The Forgotten Writing of Satoshi Nakamoto: Bitcoin is Neither a Ponzi nor a Fraudulent Scheme, and the Reasons are Here
Dorian Satoshi Nakamoto used to walk unnoticed through the streets of San Gabriel, California, until Leah Goodman came into his life. But this is no longer a love tale. Leah arrived at Dorian’s house accompanied by two police officers, claiming the man was the mastermind behind Bitcoin.
A 64-year-old retired engineer at the time, Dorian had his life exposed by Goodman, the investigative journalist who believed to have found the Bitcoin inventor. Thrilled with the achievement, she detailed his life in a major magazine. The article entitled “The Face Behind Bitcoin” made Dorian a celebrity, much to his chagrin. The incident happened just over eight years ago.
There’s not much to say about the real Satoshi Nakamoto other than his unparalleled knowledge of cryptography and economics. A person whose work brought back the genuine philosophy of money and value.
Satoshi is the world’s most wanted identity without committing a single crime. A genius condemned to anonymity for his illustrious invention. Perhaps, proud to have given humanity a breath of hope, distributed digitally in the form of incorruptible money. A famous pseudonym deprived of being a celebrity, in the name of a masterpiece with no visible shape but of immeasurable value. This is Satoshi Nakamoto.
If you believe these are inflated words, read his latest private message, addressed to Gavin Andresen:
“I wish you wouldn’t keep talking about me as a mysterious shadowy figure, the press just turns that into a pirate currency angle. Maybe instead make it about the open source project and give more credit to your dev contributors; it helps motivate them.”
As for Satoshi’s personality, it is only possible to speculate. To state otherwise would be unfair. It’s worth mentioning that fame, recognition, and popularity don’t seem to be some of his most notable attributes. The same can be said of Dorian, and both stories contrast with that of Charles Ponzi.
Carlos Pietro Giovanni Guglielmo Tebaldo Ponzi was born in Lugo, Italy, in 1882. At age 21, he anchored in the United States with US$ 2.50 in his pocket plus US$ 1 million in hopes, as he later told the New York Times.
Ponzi’s first visit to the United States was short-lived. He soon moved to Canada to work at Zarossi, an Italian bank, where he learned to be a skilled crook. Ponzi left the bank and went straight to jail. Sentenced to three years, he had his punishment relaxed and left the prison more than a year before serving his penalty.
Back in the US, Ponzi’s home was the Atlanta Prison. After two years of incarceration, he was free and light-hearted to — like a Maestro — orchestrate his most famous symphony, the Ponzi Scheme.
The Ponzi Scheme and The Maestro of Finance
The fraudster’s newest adventure began in 1919. From cheating to cheating, Ponzi baptized a fraudulent method after his last name in a way that history would never forget.
After harrowing years, the date symbolized the long-awaited territorial, commercial, and financial restructuring between nations since the end of the First War. At the same time, Charles Ponzi represented hope for those who had lost their savings, income, jobs, and housing due to the effects of the battle.
While the gold standard was in effect in the world’s major economies between 1870 and 1914, nations were demanded to preserve their gold reserves, and the value of each currency was defined according to the amount of gold it contained.
Though, the “demand” to issue large amounts of currency to subsidize the countries’ military operations at war abolished the gold standard. As a result, the international payment systems were affected by a mismatch in exchange rate relations.
At the time, Ponzi spoke French — thanks to the “interchange” period in Canada — in addition to English and Italian. Ease of communication was one of his qualities and a determining factor in idealizing his newest venture, The Charles Ponzi, Export & Import, a company without a single customer.
Without money to promote the business, Ponzi changed the company’s name to “The Bostonian Advertising and Publishing Company,” launching a new product, “The Trader’s Guide” magazine. The Guide never had a printed edition and was distributed in loose-leaf binders.
Ponzi’s idea was to add pages as the publication gained notoriety. The optimist Ponzi would, once again, fail miserably. Until a letter from Spain lit the light for the Maestro of finance to kick off the main show.
In the letter, the author requested a copy of The Trader’s Guide, which was no longer part of Ponzi’s portfolio. The letter contained an International Reply Coupon (IRC), allowing the recipient to transmit a response to the sender without paying for the postage. Thus, coupons purchased in the country of origin and dispatched by post allowed the recipient to respond free of charge. The coupons could also be exchanged for stamps.
