What Does the Silk Road Seizure Mean for Bitcoin?

Is the currency really only good for black markets?

The online black market Silk Road was shut down last week by the federal government after over two year of operating with impunity. The site, which operated on the anonymizing Tor network, allowed users to trade in almost anything licit or illicit—from marijuana to heroin to forged IDs—and used Bitcoin as its only currency.

Immediately after the news spread of the shutdown and the arrest of its alleged operator, Ross Ulbricht, Bitcoin prices dropped by as much as 20 percent. The long-term effect of the takedown, however, should be positive for the decentralized digital currency.

Anyone who follows it closely will tell you that there are basically three sometimes-overlapping groups that make up the Bitcoin community: tech enthusiasts and early adopters, crypto-anarchists, and entrepreneurs. Each has a silver lining to see in Silk Road’s demise.

The techies and enthusiasts have been long beleaguered by critics who argue that Bitcoin serves no purpose other than to lubricate illegal markets, and in particular Silk Road; that it is otherwise a useless toy.

“A lot of Bitcoin aficionados will probably take issue with my next point here, but I’m pretty sure history will eventually be on my side,” wrote National Review’s Betsy Woodruff in June. “My theory is that Silk Road is Bitcoin’s gold standard. Bitcoin, from what I can tell, isn’t valuable because of idealistic Ron Paul supporters who feel it’s in their rational self-interest to invest in a monetary future unfettered by Washington; Bitcoin is valuable because you can use it to do something that you can’t use other forms of currency to do: buy drugs online.”

This thinking continues after the bust. On Thursday the Silicon Valley Business Journal ran a story with the headline, “Why Bitcoin is probably doomed after closure of Silk Road, the Internet’s No. 1 drug marketplace.”

The Bitcoin exchange rate tells a different story, however. If Woodruff were right, and Bitcoin’s only value is as Silk Road’s currency, then we should be seeing its price approaching zero right now. Instead, it’s at $136. Down from $140 the day before the bust, but up tenfold from $14 one year ago.

The fact is that the market sees a lot more value in Bitcoin than just the privacy it affords sellers and buyers in black markets (something that isn’t as strong as is commonly assumed). Techies will tell you that it’s Bitcoin’s decentralized nature, which makes it a cheaper and more censorship-resistant payments network, that is what makes it truly revolutionary, and the market seems to be vindicating that view. It’s probable that black markets helped bootstrap Bitcoin, but today it’s clear Bitcoin’s value is not tied to Silk Road.

That brings us to the speculators investing in bitcoins, and the venture-capital-backed entrepreneurs who recognize Bitcoin’s potential capacity disrupt established payments networks. They are now building the infrastructure for the currency’s mass adoption—from exchanges to wallets to merchant services—and in most cases they need the blessing of regulators to launch their startups. Bitcoin’s association with Silk Road has been a liability in the eyes of the business class, which has been eagerly seeking to assuage policymakers’ fears and to comply with regulation. Silk Road’s demise is all silver lining for this group.

The next time they meet with policymakers to discuss the challenges Bitcoin poses to law enforcement, entrepreneurs will be able to point to Silk Road as Exhibit A of the system working. They will be able to say that Bitcoin is no different from traditional payments networks like Visa or PayPal. Both are used predominantly by law-abiding citizens making legitimate transactions, but both can also be used by criminals for illegal purposes, and law enforcement can adapt to deal with those cases. As a result, they will argue, Bitcoin businesses should not be regulated any more stringently than existing ones.

The Silk Road bust also illustrates two points this group often makes to regulators. First is that Bitcoin is not as private as some think. Because every transaction on the network is public, investigators can analyze patterns to identify the parties to transactions. That’s exactly what some on Reddit did to uncover the Bitcoin address that the federal government has used to store the 26,000 bitcoins seized from Silk Road. (Since Friday, people have been sending tiny amounts of money to that address and including very interesting protest messages in the transaction’s “memo” field.) If the government can’t keep it’s identity secret from Reddit, what chance do scofflaws have against the Financial Crimes Enforcement Network’s team of computer-assisted investigators?

Second, the government alleges that Ulbricht collected over 600,000 bitcoins in commissions—about $81 million at today’s exchange rate—yet he lived a relatively modest life in a rented bedroom in a San Francisco apartment. It’s likely Ulbricht did not have an easy way to convert his bitcoin earnings to greenbacks, and this might suggest how difficult it is to use Bitcoin to launder any serious amount of cash. As regulatory-compliant Bitcoin exchanges come to dominate the market, some will argue, getting cash out of the network unnoticed will become even more difficult.

