Bitcoin and the dark side of the web

Silk Road, a notorious marketplace for illegal activity, was closed down by the FBI recently. Does this mark the beginning of the end for cybercrime? Simon Wilson reports.

What was Silk Road?

Until the FBI shut it down, seized its assets and arrested its owner in the science-fiction section of a San Francisco library last week, Silk Road was the web's most notorious dark web' marketplace for illegal drugs, weapons and other items such as tutorials in hacking cash machines and hiring the services of counterfeiters and even hitmen.

Established in February 2011, and dependent on the anonymity of the digital crypto-currency bitcoin for its users' transactions, Silk Road rapidly became according to the FBI "the most sophisticated and extensive criminal marketplace on the internet today".

How big was it?

The FBI says it did business worth $1.2bn. That's over-egged it values all Silk Road deals at today's bitcoin/dollar exchange rate, whereas much of that business was done when bitcoin was worth far less.

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But its reach was international: just hours after the FBI takedown, four men were arrested in Britain on suspicion of being significant drug dealers on the site.

Its owner, who styled himself online as Dread Pirate Roberts' after a character from The Princess Bride, turned out to be (according to the FBI; he has yet to stand trial) Ross William Ulbricht, a 29-year-old physics graduate.

What's the dark web?

To access sites like Silk Road, users must download free software called Tor. This anonymises internet connections by sending communications bouncing around a network of relays run by volunteers worldwide, encrypting and re-encrypting them until the original source becomes all but impossible to trace.

Using Tor the name comes from its original styling as The Onion Routing project' is not in itself illegal. Indeed, its creation was originally sponsored by the US Naval Research Laboratory as part of a project to protect government communications. The anonymity it provides has helped political activists fighting against repressive regimes, as well as whistleblowers and hacktivists'.

Even the FBI acknowledges Tor has "legitimate uses". But it has also become the browser of choice for criminals. Using Tor cannot guarantee that communications can never be traced. But leaked US National Security Agency documents (published by The Guardian) suggest Tor remains "the king of high secure, low latency internet anonymity".

How was the Dread Pirate caught?

The Dread Pirate has been mocked by fellow outlaws for the blunders that led to his arrest such as using his real name for a Gmail address he used on a bitcoin forum seeking technical help.

The FBI seems to have tracked him using a mix of hard slog the careful monitoring of such forums and a lucky break. A border check on a package sent to Ulbricht's real home address from Canada threw up a number of fake ID cards with different names, but all featuring his photo.

In a sense it is reassuring (from the point of view of law enforcement, at least) that the FBI was able to close Silk Road using such ordinary methods. On the other hand, the fact that Ulbricht was caught due to his own errors rather than exceptional technical ability on the FBI's part means there's no reason why similar sites should not rapidly emerge.

Will alternatives spring up?

They already have. Sites vying for the Silk Road crown include Sheep Marketplace and BlackMarket Reloaded although one of the other better known sites, Atlantis Marketplace, shut down a couple of weeks before the FBI seized Silk Road, citing "security reasons".

Most users assumed the site's owners had closed to avoid an impending crackdown. They gave customers a week's notice and told them to withdraw their bitcoins (and, in this case, litecoins). But according to users, many people had technical problems getting their cash out, and Atlantis's owners still held plenty of users' money before the site abruptly vanished.

Why do users trust these sites?

For the same reasons they trust eBay. Unless they are in for a short-term con, these sites make money by taking commissions on successful trades (up to 10% in the case of Silk Road), so have nothing to gain by tolerating scammers.

Payment on Silk Road went through an escrow service, and the site only accepted bitcoins, for reasons of anonymity. Buyers would move their bitcoins into the Silk Road escrow account, and at the same time send a message to the seller giving a real world address for delivery. The message then self-destructs.

Once the drugs (or whatever) arrive, the buyer confirms delivery and the bitcoin is released to the dealer. If a package goes astray, the funds are frozen until agreement is reached between the parties. And buyers leave feedback so that reliable sellers gain in reputation.

That said, it may be presumed that those criminals who had monies owing on hold in the Silk Road escrow when it was seized by the FBI worth around $3.6m were less than impressed.

What does this mean for bitcoin?

Many critics have argued that bitcoin is merely the gold standard of online criminal anonymity. However, judging by the market reaction to the Silk Road takedown the value of bitcoin fell sharply but then recovered commentators have been right to argue that the end of Silk Road could ultimately help the currency.

According to this argument, the shutdown of the site most associated in the public mind with bitcoin will remove some of the stigma of criminality from the currency; and the fact that the notoriously volatile bitcoin has not collapsed along with Silk Road will give the market confidence.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.