The FBI has brought down one of the world's biggest virtual black markets. But what does that mean for Bitcoin, Silk Road's competition and drug dealers everywhere?

What is the Silk Road?


A virtual black marketplace operating on the Deep Web. Launched in February 2011, it ran using Tor, which ensured anyone browsing could do so anonymously by bouncing messages back and forth on volunteer relays. According to the FBI, it ran off servers in several countries. Stealth Mode offered an even more secure option, whereby vendor details were only attainable via a specific URL a user had to have prior knowledge of.

Does it just sell drugs?

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No, but anything ranging from prescription drugs to heroin does make up about 36 percent of all sales, according to a Carnegie Mellon University study. The report revealed Silk Road sells £1.22m worth of black market goods every month, with items including ATM hacking guides, stolen credit card information and hitmen contacts listed.

Weapons and ammunition sales moved to a sister site known as the Armory in March 2012.


How are payments made?

It only accepts Bitcoin, and operates using an internal bank every user has an account with (around a million exist). Bitcoin addresses used by buyers and sellers are stored in Bitcoin wallets on the site's servers. Because all Bitcoin transactions are publicly available through Blockchain, Silk Road used a "tumbler" to make tracking difficult, described as "a complex, semi-random series of dummy transactions... making it nearly impossible to link your payment with any coins leaving the site". Anyone holding an account had to pay a fee, and sales commissions were between eight and 15 percent.

So who runs the show?

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As we've seen from the FBI bust, allegedly a man named Ross William Ulbricht, arrested in San Francisco, 2 October. Ulbricht, AKA Dead Pirate Roberts, along with a small team of employees, controlled the servers and infrastructure, set the terms of service and even ran a customer support system which helped wheedle out scam artists.


How did the FBI find Ulbricht and the Silk Road servers?

There are two answers -- the official one, as outlined in the indictment issued against Ulbricht, and the rumours. As

Guardian journalist Charles Arthur points out, "the initial affidavit doesn't have to describe how the FBI actually built its case. It only has to describe how it could have built its case, and persuade a judge to sign an arrest warrant". So the FBI may have chosen to leave a good chunk of information out: namely, its tactics for identifying perpetrators, which now include four UK men, arrested this week.

The official answer

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Some of the first known forum posts mentioning the Silk Road were by a user called "altoid" (Ulbricht), who also sought an "IT pro in the Bitcoin community" and gave out a Gmail account Google linked to Ulbricht. A YouTube video surfaced in which Ulbricht spoke about why he moved to San Francisco, his plans to launch a startup and his drug use. Using his real name and photo, he went on to allude to his activities on LinkedIn, before nine fake IDs he ordered (featuring his real photo) were seized in Canada. Then there are the two alleged murder solicitations, one of which involved Ulbricht asking an undercover FBI agent to kill a Silk Road employee (agents had been undercover on the site since 2011 making transactions).

All this relied on the FBI tracking and reading messages sent using Tor, which should be undetectable. It's also claimed the FBI obtained a complete copy of the Silk Road server in July by identifying the company used to host it.

The rumours

The Guardian's Charles Arthur points to a comment by Nicholas Weaver, which said if the FBI did copy the servers, it probably did so covertly, hacking Silk Road to discover the IP "by generating a non-Tor phone-home". They would have then contacted the country of the hosting provider, that Weaver says is likely a virtual-machine since the FBI did not have to take the service down to copy it. For more on why the indictment doesn't fully explain the shutdown, read the full Guardian article here.

What's happened to the Silk Road's stash of bitcoins?

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The FBI "downloaded" 26,000 -- about $3.6 million. Ulbricht's own fortune amounts to a whopping 600,000 bitcoins worth $80 million, but the FBI reportedly cannot access it. You need to know a Bitcoin wallet's password, and Ulbricht may have piled extra encryptions on top. "Ulbricht's coins are not irretrievable," Marco Santori, chairman of the Bitcoin Foundation's Regulatory Affairs Committee, tells Wired.co.uk. "If he refuses to give the DOJ his private key, the DOJ can ask the court for a seizure order compelling Ulbricht to provide it. If he refuses, he could be sentenced to jail time without the DOJ ever having to prove a thing."

What will the FBI do with the bitcoins?

The US government agrees the currency can be used for legitimate purposes, but has been investigating the darker underbelly associated with it for years -- in May prosecutors shut down Liberty Reserve, a Costa Rican digital currency company used to launder money. How then, can it be seen to use a currency it is battling on several fronts, legitimate or not? Our colleagues over at Wired US have published a rundown of the possibilities.

