On the afternoon of Tuesday, October 1, 2013, on the quiet second floor of a small library in San Francisco, the online black market using Bitcoin as a medium suffered a major blow. A pale, thin man sat at a corner table near the science fiction area, constantly striking his laptop keyboard. He is 29-year-old Ross Ulbricht (Ublich), from Austin, Texas, is a computer genius, he lived a few blocks away with several roommates.
According to later court documents, the man used his computer to control the “silk road”, the largest crime market on the Internet. But at this time, Ublich was chatting with a netizen online, but he did not know that the netizen had been secretly contacting law enforcement. At 3:15 pm that day, Ublich did not notice that six FBI agents were approaching him quietly.
Agents dressed in plain clothes and walked through rows of bookshelves and beige walls. When they finally found him, they immediately rushed to catch him and pressed him against a floor-to-ceiling window overlooking Diamond Street.
Agents quickly sealed up his computer because they believed there was evidence of control of a huge illegal empire and 26,000 bitcoins received from Silk Road customers.
On the same day, the FBI controlled and closed the Silk Road website. For an online community full of drug dealers, thieves, hackers and assassins, this means the end of a lawless criminal paradise. For the rest of us, this is a moment of awakening. And underground criminal gangs also use Bitcoin as a new transaction method.
In the days that followed, the image of Bitcoin was criticized relentlessly. Few people have heard of this digital currency before, but now it is regarded as the currency of choice for illegal activities. This view is not groundless. The closure of the Silk Road provides us with a unique perspective, allowing us to understand the internal operation of a huge black market and the role Bitcoin plays in it.
This site was born in early 2011 and is essentially an illegal eBay, allowing independent vendors to post their products on this site. Buyers make purchases through the website, which acts as an intermediary between buyers and sellers. Its rapid success makes it very eye-catching. So far, the most revealing detail about the Silk Road is that the FBI issued a 33-page document requesting an arrest warrant to Ublich.
In the first two years or so, the Silk Road website facilitated 1.2 million illegal transactions with a total value of 9.5 million bitcoins and earned commissions of up to 614,305 bitcoins.
These data mean that, at that time, a cyber black market mastermind accumulated 5% of the world’s bitcoin. But even more incredible is that this is actually the rapid rise of a black market startup. Let’s convert these revenues to the USD price in 2014: it facilitated a $4.1 billion transaction with a profit of $266 million. It has 3,877 suppliers and sells products to 146,946 people worldwide. Bitcoin’s pseudo-anonymity makes this possible.
In fact, before the Silk Road, there was already an online black market. They also rely on virtual currencies that are difficult to trace. For example, Liberty Reserve, headquartered in Costa Rica, accepts anonymous wire transfers and provides electronic tokens. The other is E-Gold, which provides digital dollars anchored in gold. Both of these currencies have become trading currencies for the sale of drugs, weapons and child pornography.
But because they are centralized currency systems, the US government was able to close them in 2007 and 2013.
In contrast, no entity can stop Bitcoin. So users of the Free Reserve Bank and E-Gold turned to Bitcoin, and the Silk Road became their home.
The Silk Road cannot be accessed with any traditional web browser, because it only exists in the Tor network, which is a network in the network, which masks the addresses of all computers connected to it. (This is a good tool to ensure the safety of political dissidents, but it is also true for criminals.) It provides a layer of anonymity, allowing users to access websites while hiding computer addresses.
But Bitcoin changed the rules of the game. Buyers buy drugs but cannot know the identity of the seller. The seller mails the vacuum-packed cocaine, heroin or LSD to an unfamiliar address, and has no knowledge of the buyer’s identity information. Bitcoin’s anonymous digital wallet is one of them, but the Silk Road website has added an additional layer of confidentiality. The site temporarily hosts every payment. It has developed an internal bank called “Bitcoin Tumbler” to make it difficult to track any transactions from Wallet A to Wallet B.
It sends all payments through a series of virtual transactions, and a bitcoin may be sent repeatedly several times before reaching its true destination. In order to provide security for buyers and sellers, as well as provide one-stop services for all illegal goods, the site charges 8% to 15%.