The IRC had a fixed price in all countries that used this postal service. However, this was no longer the reality in 1919, with a disconnected gold standard and governments facing post-war recession.
As a result, these coupons suffered from high devaluation in nations whose currencies had been massively impacted by the war. Thus, the crafty Ponzi realized that he could buy coupons in Europe, sell them in the United States, and profit more than 400% from the operation.
Ponzi’s resilience was something to be envied. He quickly opened his newest business, The Security Exchange Company, and spread the word around Boston. Always charismatic, Ponzi was ready to introduce the coupon business to those interested in the scheme, promising a quarterly rate of return of 50%.
For the first time, Ponzi’s business was doing well. “I’m the man,” he once replied to a skeptical guy about the coupon business. Investors were getting the promised return, and nothing else mattered.
A Ponzi Scheme attracts investors with the promise of high short-term returns. And each new member of the system funds the earnings of the previous ones. Those prematurely engaged in the fraud often make exorbitant profits, thus attracting new investors eager for easy money.
It didn’t take long for Ponzi’s story to hit the headlines. The coupons — the golden goose of the ambitious scheme — were a disguise for the illegal practice of “robbing Peter to pay Paul”. Thus, a wave of withdrawals made the ambition unsustainable. Finally, “the man” behind the scheme had been unmasked.
In the last days of his life, hospitalized in Rio de Janeiro, Ponzi confessed his crime to a journalist.
“My business was simple. It was the old game of robbing Peter to pay Paul. You would give me one hundred dollars, and I would give you a note to pay you one-hundred and fifty dollars in three months. Usually, I would redeem my note in forty-five days. My notes became more valuable than American money…then came trouble. The whole thing was broken.”
Ponzi’s fascinating story is narrated in detail by Mitchell Zuckoff in Ponzi’s Scheme: The True Story of a Financial Legend.
The Bitcoin “Scheme”
To testify about Bitcoin, I initially extend a “posthumous invitation” to Milton Friedman. Friedman was a well-known economist and statistician, famous author, professor at the University of Chicago, and winner of the 1976 Nobel Prize in Economics.
Capitalism and Freedom (1962) is a best-seller and his most acclaimed work, in which he argues that social or individual sovereignty does not exist without economic freedom.
Not surprisingly, Friedman believed in the power of the internet to reduce the role of government and that a reliable digital money was the only thing missing. In a 1999 interview, aged 87, seven years before his death and nine years before Satoshi’s first “appearance,” Milton talked about this particular money he called “Ecash.”
“I think that the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing but that will soon be developed is a reliable Ecash, the method whereby on the internet you can transfer funds from A to B, without A knowing B or B knowing A.”
Friedman then addresses concerns about how the digital money he envisioned could encourage illicit dealings.
“Of course, it has its negative side. It means that the gangsters, the people engaged in illegal transactions, will also have an easier way to carry on their business…”
At an advanced age, Friedman did not live long enough to see his “premonition” arise. The Bitcoin paper was presented to the world by Satoshi Nakamoto on October 31, 2008, on a cryptography forum. On the date Halloween is celebrated in the US, Friedman would have been scared to see how his words resembled the content presented by Nakamoto.
“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.
The paper is available at:
http://www.bitcoin.org/bitcoin.pdf
The main properties: Double-spending is prevented with a peer-to-peer network.
No mint or other trusted parties.
Participants can be anonymous.
New coins are made from Hashcash style proof-of-work.
The proof-of-work for new coin generation also powers the network to prevent double-spending”, wrote the still unknown Satoshi.
Friedman would also be horrified to find out he was wrong about Bitcoin facilitating illegal transactions.
Layah Heilpern categorically responds to this misconception in Undressing Bitcoin: A Revealing Guide To The World’s Most Revolutionary Asset.
“In stark contrast, BITCOIN is in fact an unintelligent choice to conduct criminal activities with. Despite the anonymity of wallet addresses, the blockchain technology that BITCOIN is built on empowers all transactions to be entirely traceable, transparent and immutable. Authorities literally have the ability to follow a criminal trail of breadcrumbs, all the way to the original source, leaving an irreversible mark. Consequently transacting in BITCOIN for illicit purposes is almost identical to pleading guilty and exposing all known accomplices, how stupid can you get?”
