The FBI Seizes And Shuts Down Silk Road (The Pros And Cons)
The FBI Seizes And Shuts Down Silk Road
(The Pros And Cons)
(The Pros And Cons)
At 3:15 in the afternoon on Tuesday, FBI agents walked into the San Francisco public library in Glen Park, and quietly plucked Ross William Ulbricht into custody. The FBI also seized the files making up the underground black market Silk Road website, which it says he ran under the pseudonym Dread Pirate Roberts, and pocketed 26,000 bitcoins.
The operation had been mounting for at least two years. Agents had been making undercover purchases on the site since 2011, conducting over 100 transactions, said a civil forfeiture complaint document seized by the FBI.
Ulbricht seems to be an inconsistent character. On the one hand, he was extremely paranoid. He stopped talking to a Forbes reporter for a month because she had asked him for a personal meeting. But the FBI criminal complaint suggests that he was caught thanks to some basic, forehead-slapping errors. Here’s how it went down.
Firstly, he was foolish with his email address and online identities while promoting the site, getting technical advice and hiring help, alleges the FBI. He used the same online handle (altoid) on several forum sites to make users aware that Silk Road was active in early 2011. He then used ‘altoid’ again to hire developers for a “venture-backed bitcoin startup company”. But this time, he asked people to send their resumes to rossulbricht@gmail.com.
FBI investigators obtained the records for this email address from Google and cross-referenced it to Ulbricht’s Google+ account. This included a photo that matched the picture on Ulbricht’s LinkedIn account.
Ulbricht used the same email address – and his real name – when posting on Stack Overflow, a popular community site for programming advice. He asked how to connect to Tor using the PHP web programming language. Agents later found code on the Silk Road servers identical to the code that Stack Overflow members showed him.
He subsequently changed his user ID to ‘frosty’ and the email on the site to frosty@frosty.com, but instead of leading investigators away, it led them closer. This email address (which isn’t valid) later showed up in the SSH certificate stored on the Silk Road server that allows the administrator to gain access without typing in a password.
There were other coincidences in Ulbricht’s online activities and the activities of Dread Pirate Roberts. Agents noticed links in Ulbricht’s Google accounts to The Mises Institute, an organization advocating Austrian economics (a popular theory among libertarians and some bitcoin supporters).
Once again, a profile named “Ross Ulbricht” on the Mises site had a photo matching Ulbricht’s LinkedIn and Google+ profiles, the FBI said. The organization was also mentioned in several posts by Dread Pirate Roberts on the Silk Road forum.
The FBI traced Ulbricht via an IP address in San Francisco.
But where was he? Agents apparently tracked Ulbricht down by asking Google for the IP addresses used to log into the rossulbricht.com email address. It showed a Comcast address in San Francisco, registered to a friend of Ulbricht’s, the affidavit said.
Then, evidence against Ulbricht emerged via another agency. US Customs and Border Protection intercepted a parcel containing fake IDs that had been shipped from Canada to an address in San Francisco. When investigators from the Department of Homeland Security visited the house, they found Ulbricht. All of the photos on the fake IDs (which each had different names) were his.
The photos also matched his Texas driving license, which the DHS investigators asked to see. All of this happened around the same time that Dread Pirate Roberts was discussing obtaining fake IDs on Silk Road, the FBI affidavit said.
The FBI put the final piece of the puzzle in place by pulling Ulbricht’s Texas driving license and comparing it with the license that Ulbricht showed the DHS. The numbers matched. At this point, it must have considered that it had enough evidence.
Once the agents seized the Silk Road website files, they could read the IP address for that VPN server. The hosting provider gave up the access records for the VPN server to the FBI, which showed that it had been accessed from an address at a coffee shop near where Ulbricht was staying.
Hackers like to fly under the radar. Good ones have a common term known as OPSEC, or operational security. It contains several key tenets. Not using your real email address would be one of them. If the allegations in the FBI affidavit are true, then Ulbricht’s OPSEC was poor.
But Ulbricht has not been convicted of running Silk Road, and all the criminal charges that implies, meaning that he is still innocent in the eyes of the law.
In any case, the site is down now. Just how big was Silk Road? The affidavit shows that it processed sales worth around 9.5m bitcoins between February 2011 and July this year, but bitcoin experts put that in perspective.
“That incorrectly understands BTC and its use,” says Patrick Murck, general counsel at the Bitcoin Foundation. “1 BTC could change hands 9.5m times and generate ‘sales revenue’. In addition, many people don’t realize that, for the majority of Silk Road’s existence, the value of 1 BTC was less than $7 USD. It is only as recently as March 2013 that the value has risen over $100 USD.”
