And he framed it. He framed Curtis Green. And then he stood by the next day where his fellow agents on the task force confronted Green and told Green to come clean. And he also stood by knowing that Ross Olbricht had put a hit out on Curtis Green. In fact, Sean Bridges helped stage those proof of death photos and helped stage the torture and murder of Curtis Green. So later that year, we brought charges against both of these agents for embezzlement, extortion, international money laundering, and obstruction of justice. Things really out of a movie, and in fact, if you can believe it, some of the guys in this story had movie deals and book deals. But they won't be appearing in the movie because they're now sitting in federal prison.

• 16:16Speaker 0

  But they almost weren't. Why? These guys were the perfect criminals with 30 years of law enforcement investigative experience behind them, they knew exactly how to cover their tracks. And it was also very cloak and dagger. They knew my team was investigating them and they were still agents the entire time. So they were hot on our trail, because they knew we were looking at them. So they would do things like show up after we had questioned the witness and ask what we had asked. They were also able to get unwitting participants like banks, cryptocurrency exchanges, and other entities, to destroy evidence. These guys had Justice Department subpoenas they forged, court orders, seizure warrants.

• 17:04Speaker 0

  They even destroyed evidence in burn bags. But the one thing they couldn't escape was the immutable, transparent blockchain. And I'm here to tell you that without it, we never would have caught these guys. In fact, without the blockchain, they would have still been sitting in the federal government today instead of in the federal penitentiary. Now, aside from its salacious facts, that case was the first example of the US government using blockchain technology to uncover fraud and corruption. But since then, the government has used blockchain technology numerous times to uncover other hacks and frauds. In fact, even special counsel Robert Muller traced Bitcoin payments to Russian GRU operatives in the election interference case.

• 17:54Speaker 0

  You can see that up on your screen here, the headlines. And remember the Mt. Gox hack I told you about that was $500 million missing. Well, previously the feds had deemed that hack unsolvable. But now we were feeling a little more conversant in our ability to trace transactions using the blockchain. So we went back and took another look. And what we found was that the money that had been hacked from Mt. Gox, a lot of it flowed to a different cryptocurrency exchange in Russia, an exchange named BTCE. Now, BTCE was notorious for not following money laundering laws and regulations. But being in Russia, there were some challenges. And this is why I always find it interesting when people say, oh, well, it's so much better if you use banks or wires.

• 18:46Speaker 0

  It's so much easier to trace. Good luck subpoenaing a bank account in Russia. Even Google here in California gave us a hard time about turning over BTCE email records, despite that we had a court-ordered search warrant. But we were able to go back to the blockchain and trace those payments that had resulted from the 500 million dollar Mt. Gox hack straight back to BTCE and one guy named Alexander Vinnick, who it turns out profited with hundreds of millions of dollars. And last summer, Alexander Vinnick, when he was on vacation in Greece was arrested, and BTCE was shut down and its criminal proceeds seized. And now a claims process is underway for the victims.

• 19:31Speaker 0

  Now you might be thinking, based on what I just said, that cryptocurrency really is just used by criminals. But nothing could be further from the truth. In fact, it's not surprising that in those early days, criminals were using cryptocurrencies. After all, criminals are great beta testers of any new technology. Think about in the early days of the internet, although we now all use it, some of its earliest adapters were fraudsters. And the same is true of cryptocurrency. In 2012, 30% of Bitcoin transaction value. Was associated with dark net markets like Alpha Bay or Silk Road. But by 2018, that number is down to less than 1%. The fact of the matter is that plenty of ordinary people all over the world now are using cryptocurrency.

• 20:22Speaker 0

  Doctors, students, teachers, farmers, even government employees, and I don't mean the pair that we just talked about. And now in this country, where our financial systems work well enough, we're lucky. And it's true that because our financial systems work well enough here, a lot of the people in this country that are using cryptocurrency today are using it for speculation. But that's not true everywhere in the world. In many parts of the world, financial systems just don't work so well. In places like Venezuela, where inflation this year will exceed 40,000%. And where the hundred thousand Bolivar note is today worth less than 50 cents. You're seeing videos if you look online of people literally throwing bags of money away because it's not worth storing.

• 21:14Speaker 0

  And you're seeing pictures like in the background of up on your screen here. People waiting in line at banks to pull out their money out of fiat, and they are looking for alternative stores of value. So it's no surprise that hundreds of millions of dollars of transactions are actually happening in Venezuela. And it's not just in Venezuela. It's in places like Argentina, Greece, and Turkey and other places where there's hyperinflation. And Venezuela might be bad, but at least there they have banks and financial systems. They might not work well, but at least they have access to banks. That's not true in a lot of the world. In fact, 1.7 billion people in the world.

• 22:00Speaker 0

  That's 25% of the world's population, don't have access to basic financial services. These are the unbanked. And according to the World Bank, there are 1.7 billion, 25% again, of the world's population and its fastest growing segment. These are people who have access to cheap internet services and cheap smartphones, but don't have basic things like bank accounts. 55% of the unbanked, by the way, are women. For example, this summer, I was with an Afghan female entrepreneur named Roya Mahoob. Roya a few years ago started a tech company in Afghanistan. She employed a lot of female engineers. And when she went to pay them a few years ago, she realized that 99% of her employees did not have bank accounts due to cultural prohibitions in Afghanistan.

• 22:52Speaker 0

  So she started paying them in Bitcoin, and she still does to this day.

• 23:28Speaker 0

  As anyone in this room who has ever tried to send a wire abroad knows it takes so long. I mean, if you think about it, it's certainly crazy that in 2018 with smartphones, it takes longer and it costs more to wire money to another country than it does just to carry a suitcase of cash on the plane. And cryptocurrencies are poised to change that. Now you may be thinking, these sound like very fabulous use cases, but this is very different than what I see and hear about cryptocurrency today. The crypto I know is slow, it's volatile, it's hard to use, it's hard to understand, creates pollution, there are all these issues that we hear about it. And the important thing to understand here is that we are still in the dial-up days of cryptocurrency and crypto networks.

• 24:17Speaker 0

  I mean, this is just getting started, and we really can't begin to understand the ways that this is going to change the way we live, work, and communicate in all kinds of ways. And if you look at the history of innovation, it often follows a similar path. I mean, even going back to the days when the first cars were created, many people preferred the horse and buggy. It's hard to believe, but they thought the horse and buggy is faster, it's more efficient. And just look at this video.

• 24:54Speaker 0

  Put off a lot of smoke and were slow for at least the first few years. The architecture, the infrastructure, the services needed to be built out, architecture and services like roads and gas stations before we could get to this. And the same is true, by the way, of the early days of the internet. Imagine if in 1994 I would have told you that you'd hold a small device in your pocket from which you would stream two-hour movies on demand, shop for groceries, order a car, store your games and your photos, and really do all kinds of things. You would have told me I was crazy because your modem wouldn't stay connected long enough to fire off a single email.

• 25:39Speaker 0

  Really, we had to wait for that infrastructure and the services to be built out before the internet could not only change the way that we communicate, but change the way we live and work in all kinds of ways we couldn't imagine then. And the same is true of crypto. It is tempting with the headlines out there to confuse the current state of the innovation with the end state of the innovation. And to do that would be a huge mistake. Thank you very much.