Layah Heilpern
In another passage, Layah brings information from the United Nations to demonstrate that “between 2 to 5% of global GDP, that’s 8 hundred billion to 2 trillion U.S. Dollars, is in fact laundered through fiat currencies.” And then she provokes: “I personally think it’s now crystal clear which is the preferred method for criminals, don’t you?”
Unfortunately, news like this doesn’t make the day’s headlines and is instead covered in whispering tones by the mainstream media.
In February this year, the couple Ilya Lichtenstein and Heather Morgan were arrested by FBI agents for trying to launder the balance of the largest Bitcoin stealing ever reported. The case came to light in 2016 when the Bitfinex exchange was hacked, and 119,754 Bitcoins were illegally transferred to a digital wallet. At the time of arrest, the amount looted was valued at US$4.5 billion.
It’s crucial to remember that the Bitcoin network has NEVER been hacked. The stolen cryptocurrencies were in the custody of an intermediary — the BitFinex exchange — whose system was attacked, and the hackers obtained the access keys to conduct the theft. In short, they got the “passwords” to carry out the withdrawals.
Glaidson Acácio dos Santos became known in Brazil as the Pharaoh of Bitcoins. Former waiter, pastor, businessman, and now a detainee serving time in a maximum-security prison, Glaidson, who had an income of $175 in 2014, made fortune in a scheme similar to the one orchestrated by Ponzi.
His business turned over BRL 38 billion in six years — equivalent to US$7.6 billion — and seduced public servants, politicians, entrepreneurs, police officers, and artists who relied on the pharaoh to multiply their savings. Arrested in January 2022, he swears his innocence. Once again, a financial instrument had been employed as a brilliant disguise for a blurry fraud.
In both cases, the media’s central message is for people to beware of Bitcoin, not scammers. Fraudsters will use cash, gold, works of art, postal cards, stamps, or any other available asset to fund their schemes, while Bitcoin will remain the worst choice for such a purpose.
As an attentive reader, you may have already realized that comparing Bitcoin or postal coupons to scams is meaningless. But let’s give it a try!
Bitcoin vs The Ponzi Scheme: Show me your friends and I’ll tell you who you are
Bitcoin does not have at its roots a series of fraudulent schemes. Instead, it is the effort of specialists and scholars who have dedicated themselves to science.
Among them are David Chaun, Doctor of Computer Science from the University of California and inventor of Digicash; Wei Dai, computer engineer, developer of the Crypto++ cryptographic library, and creator of b-money; Adam Back, Ph.D. in computer science, cryptographer and cypherpunk. Back developed a system used in the Bitcoin mining process; Nick Szabo, computer scientist, cryptographer and Doctor of Jurisprudence who conceptualized the smart contracts; And finally, the late Hall Finney. Finney was an outstanding game developer, cryptographer, and the first person on the planet to receive a Bitcoin transaction.
In contrast, Ponzi’s mentors were the banker Luigi Zarossi — who taught Ponzi the business of “robbing Peter to pay Paul” — and his cellmates during prison times. Ironically, it was Zarossi who fled to Mexico and left Ponzi penniless when the fraudulent scheme was discovered at his bank.
Ignazio Lupo, a counterfeiter and violent mobster, and Charles W. Morse, a millionaire skilled in financial scams, were Ponzi’s other influencers. Morse was a businessman with tremendous political clout who relied on The Wall Street Journal owner Clarence W. Barron to lobby the White House for his release. This was the same Barron who investigated Ponzi to put him back in prison.
In Ponzi’s Scheme: The True Story of a Financial Legend, Mitchell Zuckoff, recounts a memorable quote from Morse. Judging himself wronged, he said: “There is no one in Wall Street who is not doing daily as I have done.”
Fabio Cres is a finance professor and author of “Esquema Ponzi: Como Tirar Dinheiro dos Incautos” — Ponzi Scheme: How to Take Money From the Unwary, in a loose translation. In the book, Cres defines the four essential elements of a Ponzi scheme: Investment in unusual assets, extraordinary return, trust-building, and promoter control. Let’s try to understand how they fit into the Bitcoin “Scheme.”
