On October 31, 2008, an email from Satoshi Nakamoto was sent to a mailing list of cryptography enthusiasts with the subject line, “Bitcoin P2P e-cash paper”

Crash and breakthrough

The Cypherpunks were motivated by the conviction that establishing a distributed and independent monetary system was essential to a secure and peaceful society. 

As the world careened into the 2008 financial crisis, Cypherpunks’ interest in devising an alternative currency system sparked again. This time, after nearly a decade marinating in the technology hive-mind, a fully-fledged cryptocurrency system emerged — at the climax of a global financial meltdown. 

On October 31, 2008, one day after the chief of Merrill Lynch resigned in the wake of revelations that the investment bank was exposed to USD 7.9 billion in bad debt, an email from Satoshi Nakamoto was sent to a mailing list of cryptography enthusiasts with the subject line, “Bitcoin P2P e-cash paper”.[10] [11] [12]

The brief email described a new peer-to-peer digital currency system that utilised several of the foundational concepts pieced together by the Cypherpunks nearly a decade earlier: no central authority or mint, peer-to-peer authentication with Hashcash, and anonymous participation.

“I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party.” - Satoshi Nakamoto, October 31, 2008

Within three months, on January 9, 2009, Nakamoto released Version 0.1 of the Bitcoin software, launching both the software and the first units of the Bitcoin cryptocurrency, also called bitcoins. 

Who is Satoshi Nakamoto?

An aura of mystery surrounds the creator of Bitcoin. Satoshi Nakamoto is most probably a pseudonym of the person — or group of people — responsible for inventing the technology. Multiple investigations have failed to reveal Satoshi Nakamoto’s true identity, although many suspect the inventor may be one — or several — of the Cypherpunks who lay the groundwork for the Bitcoin system he pioneered. 

Wei Dai and Nakamoto exchanged emails in August 2008, several months before the publication of the Bitcoin whitepaper; Adam Back and Nakamoto also allegedly emailed during that time. Hal Finney was the first person to use the Bitcoin software after Nakamoto launched it, and the first person after Nakamoto to mine bitcoins. And Nick Szabo began publicising his renewed efforts to build ‘Bit Gold’, a system with striking similarities to Bitcoin, in the spring of 2008, yet went inexplicably silent after Nakamoto’s October announcement. More notable coincidences surrounding the birth of Bitcoin link Nakamoto to at least half a dozen other crypto-pioneers.[9] [13]

There is greater consensus behind Nakamoto’s motivations. Like many of the Cypherpunks, Nakamoto displays a distinctively Libertarian slant characterised by a mistrust of centralised authority and a desire to establish a financial system free from state regulation. The first mined bitcoin — known as the Genesis Block — contains a message from Nakamoto that directly references the ongoing financial crisis: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.[14]

The message, entered in the comment section of the first bitcoin block, quotes a headline from The Sunday Times of London, “Chancellor Alistair Darling on brink of second bailout for banks. Billions may be needed as lending squeeze tightens”. The reference has been taken as a critical commentary on the state of the financial markets.[15]

To Satoshi Nakamoto, the Cypherpunks, and early Bitcoin adaptors, the 2008 financial crisis marked the demise of an outdated global financial institution and heralded the entrance of a new breed of monetary exchange for the digital age. 

A question of trust

Bitcoin was not the first attempt at a digital currency. Various digital currency projects had already been born and passed into obsolescence — including eCash and b-money — long before Nakamoto introduced his digital coin. 

The success of any private currency hinges on trust. Participants need to believe that others will accept their coins in exchange for goods or services, and that the goods received will be worth the value exchanged. People will avoid a marketplace if its merchants are known swindlers. 

Anonymous cryptocurrencies face an even higher hurdle. By design, purchase records are private, and buyer and seller identities are kept anonymous. Cryptocurrencies are seen as a haven for fraudsters, money launderers, and drug dealers. 

To earn public trust, Bitcoin would need to do more than prove its coins are reliably redeemable. The platform would also need to demonstrate that the moral and ethical benefits of participation outweigh the risks associated with an anonymous digital currency. 

E-Gold: A cautionary tale

One year before the release of Bitcoin, the public witnessed the fall-out of a years-long effort by the US federal government to dismantle an earlier digital currency, E-Gold. 

Driven by a conviction that the United States should never have left the gold standard, Douglas Jackson, a practicing oncologist and amateur economist, decided it was time for a “radical rethink of money”. With support from a software engineer, Jackson programmed, designed, and launched E-Gold in 1996, introducing an anonymous, nationless currency backed by gold. 

By 2005, E-Gold had grown to more than 3.5 million customers in 165 countries, with 1,000 new accounts opening every day. E-Gold was second only to PayPal in the online payment industry.

