Preet Bharara tells the hotel ballroom full of bankers. "I could either come around, or you could just form a single-file line."
Bharara is standing, shoulders squared at a lectern, eyes darting across the room. He takes in the awkward laughter, which hasn't been heard much in these circles since the market bust of 2008. It's hard to know how to react when a lawman makes a joke, and it's especially hard when you happen to work on Wall Street and the lawman is Bharara.
As U.S. Attorney of the Southern District of New York, Bharara (pronounced ba-RAR-a) has taken on many big cases over the past few years that have nothing to do with America's finance industry. Among them, he secured life sentences for attempted Times Square bomber Faisal Shahzad and for Ahmed Ghailani, the Al Qaeda operative behind American embassy bombings in East Africa. But he's best known—especially in this crowd, a conference put on by the Association of Certified Anti–Money Laundering specialists—for his financial prosecutions.
In his nearly five years in office, Bharara has taken down Raj Rajaratnam, who once ran the $7 billion hedge fund Galleon Group and is now doing 11 years for insider trading; Rajat Gupta, the former McKinsey managing director who is currently appealing a two-year prison sentence; and the hedge fund SAC Capital Advisors, which recently agreed to pay an insider-trading settlement worth $1.2 billion and to stop managing money for outside investors. Bharara has also extracted billions of dollars in civil and criminal penalties from many of the country's largest banks. From last November through January, Bharara's 450-person office, which operates with a budget of roughly $50 million a year, seized close to $3 billion in assets—"better than any hedge fund you've ever heard of," he boasts.
Bharara denies plotting a political career, but he isn't shy about the scope of his ambitions. "Someone once asked me, 'What's your jurisdiction, again?' I said, 'Are you familiar with Earth?'" he says. Technically speaking, he can charge any federal crime so long as a phone call is made, a security is traded, or an email is sent in Manhattan, the Bronx, or one of six counties in the New York suburbs. His predecessors in this job have had impressive next acts, becoming senators, congressmen, and secretaries of state, as well as the current heads of the SEC and FBI. These people (all but one of them male) made their names by going after white-collar crime and the mafia. Bharara has done that well enough, but he clearly wants to be more than just another Sheriff of Wall Street. He wants to be known as the guy who cleaned up the web.
Cybercrime, Bharara says, "is the biggest, most burgeoning problem you've got to be concerned about." His opening joke about collecting the audience's bitcoins isn't too far from reality. Bitcoin is an untraceable, all-digital currency with no government regulation, which began as an underground tool for techies and is now accepted by such companies as Overstock and the NBA's Sacramento Kings. Last fall, his office seized nearly 174,000 bitcoins when federal agents arrested Ross Ulbricht, the alleged founder of Silk Road—a sort of bitcoin-fueled Amazon for heroin, cocaine, meth, and pills. Now the U.S. government is holding one of the world's largest portfolios of the new money, worth about $105 million as of a February exchange rate.
"There are websites," Bharara tells me, "whose business model is to use the fact that they can't know everything that's going on as an excuse to look the other way. There are people who run companies whose websites are rife with tremendous amounts of illegal activity."
It's often the ethos of startup founders to unleash disruptive systems and then claim no control over the activity that follows. That was Napster, Reddit, BitTorrent, even YouTube for a while. And while the 2008 banking crisis inspired tighter laws and more-watchful regulators, Silicon Valley innovators are now funding dozens of companies that aim in one way or another to take away market share from traditional banks. Some of these, such as Kickstarter and AngelList, have been content to operate largely in the margins of the American financial system; others, such as Dwolla, Second Market, and Lending Club, attack it more directly.