This market attracts various criminals from all corners of the world. The sites are mainly drug dealers selling cocaine, heroin, LSD, marijuana, psychedelic mushrooms and high-end drugs. But not only that. The “forgery” column also provides fake passports, driver’s licenses, social security cards, credit card bills, car insurance records, and utility bills.
Services provided by hackers include hacking into Facebook, Twitter and email accounts. They sell computer viruses, password theft software and other destructive malware. There is also a tutorial on cracking ATMs on the website. Some even sell contact lists for professional killers.
The founder of the site is very mysterious. He calls himself “Horrible Pirate Roberts”, the name comes from William Goldman’s novel/movie “Princess Bride”. He is responsible for coordinating with suppliers, resolving disputes, and assuring everyone that the design of the website and the use of bitcoin as a payment method can keep their identities confidential.
That’s why in 2013, when a vendor named FriendlyChemist tried to blackmail him for $500,000 and threatened to publish the names of several vendors and customers, Roberts did what any black market leader would do. He found out the true identity of FriendlyChemist and found that FriendlyChemist was a married father with three children who lived in the suburbs of Vancouver, Canada, so Roberts hired another Silk Road vendor to kill him.
The horror pirate Roberts paid 1,670 bitcoins to the merchant as compensation, and demanded a photo of the man’s body. His purpose was achieved. These secret conversations, along with all internal records on the site, were revealed when the FBI traced a computer server that kept the site running. This is why they were able to find the webmaster and eventually Ublich himself.
In the months of Ublich’s arrest, he did not comment publicly on the arrest. The charges he faces include conspiracy to launder money, sell drugs, hack into computers, and assume the role of leader of a criminal group. In February 2014, he filed a plea of innocence in a Manhattan court. His New York lawyer, Joshua L. Dratel, asked to dismiss the case. The lawyer claimed that Ublich was nothing more than a “digital landlord,” and that his website was only used as a safe haven for criminals.
But the federal prosecutor refuted this claim.
However, the decline of the Silk Road did not end the Bitcoin black market. Just a month after the Silk Road was closed, a similar black market site that claimed to be “Silk Road 2.0” appeared on the Tor network. This site was dominated by another mysterious person who also claimed to be the horror pirate Roberts. (Just as the pirate in “Princess Bride” is not a male, people from different eras pass this name down regularly.)
Buyers and sellers have flocked to this point and continue to trade as usual.
This website acts as an intermediary between buyers and sellers. During the transaction, user funds are temporarily held by the website account. The buyer deposits his bitcoin into the Silk Road 2.0 account, and the seller withdraws funds directly from it.
But this iteration did not last long. In just a few months, the site claimed to have been hacked and lost 4,440 bitcoins kept for users. But this explanation is not tenable at all, so customers have accused the site’s administrators of forging hacking attacks, but in fact stealing funds themselves. However, because this entire Silk Road is illegal, no one has any legal recourse. This incident proves once again that Bitcoin (by design) is not suitable for suspicious middlemen.
All transactions are irreversible, as long as someone can access your digital wallet, your wallet will be searched out. But these figures do not reflect a huge awakening. As of April 2014, Silk Road 2.0 was even larger than its predecessor. The website sold 13,648 kinds of goods, including drugs, weapons, hacking tools, and various illegal services.
But Bitcoin’s peer-to-peer system is not limited to large, Amazon-style illegal markets. Physical stores have popped up everywhere, read their products carefully, and you will find out how bitcoin has truly become an underground transaction currency. Compared to fast bitcoin transactions, slow, expensive, and potentially recognizable wire transfers are a poor second choice.
As long as the reward is Bitcoin, there will be countless computer hackers willing to accept employment. Here is the operating cost of a service called “Rent-a-Hacker”: Want to hack someone’s email or Facebook account? This requires 0.64 bitcoins. Want to shut down a website or monitor someone’s computer? This requires 1.6 bitcoins. The following is the service description:
“As long as you give money, you can do anything, I can help you ruin another company or ruin the lives of others! Ruin your opponents, companies or people you hate, I can ruin them financially, or let them Go to jail. If you want others to become notorious child pornography users, it’s okay.”
