Online Subterfuge: Silk Road, Tor and Bitcoins

As an undergraduate, the FBI closing of the Silk Road anonymous marketplace may not affect you beyond your drug supply or your easy purchase of another fake ID. But if you’re a political dissident in China, or a currency trader in London, the loss of the world’s illicit version of Amazon will cause serious tremors. The Silk Road’s ties to a web of other significant Internet innovations such as Tor and, more importantly, Bitcoins makes its closing a seriously disruptive event with consequences for free speech and commerce in the future.

Early last month, the FBI announced it arrested the owner of Silk Road servers, Ross Ulbricht, along with millions of USD in Bitcoin currency. Drugs accounted for about 70% of Silk Road transactions and forged documents made up most of the rest. Despite the rumors, other “harmful” items like child pornography, weapons, and contract killings were not for sale.  Ironically for all the contraband sold, the Silk Road runs on a government-sponsored, human rights-oriented server. The Silk Road marketplace was accessible through the Tor network, which was originally developed for the purpose of facilitating free speech for journalists, human rights organizations, and activists living in authoritarian states by the US Navy. Tor was also a platform for Silk Road competitors — Atlantis Market (drugs), Black Market Reloaded (Silk Road’s closest competitor), Sheep Marketplace, and the Russian Anonymous Marketplace — who have mostly closed for security reasons, or just temporarily shut their doors in the wake of the FBI crackdown.

The Tor network facilitates website anonymity through hidden services: IP addresses (and therefore network location) are rerouted, even behind firewalls, without encryption or exit node tracking. So, if I had wanted to buy a fake ID, I would have had to download the Tor server (separate from Chrome or Safari), access Silk Road via the Tor browser, purchase my own Bitcoins (through bitInstant, for example), find a seller and provide barebones information (a photo, for example). While these exchanges are ethically questionable, the Silk Road’s shutdown takes a firm blow to the freedom of political dissidents. The Tor Network’s strength lies in numbers. Anonymity gets the strongest the bigger the network is and the more times a user’s information can get rerouted and encrypted. With thousands of Tor’s most avid users gone because of the Silk Road closure, I can’t get into a bar before I’m 21, but a Middle Eastern journalist also might have to choose between releasing a controversial exposé on corruption and avoiding jail time.

Silk Road was also serviceable to the illicit market because it used the electronic currency Bitcoins. Bitcoins are purely electronic – although there is a movement to mint physical coins, sold by Mike Caldwell – and are made secure with a private key held by each owner. If users are careless with their private key, they can loose their cyber-cash. The anonymity of purchases served as the backbone for the Silk Road. Sellers were obligated to delete any sort of unique buyer information after confirmation of item arrival; the “legal laundering” of the Bitcoin system facilitated further lack of identification. For this reason, crypto-currency often comes under attack by pundits and policymakers, accused of being a legal form of money laundering. (To find out more about the nature of Bitcoins — how they are ‘mined’ or created, their verification process and their elusive creator — please check out ‘Coining the Web’s Currency’ in BPR’s last print edition.)

There is now even a Bitcoin Foundation to serve as an intermediary between the global reach of Bitcoins and users or the government. Bitcoin popularity has led to more federal attempts to control virtual currency, and by extension black markets like Silk Road. The New York state superintendent of financial services Benjamin Lawsky wrote, “If virtual currencies remain a virtual Wild West for narco-traffickers and other criminals, that would not only threaten our country’s national security, but also the very existence of the virtual currency industry as a legitimate business enterprise.”

The currency has been wildly fluctuating, in part due to its inhabitance of a legal gray area in most of the world. This leads to rampant speculation and a lack of regulation in large markets like China. However, the fact that Bitcoins lie outside the government’s purview also makes them attractive for people like European citizens worried about the effect on their Euros of future austerity measures, bank grabs and financial red tape.

Bitcoin’s investors are not even a fringe group any more. Apparently, Bitcoin has more venture capital investors and angel investors than actual start-ups do. While illicit marketplaces are not investable because of their anonymity and peer-to-peer set up, Bitcoins are a way to capitalize on these marketplaces. Even the Winklevoss brothers (of Facebook notoriety) jumped on the Bitcoin bandwagon. Pre-Silk Road shutdown, they and other investors fronted $12 million for Bitcoin startups between April and June this year. Although the currency was not designed to attract significant investment, savvy and forward-looking investors have watched the Bitcoin evolution and applied some of the same thinking seen in The Social Network to something far outside that sphere.

All of this is to say that the decrease in Bitcoin usage that came from Silk Road’s shutdown is a knock on Internet innovation. The currency is colored by critics as: marginally legal, black-market oriented, deflationary, needlessly complex, minimally beneficial, wildly fluctuating and on and on. But it is also the currency that doesn’t require a bank or registration. It is unregulated, but subsequently free from the prying eyes and heavy hand of the government. It frees commerce in places where there is cronyism and corruption, and to an extent insures savings for families in volatile economies. The limiting of Bitcoin’s commercial power with Ulbricht’s arrest is also paired with the FBI seizure of his 26,000 Bitcoins, valued at $3.25 million, which could depress prices if the government sells them off at auction.

Silk Road’s successful facilitation of illicit markets was largely due to its peer-to-peer platform – both with seller credibility and Bitcoin payments –, and a certain honesty-among-thieves logic. The shutdown will prove momentarily problematic for sellers whose information has not been erased and annoying for buyers who now have to find other sources for drugs, fake IDs or lock picking equipment. Bitcoins will continue to circulate internationally, spurred by investors. The Silk Road shutdown is more concerning due to its connections with the Tor Network and the increased policing by the United States government of any kind of anonymous web organization. The FBI’s shutdown of the Silk Road is in part a reneging on Tor network’s original conception to provide freedom to Internet users. Their attack on that element of commerce could be the basis for further demonization and crackdowns on the web’s anonymous and relatively unregulated currencies. The voluntary closing of Silk Road’s competitors indicates the fear spurred by increased policing, and raises questions about the future of online trading and anonymous communities. Though a huge cabal of forgers and drug dealers doesn’t sound like the best thing to have easily available online, the consequences for a freer Internet should be concerning enough to give us pause before we go on future electronic crusades.