Bitcoin, the technology behind a half-dozen well-funded Silicon Valley startups, is perhaps the most ambitious attempt yet to remake the banking system for the digital age. It is not a startup; it's a software protocol, like email, and no one person owns or really controls it. It's also a virgin financial system that enables anyone in any country to bank with near-complete anonymity. Bitcoin is not governed by central bankers or the International Monetary Fund, but by a mathematics equation overseen by thousands of independent "miners" and created by a shadowy figure known only by a pseudonym. Some in Silicon Valley believe that it could replace traditional hard currencies, especially in countries with high rates of inflation. It would do to money what the web did to media. All this makes bitcoin the most significant current example of an often-tense relationship between technology and regulation, whether propagated in the form of government policies or federal and state laws. And that puts it in the center of a collision course between the Valley and Bharara. "Nobody is suggesting there's something inherently bad about bitcoin," Bharara says. "When you have a currency like this that gives you anonymity, it stands to reason that some people legitimately want privacy. That's fine. But there are going to be a lot of bad guys who want to steal your money or sell people poison who are going to take advantage of the same technologies. That's what we have to be vigilant about."
Does that mean bitcoin trails are going to be increasingly scrutinized?
"Yeah," he says, adding that such scrutiny is "to make sure it doesn't become a Wild West for criminal activity." Then he pauses, cocks an eyebrow, and asks me, "Why, do you get paid in bitcoins?"
The U.S. Attorney's office for the Southern District of New York doesn't look like much—a nine-story Brutalist structure hidden behind the neoclassical federal courthouses and dwarfed by the skyscrapers just south on Wall Street. Thanks to a government hiring freeze, there are dozens of empty desks. When I first meet Bharara late in the day before New Year's Eve, many of his staffers have gone home, but he's looking courtroom-ready in a gray suit, a white shirt, and a blue-and-red tie, happily sitting at his computer while the Inside Llewyn Davis soundtrack blares from his Jambox.
We'd intended to meet several times earlier that month, but Bharara's schedule intervened. What happened was that he'd had an Indian deputy consul general arrested, charging her with paying her housekeeper well below minimum wage. That Bharara would subject a high-ranking female diplomat to a brief detention and strip search prompted outraged statements from the Indian government and an apology of sorts from Secretary of State John Kerry. Bharara, on the other hand, saw a case of clear-cut justice, and seemed to love the stir it caused. When I suggest that he'd caused an international incident, he smiles broadly.
"Aw," he says. "You read about that? Little old me."
Bharara is 45 years old and sturdily built, lets everyone call him Preet, and, famously, has a framed picture of Bruce Springsteen with his mother on a wall in his office. He was born in the Northern Indian region of Punjab and spent most of his childhood in Monmouth County, New Jersey. As a young boy, he wore braces and thick glasses and was socially awkward. "He was a geek, a bookworm," recalls Vinit Bharara, Preet's brother and the cofounder of Diapers.com, the e-commerce startup that Amazon acquired for $545 million in 2010. But sometime shortly before high school, Bharara began to break out of his shell. He read Inherit the Wind and became enamored with Clarence Darrow, the American Civil Liberties Union lawyer who in 1925 argued passionately in defense of teaching evolution in high school science classes. "I thought, I want to be one of those guys," says Bharara. "More specifically, I wanted to be a prosecutor—a criminal lawyer—because there's nowhere where the stakes are higher, where you can wake up every day and believe in what you're doing. I'm going to try to do it as long as I can."
He graduated from Columbia Law School in 1993, and quickly worked his way into high-profile lawyering. He served five years as assistant U.S. attorney in Manhattan. He then was New York senator Chuck Schumer's chief counsel, where he played a pivotal role in the Senate's investigation into the firings of seven U.S. attorneys, a Bush-era national scandal. President Obama nominated him to lead the office in 2009. Shortly after the Senate confirmed him, he took up his first big case, the prosecution of Rajaratnam. It was launched by his predecessor, but Bharara's victory made him the first prosecutor in an insider-trading case to successfully use clandestine wiretaps, a tactic previously reserved for violent crimes. The following month, Bharara worked with the FBI to secretly record a 104-person conference call hosted by Primary Global Research, an advisory firm suspected of illegally passing financial information. The move was controversial—many of PGR's clients were presumably innocent—but it worked, setting Bharara up for his string of prosecutions. To date, his office has won convictions or extracted guilty pleas in 79 insider-trading cases. It hasn't lost yet.
As dramatic as those cases have been, Bharara's work in technology has arguably been more transformational—and at times even more aggressive. "Government, like every other industry, needs to come into the 21st century with respect to technology," says Bharara. "That means understanding social media, understanding how to do investigations, understanding every nook and cranny of the Internet. Old-school criminal conduct is not being conducted in an old-school way."
