The pirate-based shitstorm was and is a necessary regulator

[nimda]

We all know what happened. The "credit crunch," the "collapse," the "SEC emails," the shitstorm. Pirate ran off with the money, and with him went the shaky foundations of the impromptu Bitcoin lending economy. Even the biggest names in trustworthiness have failed to be responsible with other peoples' money. Lots of money was lost, there's no one left to trust, and that's a good thing.

First off, I am sympathetic towards those who lost money. The fiat world is so heavily regulated that jumping off a cliff is nearly impossible, and those who manage to do so find their landing padded by more regulation, lawsuits, insurance, government guarantees, and ultimately, welfare safety-nets. Thus, the risks associated with transacting  bitcoin are almost surreal in magnitude. It's not only easy to steal, but transactions are irreversable, and loot is easy to launder.

There have been cries for regulation; AnCap opponents have pointed to every major theft over the past few years and said, "see? this is how regulation gets started." Yet the SEC has not returned a single satoshi to any one of Pirate's victims, and with Bitcoin, regulation backed by governmental force is fundamentally impossible.

We must turn to the ultimate regulator: the free market. Though destructive, the shitstorm was a natural tool which arose from truly free exchanges of value. And it's worked exactly as it is supposed to. Next time, the fools (myself included, though my gains currently outnumber my losses) will be a little smarter with their money, or they shall be parted from it again.

[1713908540]

1713908540

[1713908540]

1713908540

[1713908540]

1713908540

[Adrian-x]

+1

[Kluge]

Almost all of us (deposit-takers) dropped the ball in a major way. We did too much other stuff on the side, acted without staff, and kludged crap together. We had lots of ideas which just needed to be implemented. There were rules and guidelines in the primary room of lenders/deposit-takers, but we couldn't often get unanimous approval on anything. We had a collaborative list of defaulters and late payments, but practically, it was useless and time-consuming, eventually totally neglected. For those who didn't act maliciously, it was largely a problem of not taking the task seriously enough. BUT, because of the legal ambiguity, there is some justification. The larger you are, the more scrutinized your activities will be by regulatory authorities. This could be avoided by operating solely as a pseudonym, but then you have the trust problem, which is what a lot of our time focused on. How do we earn trust?

In many cases, there was a massive violation of trust, either by failing to disclose what deposits were going toward (which generally isn't required of banks, but they turn these over to government agencies - so it really should be expected of "unregulated" entities) or blatant deceit. Again, I talked with people about ostracizing and kicking them from the group (which'd potentially cut off intralender loans for them, but mostly be a status thing), but we didn't agree on anything and everyone stayed in the room except one person who was kicked for going nuts (incidentally, someone who railed against a lender-turned-defaulter).

Barring deceit, then, I'd say the biggest issues we had were that we:
*Lacked seriousness. Explained in lower sections.
*Were too small. We couldn't hire specialists -- it was just us individually, and most lacked any experience (certainly including myself). Perhaps most importantly, we couldn't afford lawyers to look through hundreds of near-impossible-to-interpret CFR pages nor was anyone a lawyer (or even accountant).
*SEVERE lack of discipline (deserves its own section). When someone offers 2kBTC or more in a single pop, it's damn hard to turn down. Once we find ourselves with too many deposits and not enough loans, decisions had a tendency (at least for me) to get very, very stupid. "Gosh, I have over 3kBTC sitting around. GLBSE is slow as fuck... I guess I'll make Nefario/CHM an offer." Turned down... "Well, gosh - I really do need a responsive exchange site to be able to grow... may's well use OPM to fund one!" - And then I met JRO, we talked... I talked to related people, then handed the coins over... Oops. When we'd have idle funds, they'd frequently go to on-demand withdrawal programs like Imsa's, you-know-who's, or into securities on GLBSE given the large number of relatively transparent bond issuers with units just waiting to be picked up. Once we realized how easy it was to buy pre-IPO securities in bulk at a steep discount, some went a little crazy. The pre-IPO craze led to JRO and Alberto receiving ridiculous sums of money for crap product and bad ideas, with many deposit-takers burned for "financial adventurism."
*Extreme demands for anonymity by lenders. This shouldn't have been a problem, but as stated before, we severely lacked discipline. Getting burned by pseudonyms whose only reputation came from meager previous sales and successful previous loans led to the "How to Request a Loan" thread with (up until that time) extreme suggestions and the "Confidence Loan Trend" thread. Even still, I was burned by a "mixmastermine" even after I'd made those threads, and on the basis that he'd been a good customer so far and agreed not to deposit with Pirate. A couple months or so ago, he PMs to say that due to Pirate and other defaults (he wasn't supposed to be arbing), he's disappearing. Because I didn't demand documents up-front, I had no effective recourse.
*Lacked unity. PatrickHarnett was the initial person to suggest to me that we form a room in Skype. We did so, and this was the closest we ever came to organization. The room expanded too rapidly, with people largely unrelated to what we do, and then we couldn't talk about certain things... 3 sub-rooms and 90% OT discussion later and little progress was made to
*Lacked time, operated on different schedules. It's really hard to resolve something in a chat room when people are on at different hours, especially when the room constantly went OT (largely my fault). Additionally, almost everyone had other jobs and couldn't spend 2 hours a day just thinking and talking about something which didn't bring in a livable wage and would likely face severe regulatory challenges short-term.
*Lacked competence. I think I've explained this one already, but no BTC lender was a lender by trade, and "real" lenders aren't going to wander into legally gray BTC territory until there's a hell of a market to justify it. Unfortunately, I never found a professional lender to get in the room and tell us the dumber of the shit we were doing. Hand-in-hand with this, we lacked time to implement ideas. Learning as we go along, we'd pick up on things we could be doing better (for example, a "Bitcoin FDIC" which would've had its own wallet and regularly have funds sent to), talked about them, but didn't have the time to really sit down, get serious, agree to something, and implement the idea.


