Do you trust the Bitcoin Foundation?
Here are a few reasons why you might want to think before answering.

February 12, 2014

Do you trust the Bitcoin Foundation? If you're like most people, at least when it comes to all matters Bitcoin, the answer is probably "yes." After all, with a name like "Bitcoin Foundation," it's hard to imagine that there's a more authoritative source for information on the virtual currency out there.

Bear in mind that it doesn't yet have tax-exempt status. It refuses to take part in relevant legal challenges to state money transmission laws. And you may have heard that recently, Charles "Charlie" Shrem IV, a founding member of the Bitcoin Foundation, was recently arrested at JFK International Airport, the Sunday before New York's virtual currency hearings were set to begin. Shrem has yet to stand trial and so he is innocent until proven guilty, but given the evidence already presented in the indictment, it's not looking good.

Well, there's still plenty of fine, upstanding Bitcoin enthusiasts left to show us the way to virtual currency paradise, right? Perhaps you haven't yet heard the story of Peter Vessenes, the Bitcoin Foundation's founder.

Mr. Vessenes is a popular man—among lawyers representing technology clients. His various enterprises are involved in not one, not two, not three, but four ongoing proceedings in federal courts. To start, there are (1) the claims and counterclaims involving Mt. Gox Kabushiki Kaisha, the Japan-based Bitcoin exchange that is all but dead. Then there's (2) a lawsuit filed by Bitvestment Partners LLC against CoinLab, Vessenes's Bitcoin startup incubator. That is separate from (3) my company's lawsuit against CoinLab and various other companies and investors accusing them of deliberately operating unlicensed money transmission businesses. And then there's (4) the curious case of CLI Holdings, Inc. and its subsidiary headquartered in the Republic of Seychelles, Alydian. CLI Holdings is in court because it is bankrupt.

Except that it isn't. That's where things get tricky. For even though Vessenes decided to file a Chapter 11 bankruptcy petition for CLI Holdings, 65% of which is owned by CoinLab, Inc., CLI Holdings is making a fortune. It's doing that by mining Bitcoin by using roughly 30 custom-built mining rigs, which produce (as of last month according to court filings) $80,000 in revenue per day. For some reason, however, Vessenes wants to sell the equipment as fast as he can and shutter the company. His bankruptcy lawyer, Deidre Glynn Levin of Keller Rohrback LLP, recently filed a motion before the court to do just that.

Bankruptcy Judge Karen A. Overstreet's reaction in a January 10, 2014 hearing was one of alarmed confusion. To start, Vessenes violated the Chapter 11 bankruptcy code when, without court approval, he decided to pay over $300,000 in retention bonuses to various employees to convince them to stay on board. He also thought it would be a good idea, without court approval, to agree to contracts between CLI Holdings and CoinLab transferring "proprietary" but otherwise unspecified assets between the companies, while signing on behalf of both at the same time. Then there's the matter of the Bitcoin.

According to the transcript, hours before filing for bankruptcy, Vessenes transferred $12 million worth of Bitcoin out of CLI Holdings accounts to CoinLab. On the court-mandated financial statements for CLI Holdings for November and December, these transfers were hard to find. Apparently, Vessenes was unaware that they would be recorded in full view on the Bitcoin public ledger.

As I have stated, my company is already in litigation with CoinLab, so I'm not an unbiased source. But the fact that one of the leaders of the pro-Bitcoin movement has already been accused by a federal judge of violating the bankruptcy code, effectively defrauding the court in order to worm his way out of legally binding contracts, bears notice. Here are a few highlights from the transcripts:

  • Document 113-1, Page 24: "THE COURT: So that concerns me even more. Now what you’re saying is the debtor agreed to pay significant incentive compensation to employees of an insider without any court approval at all."
  • Document 113-1, Page 39: "But if you're asking me am I satisfied with the credibiliy of Mr. Vessenes? No, I am not."
  • Document 113-1, Page 41: "THE COURT: I mean, my preference would certainly be that CoinLab shouldn't be paid anything except by a motion and order of the Court, or somebody needs to be looking at the invoices. Because this is a lot of money being transferred to what is clearly an insider."
  • Document 113-1, Page 42: "THE COURT: I don’t know how legitimate these expenses really are because what I see is a debtor that has absolutely zero existence, zero — the debtor is nothing. The debtor has — doesn’t have — I can’t tell whether the debtor has the assets. Mr. Stehlik raised an issue about who owns the — you know, who owns the technology. I don’t know what it takes to prove what the debtor owns. The debtor has no employees. The debtor has no office. The debtor has nothing. And so I want to make sure that when we do this worldwide advertising we are not misrepresenting to the world what we have to sell, because the integrity of the bankruptcy process is at stake."
  • Document 113-1, Page 58: "THE COURT: I guess I don’t understand how the mining works such that when the November monthly report was filed on December 17th, it showed no revenue, and it wasn’t until the day after Mr. Vessenes’s deposition that it was amended to show $1.8 million."
  • Document 113-2, Page 21: "So, Your Honor, it’s very simple. This is a highly profitable enterprise. It doesn’t need this bankruptcy. It has no business filing a bankruptcy petition, and the sale motion that is a big piece of this puzzle should be denied."
  • Document 113-2, Page 26: "There were payments to insiders two days before, and as of the date — only a couple of hours before the bankruptcy petition was filed, the debtor transferred as of today’s value over $12 million worth of bitcoins. The debtor repeatedly lied about it in his schedules, on Schedule 3B at the 341 meeting of creditors, and only amended SOFA No. 3 the day after the Rule 2004 exam, during which time it was confronted with evidence that these payments were actually made immediately before the bankruptcy petition. We have multiple other misstatements in the schedules, including Schedule D, which states that the debtor had no bitcoins as of the date of the filing of the petition."
  • Document 113-2, Page 29: "THE COURT: Okay, Ms. Glynn Levin, I can tell you, because I sit up here, that Ms. Simonyan didn’t make any noises or anything like that when she heard you say things that she didn’t like, so you need to give her the same respect."
  • Document 113-2, Page 33: "First of all, as the Court can see, many of these emails are gibberish. There are characters that are completely unreadable. Some of the font sizes are so small that it’s impossible to even read the parts that are in actual English."
  • Document 113-2, Page 65: "Post-petition contracts. I suppose the debtor could argue this was in the ordinary course of business, but I’m going to say it’s not. A contract signed between the debtor and a related entity which is signed by the person that I am counting on to be in charge of the debtor in possession, Mr. Vessenes, when he signs with both hats on, I have to have all of my systems on high alert."

Yesterday, CoinLab suddenly purchased $13 million worth of its creditors' bankruptcy claims.

So with Charlie Shrem on his way to jail, and Peter Vessenes already in federal court four times over, I simply return to my inital question:

Do you trust the Bitcoin Foundation?

Aaron Greenspan is the CEO of Think Computer Corporation and author of Authoritas: One Student's Harvard Admissions and the Founding of the Facebook Era. He is the creator of the FaceCash mobile payment system, ThinkLink business management system, and PlainSite legal transparency project.

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February 13, 2014 at 7:06 AM ST

If you think it's not looking good for Shrem's innocence, based on the "evidence" in his indictment, then that means you lack basic critical thinking skills and are essentially just a collaborator with the state. If you don't understand what money laundering actually is, and how absurd it is to charge him with it, why should I read past that sentence?


February 13, 2014 at 7:57 AM ST

Of course anyone in his sane mind doesn't trust them. They're a bunch of incompetent clowns. They just came across Bitcoin and somehow ended up in charge of maintaining the reference client, that's all. Plus, on the business side of thigs, we've seen how strong their ethics are.


February 13, 2014 at 8:09 AM ST

i take it back, if you believe in the state licensing :"money transmitters", you're just plain evil. Go to hell, asshole. If not, then suing coin lab for competing with thyour own ecurrency ideas on that makes you a total hypocrite.

Wow, just wow @ the cognitive dissonance in your head.


February 13, 2014 at 8:16 AM ST

All I see is angry idiots suing other angry idiots, and then whining on their blogs.

Of course, a more decentralised foundation would be nice. See the Global Bitcoin Alliance. The more the merrier, each to their own, and hopefully we shouldn't *have* to trust the Bitcoin Foundation.

also: everybody trusts Gavin.


February 13, 2014 at 9:00 AM ST

No. Nobody who's done 5 minutes of research trusts them. They are scammers, liars, thieves, and their all in each others pockets.

MTGOX, BFL, Bitcoin Foundation, have all shilled for each other.

The sooner it's disbanded, the better. They are not here for bitcoin, they are here for themselves. Please recognize this.


March 7, 2014 at 11:14 PM ST

@Engineer Two wrongs don't make a right. Also, please do us all a favor and without copy/pasting, please give us the finer points of money laundering, it's associated charges, and legal precedent for your assertions. After all that has happened with Mt. Gox, how can you say something like "you are essentially a collaborator with the state" with a straight face? I'd be harder on you (read: explaining exactly why you're wrong using legal precedent), but I don't think you're out of high school, so I'll let it slide. That may be considered online bullying.

Oh, the follies of children!

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