When Bharara took over in 2009, his office had a single prosecutor devoted to technology crimes. He quickly added nine more. Then he commissioned new software for prosecutors; it enables them to quickly look up suspicious-activities reports, which banks (and bitcoin companies) are required to file whenever a customer makes a large withdrawal or does anything that looks like money laundering. Bharara mandated that his prosecutors take workshops in how to use Facebook in investigations. He also hired Palantir, the data-mining company used by many banks and certain three-letter government intelligence agencies. "His use of technology is visionary and has transformed the way these kinds of cases are prosecuted," says Alex Karp, Palantir's founder and a friend of Bharara's.
Bharara and his staff are learning how to think about prosecutions in a whole new way. Street crimes are generally whodunits: Prosecutors know there was a crime, and then have to catch the criminal. White-collar crimes are the opposite—they're what'd-he-dos. Maybe a hedge-fund trader bought a stock at its bottom because he got an illegal inside tip, or maybe he just did great research. You go to jail for the first; you get a bonus for the second. Cybercrime is neither of those things. It's a who's-that: What's in question are the real-life identities of cloaked criminals. "Fighting cybercrime requires ingenuity," says Lisa Zornberg, who ran Bharara's Complex Frauds Unit from 2011 to 2012. "What Preet has done is show that he can pierce these layers of anonymity."
So far, that has meant combining sophisticated data analysis with cloak-and-dagger espionage tactics. To expose members of the hacktivist collective Anonymous, Bharara and the FBI managed to arrest and then secretly flip Hector Xavier Monsegur, one of the group's best-known members. Sabu, as he was known on the web, was allowed to stay in his apartment, where, under FBI supervision, he became a double agent and the de facto leader of a new hacker collective called Operation AntiSec. That ensnared a handful of the world's most notorious hackers. In another case, the FBI created an entire fake forum ostensibly as a marketplace for identity thieves to sell stolen credit-card numbers. Users' IP addresses were recorded and dozens of people were arrested.
Similar tactics were used to take down Silk Road. Because bitcoin transactions happen anonymously, the site seemed impervious to law enforcement, which also made it a hot media topic. But Bharara and the FBI approached the case like hackers looking to "dox," or identify, a person who hides his or her identity: It's a game of gathering everything your target has ever written or posted, and looking for connective threads. The founder of Silk Road, who went by the name Dread Pirate Roberts, allegedly posted a job listing on a bitcoin forum with an account that he'd also used to promote Silk Road. The listing included an email address that Ross Ulbricht, a 29-year-old former research scientist from Austin, had also used on his LinkedIn page.
By July 2013, investigators had followed Ulbricht's digital trail to San Francisco, and then to the Glenn Park public library. It was there, on a warm afternoon in October, that Ulbricht, wearing jeans and a T-shirt, plopped down near the science-fiction section. He opened a gray Samsung laptop, fired up a hacker-friendly browser called Tor, and logged in to Silk Road, apparently to check on customer-service queries. Then a woman reportedly lurched toward him, grabbed the computer, and screamed, "I'm so sick of you!" A half-dozen library patrons—who, like Ulbricht's assailant, were undercover FBI agents—then grabbed and cuffed him. On his laptop screen was an administrative page on Silk Road's website that showed, according to prosecutors, about 9.5 million bitcoins having passed through the site over two and a half years.
Bharara's office wants these cases to send a message straight to a specific community: "When hackers sit down at a keyboard and think they're anonymous, we want them to wonder if they're wrong," Zornberg says. But of course, hackers aren't the only ones who celebrate anonymity.
As you spend time with tech entrepreneurs, you'll often hear some variation on the phrase "It's better to beg forgiveness than to ask permission." The point is that the most important new technologies displace older companies. If entrepreneurs had to ask an authority figure for permission before trying a new idea, the thinking goes, there would never be innovation.