Silk Road existed for around 930 days. That equates to an average trading volume of around 10,215 each day, or about 4% of the daily traded bitcoin volume using recent network transaction volumes. That said, it’s worth considering that transaction volumes probably increased on Silk Road over time, and that transactions as a proportion of the network may have risen towards the end.
Nevertheless, the site yielded total commissions of 614,305, which is not inconsiderable, even at $10 prices. And of course, it hasn’t been that low for a while. Regular commissions were paid into Ulbricht’s bitcoin wallet, according to the affidavit, amounting to around $20,000 each day in some cases. His addresses held the equivalent of $3.4m in July, the FBI said.
What will the fallout from Silk Road do to bitcoin’s value and reputation? Murck makes the best of it.
“The interesting aspects of the story are that the FBI acknowledges that bitcoins ‘are not illegal in and of themselves and have known legitimate uses’ (Section 21, v),” he says. “The FBI did not have to issue that statement, but they did. Additionally, it shows that bitcoin as a store of value and medium of exchange doesn’t pose any insurmountable challenges to the law enforcement community, which should settle some minds.”
“Bitcoin’s quest to become mainstream persists through thick and thin,” said Erik Vorhees, a bitcoin advocate and founder of SatoshiDice, the wildly successful bitcoin gambling site that was sold earlier this year. “It is a tremendous tool that grows and expands while the world gossips about it. It’s a technology in the pure sense – and technologies don’t tend to care about individual events that occur in their orbit.”
“Bitcoin’s quest to become mainstream persists through thick and thin”
That didn’t stop the price dropping like a lead balloon. When the FBI published the news, the price of bitcoin plummeted to $82 from $125, according to CoinDesk’s Bitcoin Price Index.
This is mostly panic selling, argues bitcoin expert and advocate Roger Ver. “The price drop today was definitely caused by the Silk Road news, but the sell off was by users who still don’t understand bitcoin, and its myriad of uses beyond the Silk Road,” he argued. “I suspect that within a month, the bitcoin price will be higher than it was yesterday before the Silk Road news.”
What isn’t clear is what happens to the suppliers, and possibly the users. Many users (including Ulbricht, allegedly) used their home addresses for delivery of illicit goods. They must have given those addresses to someone. If delivered in a message via Silk Road, would they have been stored, and will the FBI be paying customers a visit?
“The users who used PGP to encrypt their communications are in no danger at all,” says Ver. “Those who sent their messages in plain text may be at some risk depending on Silk Road’s back-end security practices. This should be a wakeup call for everyone to start using services like PGP/ GPG, Crypto.cat, and bitmessage.org to encrypt their communications.”
This isn’t the only site dealing in illicit goods for bitcoins. Atlantis, another site, shut down two weeks ago due to ‘security concerns’ – however, the owners of that site were far less paranoid than Dread Pirate Roberts. They even had their own Facebook page.
Another, Black Market Reloaded, is still going strong. And Vorhees compares the Silk Road shut down to Napster, in the early days of illicit music file sharing. When it was quashed, many sprung up in its place.
“There will be many sites, operating in many countries,” he concludes.
The Silk Road Upside for Bitcoin
The Federal Bureau of Investigation shutdown of Silk Road, a secretive Internet marketplace for drugs, was seen as a dark moment for bitcoin. The faddish virtual currency was in heavy use on Silk Road.
Felix Salmon at Reuters, though, had a different take: The Silk Road takedown could end up a boon for bitcoin, since it removes “the single skeeviest aspect” of the currency.
In other words, for anybody wanting to see the broader adoption of bitcoin, the shuttering of Silk Road should be considered a necessary and very welcome step — and one which will help support its value over the medium term. Sure, the price fell today — but not egregiously so: it was about $140 in the morning, briefly fell as far as $110, and is now back to $125. By bitcoin standards, that’s a surprisingly low amount of volatility on a big-news day. And with Silk Road gone, a significant source of downside tail risk has now been effectively removed from the bitcoinverse.
Imagine What Could Happen If “Amsterdam” Existed Online?
U.S. prosecutors allege in a criminal complaint and civil forfeiture filing against Ross Ulbricht, the founder and administrator of Silk Road, that he ran a website they called “the most sophisticated and extensive criminal marketplace on the Internet today.”
The U.S. shut down Silk Road, which now has a landing page containing the text: “THIS HIDDEN SITE HAS BEEN SEIZED.”
It’s the latest example of U.S. authorities taking on a network relying on a virtual currency to do business.
Virtual currencies such as Bitcoin have been a recent target of federal prosecutors and regulators as they grow in use. The anonymous, decentralized currencies aren’t illegal on their own, but U.S. officials say they’re known to be used by cybercriminals seeking to launder money anonymously.