1 — Investment in unusual assets
An exotic and innovative asset is always used as bait to attract investors in a Ponzi Scheme. Bitcoin, in fact, is an unusual asset for many people. However, treating Bitcoin or the coupon as a fraud makes no sense.
The historical appreciation of Bitcoin, combined with the boom in the cryptocurrency market, makes Bitcoin an object of desire and arouses fantasies in the human imagination. But let’s be clear: the asset used in the scam, which can be a cryptocurrency, the shark fin, the baseball card, etc., serves merely as a decoy to attract both the ambitious and the desperate. No sophistication is required: robbing Peter to pay Paul is the only “profitable” deal.
2— Extraordinary return
Bitcoin and its unprecedented appreciation is a good trap. Fraudsters often compare the asset that is the subject of the fraud with the most valuable asset available at the time. But not even Bitcoin is close to the yield promised by Ponzi or his modest fan, the Pharaoh of Bitcoins.
To give you an idea, in December 2014, Bitcoin was trading at $315. On this date, this same amount invested with Glaidson, the Pharaoh of Bitcoins — at a monthly rate of return of 10% — would be worth $1,521,456.48 today. One and a half million dollars. This represents a value 37 times higher than today’s Bitcoin price. As the famous saying goes, too good to be true!
3 — Trust-building
In a Ponzi Scheme, fraudsters will always honor the initial payments to establish a trusting relationship with investors and thus attract others.
This element merits no comparison with the nature of Bitcoin. Bitcoin is a technology that requires no intermediaries and is based on a concept known as “trustless.” In a slightly technical language, this basically means that an application based on a “trustless” system does not need a trusted third party to arbitrate a transaction.
4 — Promoter control
There is always a controller or a centralizing entity in a Ponzi Scheme type fraud. Always! The fraudsters pose as successful business people and usually have a plan to flee the moment things start going wrong.
On the other hand, Bitcoin is a decentralized network that operates without a central person or entity in charge. Furthermore, all transactions that take place on the network are public and can be verified by anyone. Also, it has no expiration date.
The table below illustrates a (meaningless) comparison between a Ponzi Scheme and Bitcoin.
Conversely, Bitcoin has something in common with fraudulent financial schemes: both take advantage of economic weaknesses. While in financial schemes, the victims are almost always ordinary people, in the Bitcoin “Scheme,” the victim is the economic weakness itself.
If Bitcoin is not a fraud, what is it, and why does it keep going up?
More than four decades ago, Watts S. Humphrey, the father of software quality, proclaimed: “Every business is a software business.”
Do you know what Amazon, Google, Facebook, Apple, Microsoft, Twitter, Tesla, The New York Times, Blue Origin, Medium, and most companies that trade on NASDAQ, NYSE, LSE, or any other world stock exchange are? Software companies, each with their own products and services.
Tell me about a notable company in any industry that doesn’t rely on software to function. It doesn’t matter if they send vessels into space, sell advertising or build vehicles. And if you are thinking of software as a mere support for organizational activities, I must say that you are deeply mistaken, as I was not long ago. The software is almost the business itself.
To show you what I mean, let’s take Uber, Airbnb and Amazon as examples. Uber is a software company that offers mobility services in the same way that Airbnb is a software company that offers hosting services. Some might call Amazon a retail company. It has never been. After all, Amazon is a software organization that is also active in the retail sector. And that was long before AWS came along. The list goes on.
Each of these companies has specific problems to solve — and a business model to respond to those problems — yet none of them would face those challenges without a proper software solution. In today’s environment, to think otherwise is delusional.
What are banks? Guess what? Banks are software companies that make money providing financial services to you (Scott Ambler). But the money you keep in the bank comes from a bygone era. And the transactions you make through digital banking represent a digitized past. It’s like editing a sad old photo. You can make it beautiful, but it won’t change its history.
Niall Ferguson is a historian and former professor at Harvard University. The professor was considered one of the 100 most influential people in the world by Time Magazine in 2004. In his book, The Ascent of Money: A Financial History of the World, Ferguson criticizes the current monetary system.