Finally, you might wonder what exactly it is that Bitcoin’s most-ideological backers, especially crypto-anarchists, should have to celebrate in Silk Road’s end. After all, the site and its operator, known as Dread Pirate Roberts, were symbols of the agorist ideals of voluntary trade, freedom from state or mob coercion, and counter economics facilitated by technology. But here is the silver lining for radical libertarians: nothing about Bitcoin’s design was compromised, and it remains a sound alternative to government money and traditional payments systems.

Silk Road may be gone, but as long as the demand is there, there will be successors. Indeed, there are already existing alternative black markets online. They are still undergirded by the resistance to censorship Bitcoin provides.

Bitcoin’s censorship-resistance means that the government cannot engage in prior restraint when it comes to financial transactions. They may be able to identify and punish parties to a transaction after the fact, but with Bitcoin they can’t prevent that transaction from happening at all, something they can do with traditional financial systems by putting pressure on payments processors like Visa and PayPal. This is a new and revolutionary development that remains intact even after one of the government’s most serious attacks on the deep web. The fact is that online black markets are the new normal, and realizing that should take the sting out of any crypto-anarchist’s grief for Silk Road.

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  • SweatingGin||

  • SweatingGin||

    And I should read the article rather than just ctrl-f'ing it

  • SweatingGin||

    I'd love to be a fly on the wall for meetings when they start thinking about getting rid of those seized BTC, and realize they've gotten more donated to them.

    What the hell do you do? There's no form for "money donated to a seized account"

    Public Note: So high I dunno what I'm doing now
  • Fist of Etiquette||

    The site, which operated on the anonymizing Tor network, allowed users to trade in almost anything licit or illicit—from marijuana to heroin to forged IDs...

    Shouldn't that list of examples include something that's licit?

  • ||

    There were a few "legal" listings for things like software but the fact that it was on the deep web, required BTC conversion, and had high fees made it pretty much a nonstarter for anything that could be much more easily sold on amazon or ebay.

  • bassjoe||

    Bingo. You went to SR to buy scheduled drugs or illegal hacker tools. Nearly anything else could be purchased for cheaper for elsewhere.

    That said, many of those scheduled drugs probably shouldn't be illegal to begin with... but that's another story (one that's pursued almost weekly in Reason).

  • Cytotoxic||

    I've heard a lot of conflicting info regarding the privacy of BTC. An article at CoinDesk or something stated that BTC is every bit as private as you want it to be because you have to use tools like ZeroCoin.

  • Pro Libertate||

    That takedown page makes me wonder whether, if the shutdown continues, people will start hacking the shit out of sites not being actively maintained/supported.

  • ||

    Just because they are not being actively maintained doesn't mean they are suddenly hackable, Cereal Killer.

  • Pro Libertate||

    I know that, but they get nailed fairly frequently, anyway. If they're really keeping the web, database, and security guys home, you've got to wonder.

  • eloramoody||

    my classmate's half-sister makes $72 every hour on the internet. She has been without a job for eight months but last month her payment was $16159 just working on the internet for a few hours.Here's the site to read more......
    ======================

    http://www.Works23.Com

    ======================

  • Brian||

    OT: People shocked that their Obamacare insurance is so damn expensive.

    "Of course, I want people to have health care," Vinson said. "I just didn't realize I would be the one who was going to pay for it personally."

    Translation: "I thought I was doing, to someone else, what is happening to me. Now, I don't like it so much."

    Let me go find the world's smallest violin...

  • Brett L||

    OT: This article from the Hill is awesome.

    Senate Democratic sources say Reid agreed at a meeting in Boehner’s office on July 17 to accept a stopgap set at $986.3 billion. In return, they say, Boehner promised to keep it free of legislation defunding ObamaCare.

    Reid knew he would have a tough job selling liberals on a funding level $72 billion lower than what labor unions and progressive groups wanted.

    When Congress reconvened after the August recess, House conservatives balked at their leadership’s plan to merely require the Senate to vote on defunding ObamaCare before considering legislation to keep the government open.

  • Paul.||

    Reid knew he would have a tough job selling liberals on a funding level $72 billion lower than what labor unions and progressive groups wanted.

    If $72 billion is cut, it's the zombie apocalypse.

    If $72 billion is added, pish-posh, it's statistically insignificant increase in spending, go pound sand, libertard.

  • Paul.||

    Bitcoin serves no purpose other than to lubricate illegal markets

    Like cash "lubricates" illegal markets?

