End of the Silk Road

Silk Road is the leading online drugs marketplace. It’s entirely public on the Deep Web, yet untraceable. Or at least that was the case until last week, when the FBI finally managed to arrest a 29 year-old man suspected of running the site, which has now been blocked. Approximately 26,000 Bitcoins were also seized (currently worth approx 3 million USD), suspected to derive from the revenues of Silk Road.

So what happened? Can the users of the Tor network, which enables access to the Deep Web, be traced after all? Is Bitcoin not in fact anonymous? It seems that’s not the problem. Tor and Bitcoin are both functioning as they should. Ross Ulbricht, the arrested owner of Silk Road made a few small errors at the start that enabled the detectives to track him down in the course of an investigation that lasted two years.

What does that mean for Bitcoin? As can be seen from the figure, the first reaction was one of panic: the BTC price plunged from 127 to 85 USD within a couple of hours. However, nerves calmed within a few days, and the BTC price has now essentially climbed back to its pre-panic level. Indeed, it follows from the above that since the functioning of Tor and Bitcoin is unaffected, Silk Road’s business model is a viable one. The market niche will soon be filled – existing online drug marketplaces will take Silk Road’s place. Their operators will doubtless learn from their predecessor’s mistakes and be able to run their businesses with even less risk than hitherto.

Taking a look at the business figures of Silk Road, which have now been uncovered, they will probably decide the risk is worthwhile. The investigation revealed that in July 2013 Silk Road had almost 1 million registered users. From February 2011 to July 2013 it acted as a marketplace for 1,229,465 transactions between 146,946 active buyers and 3,877 sellers. The volume handled was in the order of 1 billion USD, while Silk Road’s commission amounted to several tens of millions of dollars in Bitcoins!

I wish to highlight another two points which I think are important with regard to Bitcoin’s future. The following sentence features in the FBI’s indictment: “Bitcoins are not illegal in and of themselves and have known legitimate uses.” Recently there are increasing indications that the authorities intend not to ban Bitcoin, but to acknowledge its legality and try to regulate its use. The legal/regulatory risks surrounding Bitcoin would quickly diminish as a result.

The other point concerns the riskiness of Bitcoin. Earlier, the centralization of services connected to Bitcoin was one of Bitcoin’s weak points. In 2011 when the largest Bitcoin exchange, Mt. Gox, was hacked, the BTC price plunged to a tenth of its previous value and remained extremely low for a long time, despite the fact that no damage or disruption was caused to the functioning of Bitcoin in itself. At that time there was no other exchange performing such services satisfactorily, and without such infrastructure Bitcoin is worth nothing. It seems that such risks are lower today. There are now several Bitcoin exchanges whose volume is of a similar order of magnitude, which provide an alternative. Second, there were fears that the elimination of the leading online black marketplace would leave the BTC price at a persistently low level, but that has not been the case. That is doubtless because Silk Road has well-functioning successors that can provide the same services.

Original date of Hungarian publication: 07 October 2013