Article

Bitcoin at the end of the (Silk) Road

Will it help or hurt the digital currency that its busiest merchant, Silk Road, was busted this week by the FBI?

October 3, 2013 by Suzanne Cluckey — Owner, Suzanne Cluckey Communications

The FBI announced this week that it had shut down the notorious black market website, Silk Road, and arrested its alleged proprietor, Ross William Ulbricht, 29, aka, Dread Pirate Roberts.

The shuttering of the busiest online merchant trading in Bitcoin naturally raises questions about the future of the digital currency.

Will it gain legitimacy now that it's no longer associated with illegal trade on the most popular of underground sites, Silk Road?

Will it lose favor now that the Fed has proven that it can breach the supposedly impenetrable workings of the deep web — and perhaps trace how people are spending their Bitcoins?

Curtains for a criminal enterprise

The beginning of the end for Silk Road came last week. In a complaint filed on Sept. 27 with the U.S. District Court for the Southern District of New York, Ulbricht was charged with narcotics trafficking, computer hacking and money laundering. (Read the full criminal complaint.)

photo: LinkedIn

Ulbricht, or "DPR," is also alleged in the affidavit to have solicited murder for hire, though he currently is not charged with that offense.

In a deposition, agent Christopher Tarbell said that DPR offered $150,000 in bitcoins to one Silk Road client as payment for carrying out a hit against another.

In communications with the hitman, DPR explained that the target was threatening to reveal the identities of thousands of other Silk Road clients unless he was paid $500,000. The FBI said the hit was not carried out.

However, Ulbricht is under a grand jury indictment in Maryland for the attempted murder-for-hire of a former Silk Road employee who stole $40,000 worth of Bitcoin. In that case, the "hitman" was an undercover agent.

Ulbricht was arrested pursuant to the New York complaint in San Francisco on Wednesday, Oct. 2, and is to appear before Judge Joseph C. Spero in San Francisco federal court for a detention hearing on Friday, Oct. 4.

Idealism or anarchy?

Silk Road was known chiefly for its trade in illegal drugs. Its 13,000 listings included everything from amphetamines to cocaine, designer drugs, heroin, marijuana and pharmaceuticals.

The Silk Road traded in illicit drugs — and more.

But that's not all. The site also traded in ATM hacking tutorials, banking Trojans, forged documents and contact lists for black market connections and counterfeiters.

At one time, weapons were also sold on the site. But that venture was not a success, so DPR shut it down. However, in a highly encrypted written Q&A on July 4 interview with Forbes, he said he was considering reopening it.

DPR described himself in the interview as a libertarian and a purveyor of freedom who allowed people to obtain whatever they wanted so that they could live their lives the way they wanted to.

"We don't allow the sale of anything that's main purpose is to harm innocent people, or that it was necessary to harm innocent people to bring it to market," DPR said.

"For example, anything stolen is forbidden, counterfeit money and coupons which are used to defraud people, hitmen aren't allowed, and neither is child pornography. No substance on Silk Road falls under those guidelines."

How Silk Road verified that its illegal goods were on the up-and-up, Dread Pirate Roberts did not explain. Nor did he offer to define "innocent people."

The currency of crime

All Silk Road transactions were carried out with Bitcoin, which offers a certain degree of anonymity for criminal enterprises. Silk Road "enhanced" secrecy with a tumbler that scrambled the currency as it was withdrawn from the site, further obfuscating ownership.

But it was very likely that law enforcement could already identify many Silk Road customers since their transactions are publicly recorded in "blocks" within Bitcoin's peer-to-peer network on the "clear net," according to a report by MIT Technology Review. This shared log prevents fraud such as double-spending of bitcoins in simultaneous transactions.

The Review cited research by Carnegie Mellon University Assistant Research Professor Nicolas Christin, in which he estimated that Silk Road accounted for up to 9 percent of bitcoins traded on any given day.

The underground marketplace is said to have taken in 9.5 million bitcoins — equal to $1.2 billion, according to the FBI — since 2011.

Of course, some of these would have circulated through the site more than once in transactions. But the volume is still impressive, given that fewer than 12 million bitcoins have been created to date.

The fate of seized funds

A report by Reuters said that, in addition to Silk Road servers, the FBI took control of Bitcoin wallets with a total value of $3.6 million.

Following the Silk Road seizure, Bitcoin value took a serious hit, falling from a pre-bust price of $140 to a low of $110 before rebounding somewhat.

FBI notice posted on the Silk Road home page.

At 4:30 EDT on Oct. 3, the currency was at an asking price of around $128 on Mt. Gox — the largest Bitcoin exchange.

In a corresponding civil asset forfeiture action, prosecutors said that Silk Road and Ulbricht were liable for the value of all transactions involving drug trafficking and computer hacking, plus penalties for money laundering — all of which would be determined by the court, according to the Reuters report. 

Sorting out how much of the virtual currency seized is — or is not — dirty will not be easy. And in any event, will not be decided anytime soon at trial. It could be years before clean bitcoins are returned to their rightful owners. Who knows what a bitcoin will be worth then.

The future of Bitcoin — and the Bitcoin ATM

As soon as the "seized" notice went up on Silk Road, the speculation began as to whether the bust would be good or bad for the alternative currency.

Some Bitcoin watchers believe that the Bitcoin economy will be seriously impaired by the Fed's actions. Technology Review speculated that the FBI's now-proven ability to track the currency will have a chilling effect on its use: 

Silk Road was popular in part due to bitcoin's reputation for providing anonymity. But the FBI may now have evidence that could lead it to people who traded on the site. Such investigations could be helped by recent research showing that it is relatively easy to track the flows of bitcoins and identify their owners. ... Whether or not that leads to a string of secondary arrests in coming days, weeks or months, there are good reasons to expect bitcoin transactions and spending to fall.

On the other side are those who believe that putting Silk Road out of business will help bring the currency out of the back alley of criminal association. Brian Krebs, who publishes the blog Krebs on Security, is one of those.

"It may well be that the demise of the Silk Road will help remove a bit of tarnish from Bitcoin's public image," USA Today quoted Krebs as saying.

Others cite the bounce-back of Bitcoin to a price that's less than 10 percent off the pre-raid value, saying that Bitcoin has gained enough traction in the legitimate marketplace that it can do quite nicely without Silk Road, thank you.

And what will it mean for the Bitcoin ATM — which is just now getting out of the gate with units planned for rollout in Canada before year-end?

That might depend on the value Bitcoin buyers around the world place on an alternative store of wealth that provides an easy mechanism for international payments, thanks to built-in DCC capability — if not built-in anonymity.

Read more about regulatory issues.

cover photo: the tire zoo

ulbricht photo: linkedin

screen shot: u.s. dept of justice

About Suzanne Cluckey

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Suzanne’s editorial career has spanned three decades and encompassed all B2B and B2C communications formats. Her award-winning work has appeared in trade and consumer media in the United States and internationally.