History encourages this argument. Movie studios once claimed that VCR recordings were illegal; they relaxed when tapes became enormous moneymakers. Napster enabled illegal activity, but it also shook up a digitally resistant music industry and gave rise to the likes of iTunes and Spotify. Google Books altered the way courts look at copyright. In an interview, Chris Dixon, a partner at the venture-capital firm Andreessen Horowitz, offers the example of Wikipedia: As it grew in the mid-2000s, a brouhaha erupted in academia over accuracy. But that didn't slow progress, because the old guard had no laws to turn to. "Imagine if the encyclopedia business had been heavily regulated," Dixon says. "Would Wikipedia exist?"
Comments like this elide an important distinction: Some of the business world's status quo is enforceable by law, and some isn't—but entrepreneurs don't always seem to care. Take, for instance, car-service company Uber, which launches in new cities with little regard for local taxi regulations. When regulators complain, Uber fights like hell, acting as if local laws are designed to protect the old guard. So far, the approach has worked well—changing some laws and sending Uber's valuation soaring. But carrying that attitude into finance, as many startups are, is another thing.
What can go wrong in an unregulated system flush with cash? All sorts of crazy things. Allegedly, Ulbricht of Silk Road even tried to order several murders of possible adversaries—paying would-be assassins, of course, in bitcoins. When the hit man told Ulbricht that one of his targets had three roommates, prosecutors say, Ulbricht then offered more than triple the price to have them killed too. (Ulbricht has pleaded not guilty, and he has multiple cases pending.)
But the bitcoiners I spoke with didn't seem worried about a Silk Road–style bust; they trust in the disruption. "The beginning of the Internet was the same way," Dixon says. "This is a common pattern: The first reaction to a new technology is fear." On October 31, less than a month after Ulbricht was arrested, the Boston-based bitcoin bank Circle Internet Financial announced that it had raised $9 million. That included money from Jim Breyer, the Accel Partners venture capitalist who has served on the boards of Facebook, Walmart, and News Corp. Not to be outdone, Andreessen Horowitz announced in December that it led a $25 million round in Coinbase, another bitcoin bank. The cost of a bitcoin, which before the bust had mostly hovered under $100, spiked up to $1,200. (It dipped to about $550 in February.)
Jeremy Allaire, the founder of Circle Internet Financial, first got interested in bitcoin after reading an article about Silk Road. He had previously run the online video company Brightcove and was looking for something new. "Bitcoin just really sparked my imagination," he recalls. "It was very raw, very immature." He also loved its revolutionary nature and suggested that, to understand it better, I spend some time reading the ultra-free-market Austrian economist Friedrich von Hayek. Bitcoin, Allaire says, is "a global financial system that can't be manipulated and has a fixed supply." And yet, even here, the philosophical line between disruption and corruption becomes thin: Silk Road's Dread Pirate Roberts is also a devotee of the so-called Austrian school of economics, and saw his work as equal parts market opportunity and revolution. "Now it is profitable to throw off one's chains, with amazing crypto technology reducing the risk of doing so dramatically," Roberts wrote.
Bitcoin boosters bristle at comparisons like this. Bitcoin's corrupting powers are "a myth, fostered by sensationalistic press coverage and an incomplete understanding of technology," wrote Marc Andreessen, Dixon's colleague, in a New York Times column. Bitcoin transactions are recorded in a publicly available ledger, which logs transactions by number but does not include identifying information; he argued that this should make bitcoins less prone to abuse than cash or diamonds. That may be true in some theoretical sense, but unlike cash or diamonds, bitcoins do not have to be smuggled across borders or exchanged on street corners. Nor do discussions of the possible criminal appeal of bitcoin have to be purely academic: There are still dozens of bitcoin-powered criminal marketplaces, including an apparent copycat site, Silk Road 2.0, which until recently was run by somebody who also went by the handle Dread Pirate Roberts. In January, the site had 13,000 listings, most for illegal drugs.
This is troubling to Bharara. "If you clean up a housing project and get rid of the crack dealers, you've done a worthy thing," he says. "But if the next day another gang of crack dealers comes in, you haven't made life safe or better for the good people of that neighborhood." Bharara tells me that often the only way to choke off criminal activity is to target "the enablers, the folks who are dealing virtual currency and using it to hide bad conduct," he says, and then adds, "Sometimes, it's the payment processors."
