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.