So... I think it'll get better with time. Better underlying infrastructure (I haven't used it, yet, but I haven't heard anything negative about BTCJam), more competent people as the market expands, better track-records for business-grade loans (back then, a BTC business operating for over six months was a shockingly pleasant surprise), and better guidelines/insight available by previous experiences in the Bitcoin lending market.

- And to the implied question... Almost everything we (at least, I) fucked up on could've been avoided with the government regulations imposed on banks... with the caveat that it never would've happened. - But, the restrictions and up-front capital requirements (including a non-refundable $20k fee [last I checked] with application with stringent requirements) would've ensured nobody would've gotten in the business who did not already have years of experience and knew what to do or were unwilling to devote a lot of resources into the venture. I'm not arguing in favor of gov't regulation, though... BTC lending will get better, but it'll probably take a lot of time until someone truly competent exists willing to make cryptocurrency lending their "job," and hopefully their proven procedures will give upstarts something more relevant to reference.

ETA: I think it's also important to note that BTC deposit-takers probably don't have too much of a wildly-higher failure rate than other BTC start-ups. Exchanges, for example, are probably most similar. Exchanges and deposit-takers shutting down take the most heat because OPM is at stake. God only knows how many BTC startups fail within their first year of operation, and I can probably name more failures than successes (definitely with exchanges), but we frequently don't hear about BTC Prostitute Job Board #8 failing because OPM isn't involved -- there's little at stake. So, while BTC lending (rather, alleged lenders who take deposits) and other investment opportunities seem like a massive wasteland of scams (well.. it pretty much is, but...), I think it's probably over-exaggerated relative to the failure rate of other ventures and reflects an unrealistic idealism of the investor who thinks the vast majority of startups aren't going to fail and aren't managed by deceitful assholes. (Alright - I think I've rambled enough, for now)

[hazek]

Make no mistake - all this shit that happened is a direct consequence of the state. This is painfully obvious as soon as you agree that we don't and never can have a free market as long as there is a state. Why? Because anonymity and responsibility don't mix.

The state is the reason why so many must hide their identity, since if they want to preserve their safety, well being and wealth, this is the only way to avoid a giant mafia of thugs hurting and robbing them simply for providing a voluntary service to their customers. Were this not the case, non violent ostracization would be made possible as punishment for those service providers that violate their promises and eventually the bad apples would get weeded out. And there are many bad apples.

But being a service provider willing to defraud is not why fraud happens, largely it's still a cost benefit analysis. When your legitimate business doesn't earn you enough to live comfortably but defrauding your clientele would while not really having any negative repercussions for you, there's rarely anyone who possess enough integrity to resist such a temptation. The only thing that customers have here is the hope that the merchant isn't willing to kill his golden goose. And because there are infinite amount of reasons why someone could find it more profitable to kill the golden goose now and run with their customer's money that hope simply is not enough.

You need to know who you are dealing with, it's as simple as that. You need to know their name, their body, their home, if possible their record, their friends, what ever you can in order to significantly increase the cost of defrauding you. I think it's the only way to effectively apply regulations by customers i.e. the only way a free market can possibly function. And until there's a state for most that simply isn't an option and so I do not believe we will be able to solve this, not unless we can figure out a way to create unique IDs and still hide our identity from the government.