“In many respects, as we have seen, the established monetary system is a product of the analog age. Fiat currencies managed by central banks, without any connection to precious metal, are a product of the 1970s, when the Bretton Woods system collapsed. Credit cards, which have displaced banknotes as the preferred means of payment for consumers, are also late-twentieth-century in origin: Mastercard originated as ‘Master Charge’ in the late 1960s. The Society for Worldwide Interbank Financial Telecommunication (SWIFT), which today handles most international transfers between banks and other financial institutions, was founded in Brussels in 1973.”
Nail Ferguson
Our money, these old-fashioned institutions cited by Ferguson, and therefore the current monetary system, are, in effect, the product of an analog age. The digitized version of the sad old photo. What a mess!
Bitcoin is different! Bitcoin is a software solution for a monetary problem. But unlike those companies I have mentioned above, no CEO or central entity controls it. It’s electronic cash, as described by Satoshi Nakamoto and conceived by a community of developers. It’s decentralized, scarce, modern, and sovereign, without borders, ownership, or state manipulation. A new photo, not a hypocritical old image. It’s the world’s money.
And if technological progress was an imperative factor for the emergence of Bitcoin, its ability to eliminate the middleman’s role along with its scarcity-based economic facet combined with the constant evolution in its code is what will keep it alive, whether as a store of value, a medium of exchange, or even as a unit of account. Time will tell!
Few people are as familiar with the economic and technical aspects of Bitcoin as Saifedean Ammous, author of The Bitcoin Standard: The Decentralized Alternative to Central Banking, a best-seller translated into 21 languages. Ammous holds a Ph.D. in Sustainable Development from Columbia University and an MSc in Development Management from the London School of Economics.
In the work — a cut diamond — Ammous does not take shortcuts and offers the reader a lesson in history and economics to then address the main aspects of Bitcoin. The author proposes reasons to believe The Bitcoin Standard is feasible.
Seeking to understand why Bitcoin continues to rise, I turned to him and asked if the cryptocurrency would find a stabilization point. In less than 6 minutes, he replied:
“It will continue to grow as long as there are other monies and bonds for it to eat. Once it has eaten them all, and it is the only money and store of value in the world, it will start growing in value every year by the amount of economic growth in other goods and services. In other words, when we produce more things, their value drops against bitcoin. We will keep making more of everything except bitcoin.”
Saifedean Ammous
Given the current monetary system, it seems challenging to oppose Saifedean’s argument.
Bitcoin is David versus Goliath. It’s the clumsy Susan Boyle singing I Dreamed a Dream on Britain’s Got Talent. The glory of the underestimated. But it’s also the explosive Tina Turner singing The Best.
Bitcoin is a lesson in morals and ethics for economic policymakers. It’s the Storming of the Bastille and the Fall of the Berlin wall. The Tank Man — the Unknown Rebel in front of the tanks at Tiananmen Square in Beijing. It’s the image and likeness of a community that donated millions of dollars worth of BTC to Ukraine to defend its people and territory against the Russian invasion.
Bitcoin is the sum of many epoch-making events and the gateway to the post-contemporary age. It is indeed a symbol of wealth and power, but it also awakens the expectation of the poorest. How is it possible?
Bitcoin is Dorian having to explain he’s not someone he never pretended to be. Bitcoin is the indecipherable Satoshi Nakamoto. It’s the new new normal. A standard, not a scheme. A genuine currency, not a fucking fraud!
I firmly believe Bitcoin is not a scam, but the same cannot be said about the global cryptocurrency market, where credible and fraudulent initiatives abound. Also, this is my opinion, and please don’t take it as financial advice.
As an assiduous reader, I only recommend what I read and what catches my attention.
If you have enjoyed the reading, follow me to get updates on new stories.
I’m also on Twitter: @GandaraMarcio
Read in Portuguese (Leia em português)
Thank you!
…
Post-credits
Not every Ponzi Scheme is born as a Ponzi Scheme. Charles Ponzi was already a crook before he went down in history, but it’s not known for sure if he believed in the possibility of making money with the postal coupons.
Dorian Satoshi Nakamoto has earned the cryptocurrency community’s admiration and respect, and his image has become an icon among Bitcoin enthusiasts.
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