They point out it can't be used to make investigatory transactions on other virtual blackmarkets -- since Bitcoin is public, anyone can follow transactions that leave the FBI's wallet.

It's unlikely it will exchange them for dollars, considering major services like Mt.

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Gox stopped exchanging dollars this year after a run in with the US government. They could auction it off as they do confiscated goods, but this would mean considering it an asset, not a currency. Santori predicts, "The seized coins will probably be sold back into the market, but that could take years" --

whatever happens, it will be after the case closes.

What does the shutdown mean for Bitcoin?

Although the number of ways you can spend your bitcoins is increasing, with even a chain of UK pubs accepting the currency, figures released by the FBI show the Silk Road was responsible for the lion's share of all Bitcoin transactions. Sales totalled $1.2 billion and commission $80 million (between February 2011 and July 2013), while the total value of all bitcoins in circulation is $1.5 billion. It appears as though Silk Road-style services are driving the currency's evolution.

Not so, argues Santori. "The Silk Road shutdown is a watershed moment for Bitcoin. Just like the March FinCEN guidance demonstrated that your bitcoins were not contraband, the shutdown has demonstrated your bitcoins are in no way dependent upon Silk Road or illicit activity for their value.

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If they were, we would have seen Bitcoin prices sink to near-zero."

It's true that in the days following the shutdown the value fell by around 20 percent, but within days it had rallied almost back to pre-shutdown levels. Besides, Bitcoin's value has always been volatile.

More and more businesses are cropping up based on Bitcoin, with Bitcoin exchange CoinLab announcing in August it will start incubating Bitcoin startups, and VC data firm CB Insights announcing Bitcoin startups raised $12 million in three months this year.

But isn't Bitcoin's anonymity what drove its popularity on the Silk Road? Surely this is still a thorn in the government's side?

Yes and no. Bitcoin is paradoxically a totally public transaction system (with all payments visible in a file known as the Blockchain, posted to the Bitcoin network), that can be used almost totally anonymously.

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Users have no way of checking each other's true identity. However, as soon as an individual links an address to someone else for payment, those transactions are published.

Hence, after the FBI's Bitcoin wallet was identified as the holder of the seized Silk Road funds, protestors began sending tiny amounts of Bitcoin to the wallet in order to publicly post messages. It's for this reason Sarah Meiklejohn of the University of California, San Diego,

published a study claiming it would be almost impossible to launder large amounts of money covertly using Bitcoin: "The money that's moving around the system every day is just not enough to disguise large quantities of Bitcoin." "Bitcoin was never anonymous -- it is and has always been, at best, pseudonymous," says Santori. "The public challenges facing it are not Bitcoin challenges; they are digital currency challenges... Bitcoin is the tip of the spear that is driving adoption today, but there are other, still nascent, digital currencies out there that will benefit from the Bitcoin's successes. "Ultimately, I've found that regulators don't care whether people are transferring value using dollars, bitcoins or pukka shells. Their goal is to protect the public and prevent crime."

So, does all this mean the end of the virtual black market?

Not at all. Silk Road had competitors, including Atlantis, Sheep and Black Market Reloaded, where it seems a lot of vendors have already moved. The word in forums is Silk Road 2.0 is in the making. According to one poster affiliated with Atlantis, there are five projects in the race to fill Silk Road's shoes. Rumours are it's being replicated completely, and is near completion.

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Is it possible to mirror Silk Road, as is being claimed?

David Emm, Senior Security Researcher at Kaspersky Lab, told Wired.co.uk: "How far it could build on Silk Road would depend on whether anyone still has access to the Silk Road infrastructure and how far they could use it without risk of detection by law enforcement agencies."

Surely the fear of being detected will deter anyone from building a replica, let alone using one?

You'd think so, but back when the Silk Road suffered a Distributed Denial of Service attack earlier this year, Dead Pirate Roberts wrote that as well as considering modifying the Tor software being used, they might "move to a semi-private scheme where users will be given access through many private URLs" -- a total Stealth Mode.

Total Tor usage may also protect new administrators.


A user known as The Godfather said: "We will come out with a newer, sleeker, more secure version of Silk Road that will be 100% untraceable. Why will this Silk Road be better? From the get-go, we have only made communications with each other through Tor so we all remain completely anonymous, even to each other. LONG LIVE SILK ROAD!!!!!!!!!"

Well then, what was the point?

"Any disruption to cybercriminal activities is positive -- for one thing, it shows it's not a risk-free activity," says Emm. "However, it's like doing the housework: the job is never 'done' -- in the case of cybercrime, because the perpetrators continually seek new ways of achieving their goals and covering their tracks." And the FBI has certainly made a big dent in virtual black market activities.