[cunicula]

Make no mistake - all this shit that happened is a direct consequence of the state.

That is some hilarious shit right there. Pirate Ponzi is a direct consequence of the state. Love it!

[mcgravier]

We all know what happened. The "credit crunch," the "collapse," the "SEC emails," the shitstorm. Pirate ran off with the money, and with him went the shaky foundations of the impromptu Bitcoin lending economy. Even the biggest names in trustworthiness have failed to be responsible with other peoples' money. Lots of money was lost, there's no one left to trust, and that's a good thing.

First off, I am sympathetic towards those who lost money. The fiat world is so heavily regulated that jumping off a cliff is nearly impossible, and those who manage to do so find their landing padded by more regulation, lawsuits, insurance, government guarantees, and ultimately, welfare safety-nets. Thus, the risks associated with transacting  bitcoin are almost surreal in magnitude. It's not only easy to steal, but transactions are irreversable, and loot is easy to launder.

There have been cries for regulation; AnCap opponents have pointed to every major theft over the past few years and said, "see? this is how regulation gets started." Yet the SEC has not returned a single satoshi to any one of Pirate's victims, and with Bitcoin, regulation backed by governmental force is fundamentally impossible.

We must turn to the ultimate regulator: the free market. Though destructive, the shitstorm was a natural tool which arose from truly free exchanges of value. And it's worked exactly as it is supposed to. Next time, the fools (myself included, though my gains currently outnumber my losses) will be a little smarter with their money, or they shall be parted from it again.

Nature simply punishes morons - while state is babysitting them. But pirates ponzi had some other good side: It kept me entertained for a looong time. You guys have no idea how much I laughed when entire scheme collapsed.

[BCB]

for the record "Pirate"/"Pirateat40" === "Trendon Shavers"

If you could refer to him by his proper name rather then his nic it's helps with SEO.  The more hits "Trendon Shavers" gets on google, the more likely other who have yet to be scammed by will be kept inform of his methods.

Thanks.

[notme]

for the record "Pirate"/"Pirateat40" === "Trendon Shavors"

If you could refer to him by his proper name rather then his nic it's helps with SEO.  The more hits "Trendon Shavors" gets on google, the more likely other who have yet to be scammed by will be kept inform of his methods.

Thanks.

I'm pretty sure it's spelled Shavers, but sure, optimize the wrong spelling.

[Raoul Duke]

for the record "Pirate"/"Pirateat40" === "Trendon Shavors"

If you could refer to him by his proper name rather then his nic it's helps with SEO.  The more hits "Trendon Shavors" gets on google, the more likely other who have yet to be scammed by will be kept inform of his methods.

Thanks.

I'm pretty sure it's spelled Shavers, but sure, optimize the wrong spelling.

And he writes Shavors instead of Shavers like 95% of the time lol

[BCB]

for the record "Pirate"/"Pirateat40" === "Trendon Shavors"

If you could refer to him by his proper name rather then his nic it's helps with SEO.  The more hits "Trendon Shavors" gets on google, the more likely other who have yet to be scammed by will be kept inform of his methods.

Thanks.

I'm pretty sure it's spelled Shavers, but sure, optimize the wrong spelling.

And he writes Shavors instead of Shavers like 95% of the time lol

fuck fuck fuck.... i'm foiling my own plan.  Post Updated! 

Thx to the bitcointalk spelling patrol! Anyone who bothers to read my posts knows I NEED it!

Thanks.

[thebaron]

I actually learned during this ordeal that the SEC can really only hand out slaps on the wrists for obvious fraud. Yay government!

[BCB]

1 year after the MF GLOBAL meltdown 1.6 BILLION! dollars is still unaccounted for and it is high unlikely John Corzine who the US Congress recently found at fault will server a day in jail.

http://www.forbes.com/sites/francinemckenna/2012/10/31/on-mf-global-anniversary-something-still-missing/

Trendon Shavers is a piker compared to this and probably has nothing to worry about from the SEC investigation.

[Buffer Overflow]

It kept me entertained for a looong time. You guys have no idea how much I laughed when entire scheme collapsed.

Yet you waited until November 12th to register your account on this forum?

[molecular]

1 year after the MF GLOBAL meltdown 1.6 BILLION! dollars is still unaccounted for and it is high unlikely John Corzine who the US Congress recently found at fault will server a day in jail.

