Fraud of the century?

This post originally appeared on the Unbounded Capital website and we republished with permission from Jack Laskey.

The degree to which accusations of fraud are flung around the Bitcoin world is disappointing. The price of this confusion will be felt acutely by few, but will impact far more through its delay of a transformative technology’s progress. Unfortunate as it may be, there is no doubt that fraud exists. Of course, scams of various sorts have been a constant feature of the early Bitcoin/blockchain industry, an industry that is very attractive to the “fast money” crowd. But, none of these are the fraud of the century.

There is only one candidate for fraud of the century, and it isn’t Dr. Craig Wright. For those new to this controversy, Dr. Craig Wright is an Australian computer security expert and polymath who was outed at Satoshi Nakamoto, the creator of Bitcoin, in 2015 by Wired and Gizmodo magazines. After a period of denial, Dr. Wright admitted that he is Satoshi Nakamoto. However, for a number of reasons of varying feasibility, the broader Bitcoin community rejected his claim emphatically. He is widely believed to be a fraud, and his current focus, Bitcoin SV, an alternative version of Bitcoin which has pivoted back to the original design and away from dominant version BTC, is often labeled a scam.

I’ve made it clear in other writings that I believe the majority is mistaken and that Dr. Craig Wright is almost certainly Satoshi Nakamoto. I see the evidence for dwarfing the evidence against. Further, I don’t see the incentive to perpetrate such a fraud, but I do see the incentive to have taken Dr. Wright’s actions to this point if Dr. Wright is Satoshi Nakamoto. There is historical precedent to this scenario. When the Wright brothers (not related) invented the airplane, they were widely disbelieved. They used this window to continue building and testing in private while patenting key technologies. Dr. Wright has used this window of disbelief to patent well over 1,000 Bitcoin related technologies. His firm nChain seeks to hold more patents than any company in existence.

Regardless, the magnitude of Dr. Wright’s alleged fraud is pedestrian compared to his counter-accusation. Pretending to be Satoshi Nakamoto is certainly an oddity, especially for such a long time and in the face of such derision. And, while the upside of such a fraud for Dr. Wright and his alleged conspirators is unclear, there certainly would be a number of victims who made personal and financial arrangements based on the belief that Dr. Wright would be vindicated in his claim, myself included.

The candidate for fraud of the century is not Dr. Wright but those accusing him of fraud—and not simply because they are likely mistaken. In the new world of Bitcoin and associated technologies, it can be hard to map what is transpiring in this unfamiliar space to better understood areas. To make things clearer, an explanation in Bitcoin terms of Dr. Wright’s accusation followed by a hypothetical parallel in the traditional equities space will be helpful.

Dr. Wright’s accusation of fraud is generally directed at the developers who control the BTC codebase and the exchanges who list BTC as Bitcoin. They are accused of violating Dr. Wright’s database rights, having stolen his database and repurposed that database for a competing system. They then colluded with exchanges to pass off this new system as the original system, Bitcoin. Investors, whose ownership was recorded in this database, are now confusing their ownership in Bitcoin for ownership in this new system which operates under different rules. The switch was conducted over time with various changes and was consummated with a “soft fork”, an underhanded change in the rules passed off as a democratic switch.

Database rights? Soft forks? It’s all a bit arcane. But, when framed in the world of traditional equities, the brazenness of such a fraud becomes apparent.

What Dr. Wright alleges has transpired in Bitcoin, if true, is similar to the following hypothetical scenario:

Imagine a company BitCorp. BitCorp goes public in 2009. All of the shares have been issued and the company starts selling shares gradually over time. These shares are bought by investors and are immediately tradable. Eventually, the founder and CEO leaves the company and a group of other employees consolidate power and begin making changes which violate the company’s bylaws. Eventually, the bylaws become so constraining to the employees which have consolidated power that they decide they need to start a new company with new bylaws. However, they fear that without bringing the existing shareholders with them, something they wouldn’t be likely to do if what was occurring was made explicit, they won’t have a business that can succeed. At this point, the employees decide that they can simply coordinate with stock exchanges to direct the existing shareholders to the new company with new bylaws and tell them that this is the original company. After all, it will maintain its name, BitCorp.

At this point, other employees at the company catch wind of what is going on and decide to pre-emptively revert away from some of the changes that had been made in violation of the bylaws and to stop working with the rogue employees. However, they soon find themselves labelled as the upstart with shareholders seeing the company being operated by the rogue employees with new bylaws as the original. The new bylaws end up crippling the progress of the rogue company, but the hype machine drives up the share value. The original company returns to smooth operation and progresses, but absent its track record of success as BitCorp, they are widely seen as a risky upstart unlikely to succeed next to the existing behemoth, and are also considered to be a fraud for claiming to be the original. At the time of the exchange collusion, the company was worth about $10B. Now, the company with the fraudulent cap table is worth $300B and the original company is worth around $5B. 

So why is this a good analogy? What do database rights have to do with the ownership distribution of a company? Bitcoin was open-sourced. Anyone can start their own instance of Bitcoin. This doesn’t mean that an existing instance of Bitcoin can be copied along with all of the information in that instance of Bitcoin’s blockchain. Even if that were legal, the copy would be an air-drop, newly issued assets which the owners would have to pay taxes on. What is certainly not legal is to make a copy of a database and then claim to be the original database when one is operating under different rules than the original database agreement specified. Since the database was largely used as a record of ownership distribution, copying that ownership distribution and applying it to a new asset and passing off the new asset as the old asset is a criminal offense.

It is hard to know how courts will ultimately view this history. Dr. Wright’s involvement complicates things. Dr. Wright vs the exchanges and the BTC developers implies things that “the people” vs the exchanges and the BTC developers does not. Regardless, “the people” aren’t pursuing the case, and Dr. Wright certainly seems to be. Will the $300B BTC, which in company form would be on the order of Walmart and Nestle, come crashing down as the fraud of the century? It’s a bet I’m willing to make. Should you be?

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