friendly toward working with
Bitcoin
the
currency.
JPMorgan’s
operating
committee, led by Jamie
Dimon, decided in the spring
of 2014 that it would not
work
with
any
Bitcoin
companies. At events in
California with tech moguls,
Dimon spoke derisively about
Bitcoin and the ambitions of
Silicon Valley to take over
Wall
Street’s
business.
Dimon said that JPMorgan
and the other banks weren’t
going to go down without a
fight. At one point, JPMorgan
threatened to stop providing
services even to other banks
that had Bitcoin companies as
customers—like
the
European bank working with
Bitstamp. Other American
banks went so far as to close
down
the
accounts
of
individuals who transferred
money to Bitcoin exchanges.
But inside almost all these
banks, there were people who
loved the concept of a
decentralized financial system
like
Bitcoin.
JPMorgan
maintained
a
so-called
Bitcoin Working Group, with
about two dozen members
from across the bank and
around the world, which was
led by the bank’s head of
strategy and which was
looking at how the ideas
behind Bitcoin might be
harnessed by the financial
industry.
This
JPMorgan
group
began secretly working with
the other major banks in the
country, all of which are part
of an organization known as
The Clearing House, on a
bold experimental effort to
create a new blockchain that
would be jointly run by the
computers of the largest
banks and serve as the
backbone for a new, instant
payment system that might
replace Visa, MasterCard,
and wire transfers. Such a
blockchain would not need to
rely
on
the
anonymous
miners powering the Bitcoin
blockchain. But it could
ensure there would no longer
be a single point of failure in
the payment network. If
Visa’s systems came under
attack, all the stores using
Visa were screwed. But if one
bank
maintaining
a
blockchain
came
under
attack, all the other banks
could keep the blockchain
going.
For
many
technology
experts at banks, the most
valuable potential use of the
blockchain was not small
payments but very large ones,
which are responsible for the
vast majority of the money
moving between banks each
day. In the stock trading
business, for example, the
lengthy
settlement
and
clearing process means that
the money and shares are all
but frozen for three days.
Given the sums involved,
even the few days that the
money is in transit carry
significant costs and risks. As
a result, various banks began
looking at ways they could
use
the
blockchain
technology to make these
sorts
of
large
transfers
quickly and securely. For
many banks, the biggest
stumbling block was the
inherent unreliability of the
Bitcoin blockchain, which is,
of
course,
powered
by
thousands
of
unvetted
computers around the world,
all of which could stop
supporting the blockchain at
any moment. This increased
the desire to find a way to
create
blockchains
independent of Bitcoin. The
Federal Reserve had its own
internal teams looking at how
to harness the blockchain
technology and potentially
even Bitcoin itself.
Many in the existing
Bitcoin community scoffed at
the idea that the blockchain
concept could be separated
from the currency. As they
viewed it, the currency, and
the mining of the currency,
was what gave users the
incentive to join and power
the blockchain. Given that a
blockchain could be taken
over and subverted if an
attacker controlled more than
50 percent of the computing
power on the network, a
blockchain
was
only
as
secure as the amount of
computing power hooked into
the network. A blockchain
run by a few dozen banks
would be much easier to
overwhelm than the Bitcoin
network,
which
now
commanded
more
raw
computing power than all the
major
supercomputers
combined.
Bitcoin mining, which
had once been a thing that
Martti Malmi and Gavin
Andresen could participate in
with just their laptops, was
indeed well on the road to
becoming
an
industrial
enterprise. One of the big
players
was
21e6,
the
secretive project founded by
Balaji Srinivasan and funded,
in
part,
by
Andreessen
Horowitz. Balaji had been
among the first to see that as
the chips became more high
powered,
the
factor
determining who would profit
from Bitcoin mining would
be the energy costs involved
in powering and cooling the
chips. A chip that was fast but
ate up energy and got hot—
requiring cooling—could end
up costing more in electricity
bills
than
it
earned
in
Bitcoins. To cut down on
power costs, Balaji’s team
had designed a system that
kept the chips immersed in
mineral oil, which absorbed
the
heat
and
eliminated
cooling
costs.
The
data
centers
running
21e6
machines were now the single
biggest source of mining
power in the United States.
And
21e6
was
already
working
on
its
next
generation of chips, with code
names
like
Yoda
and
Gandalf.
In
China
some
entrepreneurial young men
with
access
to
cheap
hardware straight from the
factories realized that their
country provided its own
advantage for cutting down
on power costs: corruption.
One mining operation near
Beijing set up right next to a
coal power plant, where it got
its power practically free
thanks to the relationship
between the power company
and the owner of the mining
computers. Another so-called
mining farm was set up in
Inner Mongolia where cheap
power was plentiful. Mining
was particularly popular in
China because it provided a
way for Chinese citizens to
acquire
Bitcoins
without
going
through
the
increasingly restricted Bitcoin
exchanges.
Surpassing all these other
mining operations, though,
was a company created by a