This reminds me of myself: This particular mistype happens to me a lot. I also tend mistype "silkraod" as it turns out. That brain-bug recently cost me 14 BTC. So BCB, just a tip: don't try to be anonymous. And if you ever do: use a spellchecker.

[Brunic]

Almost all of us (deposit-takers) dropped the ball in a major way. We did too much other stuff on the side, acted without staff, and kludged crap together. We had lots of ideas which just needed to be implemented. There were rules and guidelines in the primary room of lenders/deposit-takers, but we couldn't often get unanimous approval on anything. We had a collaborative list of defaulters and late payments, but practically, it was useless and time-consuming, eventually totally neglected. For those who didn't act maliciously, it was largely a problem of not taking the task seriously enough. BUT, because of the legal ambiguity, there is some justification. The larger you are, the more scrutinized your activities will be by regulatory authorities. This could be avoided by operating solely as a pseudonym, but then you have the trust problem, which is what a lot of our time focused on. How do we earn trust?

In many cases, there was a massive violation of trust, either by failing to disclose what deposits were going toward (which generally isn't required of banks, but they turn these over to government agencies - so it really should be expected of "unregulated" entities) or blatant deceit. Again, I talked with people about ostracizing and kicking them from the group (which'd potentially cut off intralender loans for them, but mostly be a status thing), but we didn't agree on anything and everyone stayed in the room except one person who was kicked for going nuts (incidentally, someone who railed against a lender-turned-defaulter).

Barring deceit, then, I'd say the biggest issues we had were that we:
*Lacked seriousness. Explained in lower sections.
*Were too small. We couldn't hire specialists -- it was just us individually, and most lacked any experience (certainly including myself). Perhaps most importantly, we couldn't afford lawyers to look through hundreds of near-impossible-to-interpret CFR pages nor was anyone a lawyer (or even accountant).
*SEVERE lack of discipline (deserves its own section). When someone offers 2kBTC or more in a single pop, it's damn hard to turn down. Once we find ourselves with too many deposits and not enough loans, decisions had a tendency (at least for me) to get very, very stupid. "Gosh, I have over 3kBTC sitting around. GLBSE is slow as fuck... I guess I'll make Nefario/CHM an offer." Turned down... "Well, gosh - I really do need a responsive exchange site to be able to grow... may's well use OPM to fund one!" - And then I met JRO, we talked... I talked to related people, then handed the coins over... Oops. When we'd have idle funds, they'd frequently go to on-demand withdrawal programs like Imsa's, you-know-who's, or into securities on GLBSE given the large number of relatively transparent bond issuers with units just waiting to be picked up. Once we realized how easy it was to buy pre-IPO securities in bulk at a steep discount, some went a little crazy. The pre-IPO craze led to JRO and Alberto receiving ridiculous sums of money for crap product and bad ideas, with many deposit-takers burned for "financial adventurism."
*Extreme demands for anonymity by lenders. This shouldn't have been a problem, but as stated before, we severely lacked discipline. Getting burned by pseudonyms whose only reputation came from meager previous sales and successful previous loans led to the "How to Request a Loan" thread with (up until that time) extreme suggestions and the "Confidence Loan Trend" thread. Even still, I was burned by a "mixmastermine" even after I'd made those threads, and on the basis that he'd been a good customer so far and agreed not to deposit with Pirate. A couple months or so ago, he PMs to say that due to Pirate and other defaults (he wasn't supposed to be arbing), he's disappearing. Because I didn't demand documents up-front, I had no effective recourse.
*Lacked unity. PatrickHarnett was the initial person to suggest to me that we form a room in Skype. We did so, and this was the closest we ever came to organization. The room expanded too rapidly, with people largely unrelated to what we do, and then we couldn't talk about certain things... 3 sub-rooms and 90% OT discussion later and little progress was made to
*Lacked time, operated on different schedules. It's really hard to resolve something in a chat room when people are on at different hours, especially when the room constantly went OT (largely my fault). Additionally, almost everyone had other jobs and couldn't spend 2 hours a day just thinking and talking about something which didn't bring in a livable wage and would likely face severe regulatory challenges short-term.
*Lacked competence. I think I've explained this one already, but no BTC lender was a lender by trade, and "real" lenders aren't going to wander into legally gray BTC territory until there's a hell of a market to justify it. Unfortunately, I never found a professional lender to get in the room and tell us the dumber of the shit we were doing. Hand-in-hand with this, we lacked time to implement ideas. Learning as we go along, we'd pick up on things we could be doing better (for example, a "Bitcoin FDIC" which would've had its own wallet and regularly have funds sent to), talked about them, but didn't have the time to really sit down, get serious, agree to something, and implement the idea.


