Critics of bitcoin and other cryptocurrencies have long contended that their widespread use would empower hackers and other criminals. Purported anonymity, ease of cross border transport, lack of clear regulations, and settlement finality are all features of cryptocurrencies that may appeal to those who wish to skirt the law.[1] Since bitcoin’s inception, several high-profile instances of criminal misconduct have shone a light on the potential dangers of cryptocurrency. Among them was the creation of the world’s first online drug bazaar, and a massive hack at the Mt. Gox bitcoin exchange, which sparked a vicious bear market in the price of bitcoin.[2] More recently, a multibillion-dollar money laundering scheme was uncovered at another exchange, allegedly linked to the infamous Mt. Gox hack.[3]
In February of 2011, Ross William Ulbricht, who went by the nom de guerre of “Dread Pirate Roberts,” founded the site “Silk Road.”[4] Ulbricht, a former Penn State graduate student and amateur programmer with a strong libertarian and anarchist bent, dreamt of an online marketplace where people would be able to buy and sell narcotics and other illicit items, without governmental interference.[5] While the users of a Darknet site can use Tor[6] and Virtual Private Networks to obscure and hide their identities, they had no way of exchanging anonymous payments among themselves, short of sending envelopes full of cash via the postal service, an obviously impractical solution. Ulbricht got around this conundrum by using bitcoin as a payment method. Bitcoin addresses do not require a bank account, ID, social security number or name, and are free to open and maintain.[7] Bitcoin’s decentralized ledger – the blockchain – provided a way to verify that payments had been received or sent.[8] By using bitcoin, the only identifying information for a narcotics transaction would be the address of the receiver, a problem solved by using an anonymous P.O. box.[9] Ulbricht would act as an escrow service between buyer and seller, and would profit from commissions taken from every transaction.[10]
Silk Road opened to modest beginnings, with psychedelic mushrooms grown by Ross himself listed as the first items for sale.[11] However, Ross promoted his site on the famous bitcoin forum, an act which attracted a few buyers for his mushrooms, but ultimately led to his downfall.[12] By the end of February, twenty-eight transactions for narcotics ranging from LSD to mescaline were conducted on the site.[13] In two months, over a thousand people had registered. Silk Road’s servers were unable to handle the influx, and a combination of hackers and increased website traffic forced Ross to temporarily take Silk Road offline, to retool and upgrade the site.[14] The real influx of users however, took place after Gawker, an online gossip column, ran an in-depth story on Silk Road.[15] Within a few months, Ulbricht had recouped his initial investment, and was able to create a virtually anonymous and thriving marketplace for the sale of narcotics, complete with a review function of vendors, similar to Amazon or eBay.[16] In that time, the price of a single bitcoin had skyrocketed from around one dollar to over thirty dollars, a rise attributable in no small part to the increased attention bitcoin received because of Silk Road.[17]
With increased media attention, however, came increased attention from one entity Ross particularly despised, the U.S. government. On June 5th Senator Chuck Schumer held a press conference where he called on the DEA and FBI to shut down Silk Road and bring its proprietors to justice.[18] Ulbricht was also struggling under the weight of Silk Road’s popularity, and in September, he decided to hire his first staff member, a user called “chronicpain.”[19] Ross also hired a vendor who went by “Variety Jones’ or “vj,” who became an important technical contributor to Silk Road. Vj urged Ross to adopt the moniker of “Dread Pirate Roberts” or “DPR” instead of “silkroad,” in an attempt to pretend that the site had changed ownership.[20] The government however, had begun to open accounts on Silk Road, and in January of 2012, the Department of Homeland Security arrested a user called “DigitalInk” otherwise known as Jacob George.[21] George immediately cooperated with the police, and provided them with their first opening into the clandestine site.[22] In March an interagency task force was formed, with the code name “Marco Polo.”[23] Shortly after, agents created an undercover identity, with the screen name of “nob.”[24]
Silk Road continued to grow, and with its growth, came continued problems. In November, Silk Road suffered a massive denial-of-service attack, which eventually shut the site down.[25] Ross was forced to pay out $25,000 to the hacker behind the attack.[26] After the hack, nob posted a listing for a large amount of cocaine, which attracted suspicion due to the lack of reviews on nob’s profile.[27] However, the agents had built a rapport with Ross, and he eventually brokered a deal, with nob selling his cocaine to chronicpain, one of the administrators of the site. Chronicpain, or Curtis Green, was eventually arrested and released on bail.[28] Surprisingly, Ross thought that Green was the one who had betrayed him, and eventually asked nob if he could have Green executed.[29] The agents complied, and staged Green’s death by emailing bloody pictures to Ross,[30] a move which would come back to haunt him.