To that end, the U.S. Treasury Department’s Financial Crime Enforcement Network, or FinCEN, issued guidance in March requiring registration by firms that issue or exchange virtual currencies. In May, prosecutors filed charges against seven men who allegedly set up a Web-based currency called Liberty Reserve and used it to launder $6 billion in criminal proceeds.
Prosecutors charged Mr. Ulbricht, who is also known as “Dread Pirate Roberts,” with narcotics trafficking conspiracy, computer hacking conspiracy and money laundering conspiracy. He was arrested Tuesday in San Francisco.
Brandon LeBlanc, a public defender representing him, didn’t respond to a request for comment.
The court documents filed against Mr. Ulbricht and Silk Road lay out one way Bitcoin can be used for illegal purposes.
Once a user buys Bitcoins from an “exchanger”, they’re kept in a “wallet” associated with an “address.”All Bitcoin transactions are recorded on a public ledger known as the “Blockchain,” but because of the currency’s anonymity, it can’t be used by itself to determine the identities behind the transactions.
“Only if one knows the identities associated with each Bitcoin address involved in a set of transactions is it possible to meaningfully trace funds through the system,” the complaint said.
But, prosecutors say, Silk Road had a solution for that: The “tumbler.”
Silk Road operated an internal Bitcoin “bank” where every user had to hold an account to make purchases. The Bitcoins used for purchases were held in escrow in “wallets” maintained by Silk Road pending a transaction’s completion, the criminal complaint said. Mr. Ulbricht had exclusive control of the “wallets” maintained on Silk Road servers, prosecutors said.
The ‘tumbler’ processes Bitcoin transactions “in a manner to frustrate the tracking of individual transactions” along the chain by sending it through a complex semi-random series of dummy transactions, the complaint said.
“If a buyer makes a payment on Silk Road, the ‘tumbler’ obscures any link between the buyer’s Bitcoin address and the vendor’s Bitcoin address where the Bitcoins end up–making it fruitless to use the ‘Blockchain’ to follow the money trail involved in the transaction, even if the buyer’s and vendor’s Bitcoin addresses are both known,” the complaint said. “The only function served by such ‘tumblers’ is to assist with the laundering of criminal proceeds.”
Silk Road is only accessible on the Tor network, which protects anonymity of Internet traffic by routing it through a system of volunteer computers all over the world, making it “practically impossible to trace” the communication back to an originating IP address, the criminal complaint said.
Websites operating on Tor have complex Web addresses that end in “.onion,” the complaint said, providing the current Silk Road address. Sites with the “.onion” extension can only be accessed via Tor, which is freely available for download on the Internet.
Using a Tor browser, a visitor to Silk Road enters a username, password and country, and immediately enters a marketplace of all sorts of illegal goodies such as hacking software, pirated media content, fake identity documents or illegal drugs of nearly variety “openly advertised on the site,” prosecutors said.
“As of Sept. 23, 2013, there were nearly 13,000 listings for controlled substances on the website,” the criminal complaint said. “Clicking on the link for a particular listing brings up a picture and description for the drugs being offered for sale, such as ‘HIGH QUALITY #4 HEROIN ALL ROCK’ or ’5gr UNCUT Crystal Cocaine!!’”
The website operates like any other online marketplace, but its reputation for being a drug bazaar has been around for years.
And the criminal complaint says Silk Road forums contain “extensive guidance” on how to evade law enforcement “posted by users of the site themselves.”
Law enforcement agents participating in the investigation made more than 100 individual undercover purchases of controlled substances such as ecstasy, cocaine, heroin and others, prosecutors said.
As of July, there were nearly 1 million registered user accounts on the server, 30% of which were based in the U.S. From February 2011 through July 2013, there were about 1.2 million transactions completed on the site.
Silk Road charges a commission generally between 8% and 15% for every transaction conducted by its users, prosecutors said. During its two and a half years in existence, Silk Road generated revenue of more than 9.5 million Bitcoins and collected more than 600,000 Bitcoins in commissions, the complaint said.
These figures, prosecutors say, are roughly equivalent to $1.2 billion in sales and about $80 million in commissions.
Prosecutors said Wednesday they already seized about 26,000 Bitcoins worth about $3.6 million, marking the largest ever seizure of Bitcoin.
Did The FBI Just Deal a Fatal Blow To Bitcoin?
The owner of Zero Hedge is at his most apocalyptic this afternoon, saying that “the end may be nigh” for bitcoin now that Silk Road, the bitcoin-fueled drugs bazaar, has been closed down by the Feds. Even Adrian Chen, who has done most of the best reporting on Silk Road, was shocked by what the FBI found:
According to the indictment, Silk Road was bigger than anyone had suspected: It boasted over $1.6 billion in sales from 2011-2013, which resulted in $80 million in commissions. (Researchers had previously estimated that Silk Road was doing about $22 million in total sales per year.)
