For years, Bitcoin has been the Silk Road's biggest strength. Escrow wallets let money change hands safely and easily, bitcoin tumblers let users keep drug transactions at arm's length, and, for a while at least, it kept everyone off the radar of law enforcement. In return, the Silk Road gave Bitcoin its first major infusion of die-hard users, a base that would drive the currency higher and higher.

The so-called "prosecution futures" are coming due

But now, as Ross Ulbricht defends himself against charges of running the Silk Road and profiting from drug transactions, Bitcoin may be the single biggest problem for his defense. The same features that made Silk Road possible have now turned against him, and casual observers are realizing that Bitcoin isn’t as anonymous as they thought. The public Bitcoin ledger details Ulbricht's enormous financial holdings and a wealth of potentially incriminating transactions. Now that his wallet address has been discovered, the perfect anonymity tool has turned into the perfect source of evidence. Skeptics sometimes called the currency "prosecution futures," and now it looks like some of those futures are coming due.

The problem is coming into focus because of new details about Ulbricht’s defense strategy, made clear in yesterday’s opening statement. The defense is admitting from the outset that Ulbricht created the Silk Road and ran it for the early months, a bold tactic that many are concerned may backfire. Instead of claiming a full mistaken identity, the defense is simply claiming Ulbricht didn't profit from the drug trade that happened on the Silk Road, having already handed off the site to an unnamed accomplice. As lead defense attorney Joshua Dratel put it in his opening statement yesterday, "the real Dread Pirate Roberts is still out there."

"Bitcoin is insanely traceable."

As a result, all the prosecution has to do is prove Ulbricht was profiting off the Silk Road's drug transactions — something that Bitcoin's public blockchain makes it easy to do. Every Bitcoin transaction is publicly recorded in the collective blockchain, giving researchers an easy view of how much is in any account at a given time. "Bitcoin is insanely traceable," says Nicholas Weaver, a researcher at UC Berkeley's International Computer Science Institute. "The Silk Road bitcoins are well known, not just the ones seized but the entire cloud of Bitcoins. Add in the known purchases from law enforcement, and it becomes downright trivial to create the "history cluster" that is Silk Road." This kind of tracing has become a popular subject for Bitcoin-minded academics, and with access to the Silk Road's server logs, there should be plenty of evidence connecting Silk Road transactions to Ulbricht's personal wallet, which was seized as part of the initial raid. That's not the same as convincing a jury, but it's likely to cause serious problems for Ulbricht's defense in the very near future.

Blockchain problems have also cropped up in the defense's treatment of the $28 million found in Ulbricht's Bitcoin wallet. The defense is claiming it was simply currency-trading revenue, created by the astronomical rise in the value of Bitcoin over the period in question — but the blockchain makes it easy to check that claim. Prosecutors can easily see all the transactions that wallet made. "Making the claim that this was revenue from trading is a very dangerous claim to make," says Weaver. "The defense attorney better hope Ulbricht really was a brilliant Bitcoin trader, because that defense is easy to shred otherwise." If Ulbricht really did control 144,000 bitcoin in 2011, that money would show up in the wallets he controlled at the time. If the money can't be found, it suggests the currency-trading story isn't much more than hot air.

"The defense attorney better hope Ulbricht really was a brilliant Bitcoin trader, because that defense is easy to shred otherwise."

Ironically, it would have been much easier to conceal these assets in the traditional financial system. Conventional money laundering is still an enormous headache for prosecutors, and subpoenaing the transaction records for an offshore bank is much harder than simply checking the blockchain. Even earlier cryptocurrencies like Liberty Reserve would have made it harder to trace money as it flowed through the system. It also would have been harder to seize. As long as law enforcement doesn't know about a given stash, that money can also be used to pay associates under the table, an extremely common tactic for evading organized crime prosecutions. But as far as we can tell, Ulbricht didn't get any of those benefits. Police seized Ulbricht's Bitcoin wallet along with his laptop, and he's since filed a forfeiture motion admitting that all the bitcoins were his. It might be the simplest $28 million seizure the FBI has ever made.

All these issues stem from a misunderstanding of Bitcoin itself. The service isn't technically anonymous: it's pseudonymous. Each wallet has a hard and persistent identity and a wealth of data associated with that identity. If you don't know who's behind a given wallet, that looks a lot like anonymity, but once a person is tied to a given wallet, their financial activity becomes instantly and painfully public. That feature has been important in the past, most notably in the aftermath of the Mt. Gox theft, but it's never played out as publicly as it did in the Ulbricht case.

It's a realization that's already sending shockwaves through the bitcoin world. The exchange rate has plummeted in the hours since Ulbricht's defense attorney spoke, falling under $200 for the first time in more than a year. It's hard to say for sure that the drop is connected, and in the long term, it may well be good news for the currency, driving out criminal activity in favor of more innovative uses. Still, as the currency's most infamous customer stands trial, the world is less sure of bitcoin than its ever been.