By the summer of 2013, Silk Road was approaching its one-millionth account, with daily commissions often over ten thousand dollars.[31] Problems continued to plague Ross and Silk Road. Additional hacks cost Ross approximately $350,000.[32] When a user blackmailed Ulbricht, he contracted a purported hit man to eliminate them.[33] He did the same after a scammer and three associates had robbed Silk Road users.[34] DPR grew increasingly paranoid, as the FBI had begun to make monthly arrests of Silk Road buyers and vendors.[35] Ulbricht took more precautions to hide his identity, yet he worried that his real IP or server address would eventually leak through.[36] In what would be a lucky break for Ross, Broder Patrol agents had intercepted a package containing nine forged drivers’ licenses bound for his apartment.[37] When confronted at his door, he showed the agents his real license with his real name, but declined to answer any other questions about the origins of the documents. While Ross was a suspect at this point, the task force had not widely disseminated his name, and the agents left without making an arrest. Ulbricht decided to change apartments, but declined to cut and run.[38]
The noose began to tighten. On October 1st 2013, Ross went to the local branch of the San Francisco library, laptop in hand.[39] Unbeknownst to him, federal agents were tracking his every move. Once Ross had logged into his encrypted laptop, he received a message from “cirrus,” a new moderator whose account was appropriated by the FBI.[40] Cirrus asked Ross to check certain flagged posts, as this would require Ross to log in to the heavily encrypted inner part of Silk Road.[41] Ross eventually replied, asking which flagged posts cirrus was referring to, signaling to the agents that he had logged in. To distract Ross and make sure he didn’t shut down his computer, two agents began fighting and arguing in the stacks behind him. As Ulbricht turned around, one agent swooped in and grabbed his open laptop, while others quickly arrested him.[42] The game was up, and Ross Ulbricht was indicted on charges of narcotics conspiracy, money laundering, and solicitation of murder for hire.[43] Users of Silk Road who visited the site, found an FBI emblem over the announcement: “THIS HIDDEN SITE HAS BEEN SEIZED.”[44]
Ironically, an old-fashioned mistake led to the downfall of Dread Pirate Roberts. Gary Alford, an IRS agent assigned to work on Silk Road, scoured the web on his spare time looking for mentions of Silk Road and Dread Pirate Roberts.[45] He came across a post on the Bitcoin forum, describing an anonymous drug marketplace, with the user’s last post listing an email address, [email protected].[46] While his superiors were initially skeptical, Alford kept digging, and found multiple links between Silk Road and Ross Ulbricht, including an IP address in San Francisco that was linked to Silk Road servers.[47] Eventually the Marco Polo task force was able to capitalize on Alford’s findings. Ultimately, Ross Ulbricht was sentenced to life in prison without the possibility of parole.[48]
When news of Ulbricht’s arrest was made public, the price of a bitcoin tumbled from $140 to $110 within two hours, only to quickly recover to $130 an hour later.[49] However, many cryptocurrency advocates saw the arrest as a positive development.[50] Some analysts estimated that only four percent of bitcoin transactions were dedicated to Silk Road.[51] Furthermore, the FBI complaint against Ulbricht stated that “bitcoins are not illegal in and of themselves and have known legitimate uses,” a strong statement about the legality of bitcoin.[52] In fact, the arrest of DPR may have helped remove the association between bitcoin and crime, as bitcoin was revealed to be a less than perfect currency for criminals. The immutable ledger or blockchain, provides a record of every transaction.[53] This enabled law enforcement to track illegal transactions, despite the lack of a name or bank account attached to bitcoin addresses.
The saga of Silk Road undoubtedly provided significant exposure to the idea of bitcoin and decentralized currencies. Although this left a bad impression in the minds of many who viewed bitcoin as a vehicle for crime, Silk Road also provided an example of how bitcoin could function in the real world, proving that a decentralized currency was able to last and transfer value between participants in a global marketplace.