Chen, too, sees today’s news as bearish for bitcoin: “the extent to which Silk Road underpinned the Bitcoin market is pretty amazing,” he tweeted. After all, the complaint reveals that from February 2011 through July 2013, Silk Road’s revenues totaled 9,519,664 bitcoins — that’s almost as many as the total number of bitcoins in circulation (11,744,575).
But although I’m skeptical about bitcoin’s future, I don’t see today’s news as bad for the cryptocurrency. In fact, quite the opposite. If Silk Road is now shut down and if no one else manages to enter the vacuum caused by its disappearance, then the FBI will at a stroke have managed to remove the single skeeviest aspect of bitcoin, and the main reason why people like Chuck Schumer are so suspicious of it.
On top of that, the numbers in the FBI complaint are highly misleading. The complaint says that Silk Road’s total revenue, of 9.5 million BTC, and commission, of 614,305 BTC, “are equivalent to roughly $1.2 billion in revenue and $79.8 million in commissions, at current Bitcoin exchange rates, although the value of Bitcoins has fluctuated greatly during the time period at issue”. That’s putting it mildly. Here’s how Chen described Silk Road back in June 2011:
Mark, a software developer, had ordered the 100 micrograms of acid through a listing on the online marketplace Silk Road. He found a seller with lots of good feedback who seemed to know what they were talking about, added the acid to his digital shopping cart and hit “check out.” He entered his address and paid the seller 50 Bitcoins—untraceable digital currency—worth around $150. Four days later the drugs, sent from Canada, arrived at his house.
Those 50 bitcoins are part of the FBI’s 9.5 million BTC total, but rather than being worth $50, the FBI is now valuing them at about $6,300. As a result, the $1.2 billion number should be taken with a monster pinch of salt. Besides, if you consider that the FBI is looking at 898 days of Silk Road activity, that averages out at a pretty modest 10,600 BTC per day. That’s hardly the “underpinning” of the bitcoin market, which normally sees somewhere between 200,000 BTC and 400,000 BTC per day in total trading volume.
The US government doesn’t seem to have a reflexively negative attitude towards bitcoin: in a letter sent on August 12 to Janet Napolitano, Senators Thomas Carper and Tom Coburn write that while virtual currencies come with “threats and risks”, there should also be “a sensible regulatory framework” which will “ensure that rash or uninformed actions don’t stifle a potentially valuable technology”. Meanwhile, while Treasury certainly wants to regulate such currencies, they don’t seem to want to outlaw them.
In other words, for anybody wanting to see the broader adoption of bitcoin, the shuttering of Silk Road should be considered a necessary and very welcome step — and one which will help support its value over the medium term. Sure, the price fell today — but not egregiously so: it was about $140 in the morning, briefly fell as far as $110, and is now back to $125. By bitcoin standards, that’s a surprisingly low amount of volatility on a big-news day. And with Silk Road gone, a significant source of downside tail risk has now been effectively removed from the bitcoinverse.
On The Other Hand..
The basic problem with assuming that the FBI taking down Silk Road is a benefit to BitCoin by removing an unsavory association sullying the reputation of the currency is that it is far too easy for anybody to throw up a replacement site.
And now that lots more people know what kind of revenues they can get from illegal online drug dealing, we can pretty much count on replacement sites springing up.
Let’s face it, in the present day U.S. drug dealing is the default employment program, and now that the size of the potential market is out of the bag, it’s only a matter of time before one or more sites that do exactly what Silk Road did are online, with more precautions and stronger protections for privacy.
What will Silk Road's end mean for the popular crypto-currency? Before Bitcoin was sufficiently mainstream to constitute nonprofit donations or warrant its own exchange-traded fund, it was best known for its utility (and ubiquity) on Silk Road. Bitcoin's association with illicit trade was once central to its identity -- and is still an impetus to government scrutiny.
But Bitcoin no longer needs Silk Road. For one thing, there are other online marketplaces where Bitcoin could be used illegally. Perhaps more important, as Reuters reported yesterday, in the three months ended in June, Bitcoin startups raised almost $12 million from venture capital investors. Bitcoin may still be high-risk, but a customer base of legit startups and fewer drug lords probably bodes well.
devilsadvocate01 11 hours ago
Buzz Leapyear2 14 hours ago
ORChuck 16 hours ago
The vast majority of transactions fall into that "less exotic" category. The Silk Road site was doing about 400 million dollars per year gross. Amazon grosses about 63 billion dollars per year. And, while Silk Road enjoyed considerable market share, Amazon is only a tiny fraction of the market for legal goods.
In most respects, Bitcoin is better off without Silk Road.
Buzz Leapyear214 hours ago
Buzz Leapyear24 hours ago
ORChuck 16 hours ago
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