But the dark side of an anonymous currency exchange would soon land Jackson behind bars. International criminals were using E-Gold for money laundering and to anonymously stash funds to finance illegal operations. Between 2003 and 2005, the FBI and the Secret Service used E-Gold to arraign a number of high-profile financial criminals. Jackson collaborated with the FBI until his own arrest in 2007 on federal charges of money laundering, conspiracy, and operating an unlicensed money transmitting business.[16]

“Jackson’s radical dream, his goal of upsetting the economic status quo and overturning the government’s monopoly on money, is what really got E-Gold targeted”. — Richard Timberlake [16]

In  November 2008, less that one month after Satoshi Nakamoto introduced Bitcoin to the Cypherpunk community, Douglas Jackson was sentenced to “36 months of supervised release, including six months of house arrest and electronic monitoring, and 300 hours of community service,” and handed strict guidelines requiring E-Gold to adhere to all regulations for money transmitters should it ever re-launch. [16]  

It took E-Gold most of a decade to gather enough traction to attract the attention of federal regulators. Bitcoin’s fortunes turned when, after just five years of relative anonymity, the US government once again turned its eye to the emerging cryptocurrency market. 

Bitcoin goes to The Hill

On paper, Bitcoin should have shared E-Gold’s fate. Like E-Gold, Bitcoin was the passion project of a fervent anti-bank idealist. Like E-Gold, Bitcoin developers spent much of its early life shoring up vulnerabilities and fixing glitches. And as an anonymous, international, digital currency, Bitcoin quickly became the coin of choice for criminals and black market traders.

But in US Senate hearings on the future of cryptocurrencies held in late 2013, testimony from financial regulators, law enforcement, and federal officials signalled a surprising new openness to digital currencies.

Autumn 2013 had been a particularly fraught season for Bitcoin. In October, the FBI seized over 170,000 bitcoins when they shut down the infamous Silk Road digital black market. That same fall, hackers forced two bitcoin exchanges, in Australia and Hong Kong, to close up shop.[17]

The two Senate hearings scheduled for November 18, the US Senate Committee on Homeland Security and Governmental Affairs, and November 19, the US Senate Committee on Banking, Housing, and Urban Affairs, should have been cause for concern among Bitcoin investors. But rather than call for the shuttering of the platform, this time, government officials offered a cautiously positive outlook. 

Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network (FinCEN), chose her words carefully: “Digital currencies could be used for money laundering, but … this is no different from other financial instruments”, she said. Her measured testimony was a significant about-face from the federal ruling against Jackson six years earlier.

Ernie Allen, president of the International Centre for Missing and Exploited Children, suggested there was “broad-based agreement on its potential for social good”. Even the Chairman of the Federal Reserve, Ben Bernanke, offered that digital currencies “may hold long-term promise”.[18]

“[Digital currencies] may hold long-term promise.” - Chairman of the Federal Reserve Ben Bernanke, November 2013

The gulf between the technologists and the policymakers on Capitol Hill had narrowed, and government regulators, who for decades had monitored the growth of the internet from the sidelines, were now embracing the technology for its potential for the public good.

Earlier that year, FinCEN, which is a division of the US Department of the Treasury, issued the first significant guidance for persons creating, obtaining, exchanging, accepting, and transmitting digital currencies. The document, which clearly defines the roles of the user, exchanger, and administrator of digital currencies and the financial reporting requirements for each, paved the way for open discussions on how best to regulate newly emerging cryptocurrencies, including bitcoin.[19]

With the cautious blessing of the US government, bitcoin was poised to enter the mainstream. Now only one roadblock remained: the banks. 

The major banks and financial institutions followed bitcoin’s emergence with wary skepticism. Bitcoin’s decentralised exchange and stateless currency was a direct challenge to the traditional banking model. And the Bitcoin market was notoriously volatile; bitcoin could fluctuate in value by as much as 50,000% in a single day. Investors were understandably wary.  

Still, Bitcoin had a solution to a problem that had been dogging banks and exchanges for years. International trades can take up to three days to settle on a public market: Bitcoin trades were clearing in a matter of minutes.  The banks wanted Bitcoin’s technology to improve their own processes. Meanwhile, Bitcoin activists needed a signal from the banks to grant Bitcoin the legitimacy and trust it needed to smooth its volatile exchange. 

Soon, major global financial and technology institutions were toying with Bitcoin and examining the mechanisms that allowed the distributed financial network to operate as it did.

And it was in underlying logic of Bitcoin — the Blockchain — that banks, governments, and start-ups saw the true potential for a digital re-awakening.