[1] Paul Vigna & Michael J. Casey, The Age of Crypto Currency 41-43 (2015).
[2] The hack of Mt. Gox in 2014, which led to its insolvency, crashed the price of bitcoin. See generally, Robert McMillan, The Inside Story Of Mt. Gox, Bitcoin’s $460 Million Disaster, Wired (March 3, 2014), https://www.wired.com/2014/03/bitcoin-exchange/.
[3] Stab Higgins, $4 Billion: Russian Man Arrested for Alleged Bitcoin Money Laundering Scheme, Coindesk (July 26, 2017), https://www.coindesk.com/4-billion-russian-man-arrested-alleged-bitcoin-money-laundering-scheme/.
[4] Nathaniel Popper, Digital Gold 69-73 (2015).
[5] Id.
[6] Tor encryption, or Onion routing was developed by the US Navy to protect intelligence networks. See Wikipedia, Tor (anonymity network), (last visited, Feb. 11, 2018), https://en.wikipedia.org/wiki/Tor_(anonymity_network).
[7] See Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, https://bitcoin.org/bitcoin.pdf.
[8] Id.
[9] Popper, supra note 4, at 83.
[10] Id.
[11]Id.
[12] Id.
[13] Id.
[14] Id.
[15] Adrian Chen The Underground Website Where You Can Buy Any Drug Imaginable, Gawker (June 1, 2011), https://web.archive.org/web/20110603015735/http://gawker.com/5805928/the-underground-website-where-you-can-buy-any-drug-imaginable.
[16] Joshua Bearman & Tomer Hanuka, The Untold Story of Silk Road, Part 1, Wired (May 1, 2015), https://www.wired.com/2015/04/silk-road-1/.
[17] See Popper, supra note 4.
[18] Schumer Pushes to Shut Down Online Drug Marketplace, Nbc (June 5, 2011), https://www.nbcnewyork.com/news/local/123187958.html.
[19] See Bearman & Hanuka, supra note 16.
[20] Id.
[21] Popper, supra note 4, at 118-26.
[22] Id.
[23] Id.
[24] See Bearman & Hanuka, supra note 16.
[25] Id.
[26] Popper, supra note 4, 167-71.
[27] Id.
[28] See Bearman & Hanuka, supra note 16.
[29] Id.
[30] Id.
[31] Popper, supra note 4, at 171.
[32] Id.
[33]Nate Anderson & Cyrus Farivar, How the feds took down the Dread Pirate Roberts, (Oct. 3, 2013), https://arstechnica.com/tech-policy/2013/10/how-the-feds-took-down-the-dread-pirate-roberts/2/.
[34] Id.
[35] Olivia Solon, Police crack down on Silk Road following first drug dealer, (Feb. 1, 2013), https://www.wired.co.uk/article/silk-road-crackdown.
[36] See Popper, supra note 4.
[37] See Bearman & Hanuka, supra note 16.
[38] Id.
[39] Id.
[40] Id.
[41] Id.
[42] Id.
[43] James Ball, Charles Arthurand & Adam Gabbatt, FBI claims largest Bitcoin seizure after arrest of alleged Silk Road founder, Guardian (Oct. 2, 2013), https://www.theguardian.com/technology/2013/oct/02/alleged-silk-road-website-founder-arrested-bitcoin.
[44] Id.
[45] Silk Road: Google search unmasked Dread Pirate Roberts, bbc, (Aug. 9, 2017), http://www.bbc.com/news/av/magazine-40977474/silk-road-google-search-unmasked-dread-pirate-roberts.
[46] Id.
[47] See Bearman & Hanuka, supra note 16. (need to give the source name see rule 4.2 (a).
[48] Benjamin Weiser, Man Behind Silk Road Website Is Convicted on All Counts, NYT (Feb. 4, 2015), https://www.nytimes.com/2015/02/05/nyregion/man-behind-silk-road-website-is-convicted-on-all-counts.
[49] Popper, supra note 4, at 225.
[50] Id.
[51] Id.
[52] Id.
[53] See Nakamoto, supra note 7.