  • Paul.||

    Bitcoin is valuable because you can use it to do something that you can’t use other forms of currency to do: buy drugs online.”

    Ok, bitcoin afficianados, explain to me why Bitcoin is magically better for buying drugs online, when cash isn't? That's not a setup question to bash Bitcoin, I'm honestly curious. Is bitcoin less traceable than say, a PayPal transaction?

  • Paul.||

    First is that Bitcoin is not as private as some think. Because every transaction on the network is public, investigators can analyze patterns to identify the parties to transactions. That’s exactly what some on Reddit did to uncover the Bitcoin address that the federal government has used to store the 26,000 bitcoins seized from Silk Road.

    Ok, that kind of answers my question.

  • ||

    The transactions are public but the individuals behind them can create unlimited free wallets, as well as use tumbler services, to obfuscate their identity.

  • Paul.||

    So if I open up a paypal account and fund that account with a cashier's check (Cash), is that transaction more private than bitcoin, in that all Paypal transactions are not public?

    It's been a while since I've opened up a paypal account, so I'm wondering if you can even do that.

  • ||

    I think Paypal has to be linked to a bank account but regardless it is subject (and probably has lobbied for) all sorts of banking regulations that are impossible to apply to BTC by it's very nature.

  • Paul.||

    Hmm, I thought the purpose of directly funding a Paypal account was that it didn't have to be linked to a bank account.

    You see, now my curiosity is up. I'm tempted to try to create an entirely anonymous Paypal account.

  • bassjoe||

    That's incorrect. You go after the BUSINESSES that are large players in the bitcoin economy. By, for example, saying BSA/AML regulations apply to them... like FinCEN did in March. Voila...

  • bassjoe||

    True. But a determined police investigation can uncover the identity, just like what happened to SR.

  • rogers||

    Start working at home with Google! It's by-far the best job I've had. Last Wednesday I got a brand new BMW since getting a check for $6474 this - 4 weeks past. I began this 8-months ago and immediately was bringing home at least $77 per hour. I work through this link, go to Economy tab for more detail ...

    ============== WWW.MAX34.COM

  • Juice||

    Bitcoins aren't $130 because of Silk Road.

  • bassjoe||

    BTC as an anonymous payment system is a myth that was started by Senator Schumer, who read too many articles on the Web by early adopter-idiots of the currency, people who didn't understand the State's power to subpoena.

    Every single BTC transaction is on a public ledger. Yes, they're just "addresses" which could mean the person conducting the transaction can be anywhere in the world. But, in reality, that's not the case. Nearly every single legitimate BTC business today has a customer identification program; unless you're meeting some dude on the street to buy BTC, you're going to need to say prove you are if you go to any online exchange. These businesses are legally obligated to track which addresses BTC comes from and which addresses it sends BTC to. Law enforcement -- using tools that it has had for pretty much ever -- can pinpoint those BTC businesses for records' subpoenas and then... target the person who is associated with the targeted address... and so on and so forth.

  • OneOut||

    So if I want a quarter oz of hydro it's still better to just get it from the high school kid down the street ?

    I thought so.

  • elfieareeda||

    my roomate's mother-in-law makes $62 hourly on the internet. She has been fired for 8 months but last month her income was $19895 just working on the internet for a few hours. Read Full Article================

    http://www.Works23.Com

  • canadense||

    A brilliant piece! The integrity of the pure intellectual creation which is Bitcoin remains now more solid than ever and has proven to have both the strength and resilience to withstand assault. Now, what will the next challenge be? Bring it on!

  • srudolfopeter||

    Start working at home with Google! It’s by-far the best job I’ve had. Last Wednesday I got a brand new BMW since getting a check for $6474 this - 4 weeks past. I began this 8-months ago and immediately was bringing home at least $77 per hour. I work through this link, go to home tab for Register

    ✒✒✒✒✒✒✒✒ http://ddp.net/g7m

  • Jahfre Fire Eater||

    It means FUD.

  • Bruce Majors||

    There are groups that might want to use BitCoin who have never heard of it. I just found an Internet based group of gay and bisexual married men, sometimes closeted, who share "tips" (NPI) on how to conduct clandestine affairs, buying poppers or renting motel rooms etc etc etc, without having it show up on credit cards. I lurk in their groups to listen to the chatter, not being married or a closeted bisexual or gay. I'm telling them about BitCoin. Maybe someone should tell the peeps at AshleyMadison or whatever the adultery website is called. Maybe peeps on the downlow sexually could be a substrate to keep the BitCoin market going.

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