On a website called “Arms International”, the prices of pistols and AK-47 are denominated in US dollars, but the seller only accepts Bitcoin. You can get a Glock 17 pistol and 100 rounds of 9mm bullets for $725 worth of bitcoin. A Romanian-made AK-47 is priced at US$560, and comes with a gift: bullets up to three magazines thick. The other is BMG (short for Black Market Firearms), which includes a variety of semi-automatic rifles and fully automatic submachine guns. All its prices are denominated in bitcoin and claim to be shipped overnight via FedEx within the United States.
A website called “ccPal Store” sells services for accessing stolen financial data in bulk. The package price for 100 PayPal accounts or eBay accounts is 0.23 bitcoins. The same amount of credit card accounts require 0.34 bitcoins. Another seller who runs “PrePaidBliss” sells debit cards with an amount of $700 to $1,000. An organization that calls itself a “Tor ATM predator” sells hardware that can be installed on ATM machines to monitor unsuspecting bank customers. The miniature camera is priced at $2,000, and the seller only accepts Bitcoin. The “Onion Identity Service” claims to provide forged British passports, which will somehow match the country’s government database. This service requires only 12 bitcoins. You can also get fake driving licenses for Denmark, the Netherlands and Norway at the same price.
All products are shipped free from Germany. Those who produce child pornography pay 0.02 bitcoins per month to use a service called “Matrix Image Uploader”, which can store user pictures and allow them to be on secret forums and member-only websites share it.
What’s more, a self-proclaimed “currency cleaner” service claims that it can clean dirty bitcoins because it works with legal entities to make the money appear to be used legally. Of course, this may also be a scam that steals Bitcoin. But it is worth noting that there are still many such services.
This is currently a relatively troublesome crime by law enforcement agencies. This can explain why the US Department of Homeland Security told the Senate Committee responsible for monitoring the activities of virtual currencies that they are taking a “positive attitude” towards the illegal use of virtual currencies. The following is a letter from the Department of Homeland Security official Brian de Vallance to the senator on November 13, 2013:
“The most critical capability of transnational organized crime is to quickly and quietly transfer large amounts of funds overseas. The anonymity of cyberspace provides criminal organizations with a unique opportunity to enable them to secretly launder money.”
In response to such incidents, the FBI established an organization specializing in emerging virtual currency threats (VCET) in cooperation with other federal agencies in early 2012. This is why the Financial Crime Enforcement Network (which monitors money laundering and terrorist financing activities) prohibits Bitcoin transactions. Trading platforms like Mentougou need to register for “Money Service Business (MSB)” licenses, just like their competitor MoneyGram in the money transfer industry.
Then the exchange needs to submit documents to prove that they know the true identity of the customer. This is an attempt to eliminate the anonymity of Bitcoin wallets.
These rules have been used to track Bitcoin money laundering. In early 2014, New York’s largest bitcoin trading platform, BitInstant, went bankrupt, and the platform was allegedly related to the Silk Road. Since the black market website Silk Road only deals with bitcoin, users of the platform have discovered business opportunities and made money by selling bitcoin to others.
According to federal investigators, a 52-year-old Florida man named Robert Faiella made money by providing Bitcoin to customers on the Silk Road. Faiella’s pseudonym BTCKing sold more than $1 million worth of Bitcoin to Silk Road customers. Faiella, with the permission of BitInstant CEO Charlie Shrem, withdrew all his Bitcoins from BitInstant.
Investigators said that Shrem knew that Faiella was involved in a black market transaction, but he never confided to the federal government, even though Faiella traded more than $20,000 a week for Silk Road customers. Shrem was arrested at John F. Kennedy International Airport and accused of operating a company illegally without a money transfer business license. His company went bankrupt immediately. His two largest investors, the twin brothers Cameron and Tyler Winklevoss, were estranged from him. Shrem’s vice chairman, the Bitcoin Foundation, also avoided him. Shrem denied these allegations and publicly stated that this was an attempt by the banking industry to pressure the Bitcoin community.
But there is a simpler explanation. As Ernie Allen, chairman of the International Center for Missing and Exploited Children, stated in testimony to the US Senate in 2013:
“The appeal of Tor and Bitcoin is based on the recognition of anonymity. Therefore, if the recognition of anonymity gradually weakens, we believe that criminal behavior will decrease accordingly.”
However, not all governments approach Bitcoin with a reasonable intention to close criminal networks. Most people don’t even know what Bitcoin is.