So... I think it'll get better with time. Better underlying infrastructure (I haven't used it, yet, but I haven't heard anything negative about BTCJam), more competent people as the market expands, better track-records for business-grade loans (back then, a BTC business operating for over six months was a shockingly pleasant surprise), and better guidelines/insight available by previous experiences in the Bitcoin lending market.

- And to the implied question... Almost everything we (at least, I) fucked up on could've been avoided with the government regulations imposed on banks... with the caveat that it never would've happened. - But, the restrictions and up-front capital requirements (including a non-refundable $20k fee [last I checked] with application with stringent requirements) would've ensured nobody would've gotten in the business who did not already have years of experience and knew what to do or were unwilling to devote a lot of resources into the venture. I'm not arguing in favor of gov't regulation, though... BTC lending will get better, but it'll probably take a lot of time until someone truly competent exists willing to make cryptocurrency lending their "job," and hopefully their proven procedures will give upstarts something more relevant to reference.

ETA: I think it's also important to note that BTC deposit-takers probably don't have too much of a wildly-higher failure rate than other BTC start-ups. Exchanges, for example, are probably most similar. Exchanges and deposit-takers shutting down take the most heat because OPM is at stake. God only knows how many BTC startups fail within their first year of operation, and I can probably name more failures than successes (definitely with exchanges), but we frequently don't hear about BTC Prostitute Job Board #8 failing because OPM isn't involved -- there's little at stake. So, while BTC lending (rather, alleged lenders who take deposits) and other investment opportunities seem like a massive wasteland of scams (well.. it pretty much is, but...), I think it's probably over-exaggerated relative to the failure rate of other ventures and reflects an unrealistic idealism of the investor who thinks the vast majority of startups aren't going to fail and aren't managed by deceitful assholes. (Alright - I think I've rambled enough, for now)

Really interesting post Kluge. It's nice to see a guy with some humility making a post-mortem of a business that failed. I know you got hit hard by this mess, but you're a stand-up guy and this community can benefit greatly from your experience.

It kept me entertained for a looong time. You guys have no idea how much I laughed when entire scheme collapsed.

Yet you waited until November 12th to register your account on this forum?

It's easy to stay on the sidelines instead of going on the battlefield. Typical guy who's too afraid to act and look for reasons to flatter his ego.

[BCB]

1 year after the MF GLOBAL meltdown 1.6 BILLION! dollars is still unaccounted for and it is high unlikely John Corzine who the US Congress recently found at fault will server a day in jail.

This reminds me of myself: This particular mistype happens to me a lot. I also tend mistype "silkraod" as it turns out. That brain-bug recently cost me 14 BTC. So BCB, just a tip: don't try to be anonymous. And if you ever do: use a spellchecker.

Molecular

I'm not anonymous, really.  No one is really anonymous on the internet.  And yes I've sent the wrong amount of BTC before but I've had the fortune to be trading with honest traders who've returned the difference.

[molecular]

1 year after the MF GLOBAL meltdown 1.6 BILLION! dollars is still unaccounted for and it is high unlikely John Corzine who the US Congress recently found at fault will server a day in jail.

This reminds me of myself: This particular mistype happens to me a lot. I also tend mistype "silkraod" as it turns out. That brain-bug recently cost me 14 BTC. So BCB, just a tip: don't try to be anonymous. And if you ever do: use a spellchecker.

Molecular

I'm not anonymous, really.  No one is really anonymous on the internet.  And yes I've sent the wrong amount of BTC before but I've had the fortune to be trading with honest traders who've returned the difference.

oh no, I haven't sent the wrong amount to anyone. I put up a bounty as joe23 to find out who he really was as an experiment. They found me because joe23 mistyped silkraod just as exactly one other forum user does: molecular.

[mcgravier]

It kept me entertained for a looong time. You guys have no idea how much I laughed when entire scheme collapsed.

Yet you waited until November 12th to register your account on this forum?

Yes, what's wrong with that?

[JWU42]

Good OP and response by Kluge.

[J-Norm]

Dollars are like toy money given to us by our parent governments. They tell us how to use it and watch carefully and they try to get it back if you did something stupid with it.

Bitcoins are like adult money, you control it and nobody can tell you what to do with it. And nobody can help you if you you do something stupid with it.

If the government controlled bitcoin I would have been prevented from losing 10BTC to satoshi dice, but freedom must include the freedom to do something stupid.