Six days after Andreessen's column, Bharara's office added more to the debate: It announced the arrest of Charlie Shrem, the CEO and chief compliance officer of one of the first U.S. bitcoin exchanges, BitInstant. The 24-year-old—whose company had raised $1.5 million from Tyler and Cameron Winklevoss, the twins who laid claim to Facebook's founding—was vice chairman of the not-for-profit Bitcoin Foundation. He allegedly played a role in a scheme to secretly sell $1 million in bitcoins on Silk Road, involving a series of shady cash transactions, and now faces up to 30 years in prison. (Weeks later, bitcoin's stability was questioned further when another large exchange, Mt. Gox, abruptly stopped allowing its customers to withdraw from their bitcoin wallets.)
It probably should have been a sobering moment for investors, especially the Winklevoss twins. But later that day, at a hearing convened by the New York State Department of Financial Services dedicated to figuring out a regulatory scheme for bitcoin, the twins were there and eager as ever, referring to the arrest of their CEO as a "speed bump." Fred Wilson of Union Square Ventures declared that the "vice phase is in the rearview mirror."
Bharara likes speaking through actions, though he also likes speaking about his actions. This is a hallmark of his campaign against financial fraud: He arrests, then delivers a lesson. "The message is a simple one, and it's this," Bharara said in a speech in Manhattan, on the day that Shrem's arrest was announced. "If you want to develop a virtual currency, or a virtual-currency exchange business, knock yourself out. But you have to follow the rules. All of them. And if you want to invest in such a business, you better kick the tires and make sure compliance there is not a joke."
A few minutes after the speech, I take a train uptown to have coffee with Fred Ehrsam, the cofounder of Coinbase, to ask him how it feels to be in the crosshairs of prosecutors and regulators. He shrugs. "Hopefully lawmakers and law enforcement understand that sometimes funky things happen in the early days of a technology," he says. "But if it is powerful enough, it can do more good than harm."
"I'll make this brief: I'm really just here to collect all the bitcoins," Ehrsam is 25 years old and handsome, with a long aquiline face. He started his career as a foreign-currency trader at Goldman Sachs, got interested in bitcoin in late 2011, and then enrolled in the blue-chip startup academy Y Combinator. Coinbase now processes bitcoin transactions for 23,000 retailers. He'd come to New York to testify at the same hearing the Winklevoss twins attended, and was wearing a trim, dark suit, with his hair parted in the manner of a first-term state senator.
Ehrsam's hope, which roughly corresponds with the views of other bitcoin entrepreneurs, is that regulators will carve out exceptions for very young companies and for transactions in which bitcoins are not exchanged for dollars. Even the most reputable bitcoin companies don't try to keep track of what their customers are doing inside the network; they follow anti–money laundering protocols only when actual cash from a U.S. bank account moves into and out of the system. Right now, if you bring under $3,000 worth of bitcoins to Coinbase, you aren't required to prove your identity. All you need is an email address and a phone number. That may sound shaky, but most bitcoin wallets don't check identities at all. Regulators may want to forbid anonymous wallets or to somehow track every transaction, but Ehrsam says that would make bitcoin less private, more expensive, and less useful for international transactions. In short: bitcoin would stop being bitcoin. "The stakes are high, and not just for Coinbase, but for bitcoin as it lives in the U.S.," he says.
In the short term—and quite possibly in the long term—this means that technologists like Ehrsam will be taking more responsibility for reporting suspicious transactions and making sure that terrorists and tax cheats don't use their platforms. "We have some of the best payments lawyers and anti–money laundering lawyers in the country," says Ehrsam. "For a company of our size, we've doubled down on all the legal and regulatory stuff." For a financial startup, that means a grand total of one person, out of his total staff of 10, is devoted to compliance.
Then again, JPMorgan once had roughly 8,000 compliance officers, and look how that worked out: Last year, Bharara charged the bank with laundering billions of dollars in Bernard Madoff's Ponzi scheme. JPMorgan settled and will pay a $1.7 billion fine (and now employs even more compliance officers). There were no bitcoins involved that time—only people who thought their actions were hidden.