Washington has no idea what to make of the Dread Pirate Roberts.

As Lev Grossman and I write in this week’s cover story, the Dread Pirate Roberts allegedly ran the Silk Road, the world’s most successful online drug bazaar, until the feds caught him earlier this month. His real name, according to a 39-page federal complaint against him, is Ross Ulbricht, 29. He supposedly took the pseudonym from a character in the movie and book, The Princess Bride. In the Silk Road, DPR, as his followers called him, created a business model for anyone wanting to sell illicit items online using free encryption software called Tor and the virtually anonymous crypto-currency Bitcoin. Though the feds have taken Silk Road offline, there are plenty of folks lining up to be the next Dread Pirate Roberts.

Lev and I examine the greater implications of the Deep Web, the massive and growing anonymous area of the Internet. But from the perspective of lawmakers and law enforcement in Washington, Silk Road presents a double conundrum. It’s a blueprint for criminals the world over at a time when FBI resources are stretched thin and political will to empower government snooping has cratered. And it has created a regulatory headache in figuring how to deal with whole new currencies, tax havens and virtual online markets.

While Tor is used by everyone from law enforcement to Syrian dissidents to protect valuable information, it is a double-edged sword. Many experts warn that groups ranging from the Russian mafia to international drug cartels are looking closely at the lessons learned from the Silk Road. It took the FBI more than two years of investigative work to find Ulbricht. They don’t have the resources to compete with Silicon Valley in hiring, or the tools—a long-hoped for modernization of the law governing online wiretapping is on ice in Congress thanks to Edward Snowden.

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Developing technology to fight the Deep Web, or the anonymous non-searchable web, “is not adequately funded—it’s nowhere near adequately funded,” says Marcus Thomas, former assistant director of the FBI’s technology division and now on the advisory board Subsentio, which helps companies comply with online warranted wiretaps. “Historically it was well funded, but recently especially with sequestration, it’s been hard hit. It’s always been a difficult thing to build cost benefit analysis for. How much money should you spend building a technology you may not use for a year, if ever?”

Chester Wisnieski, a senior information technology security adviser at Sophos, adds that the FBI doesn’t have enough trained staff. “If you look at the FBI—how many agents do they have in cyber? Less than 200,” he said. “There’s been a very fast shift of traditional crimes moving online and don’t have skilled agents to deal with it.”

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The policy problem is compounded by Bitcoin, which represents another set of jurisdictional tangles for Washington. The Senate Homeland Security Committee, officials tell TIME, plans on holding hearings on Bitcoin within the month. The committee sent letters to nine federal agencies in July asking for their thoughts on Bitcoins and other virtual currencies in the hopes of developing a holistic approach to the so-called cryptocurrency that neither stifles the currency’s potential nor enables criminals to abuse it. “As with all emerging technologies, the federal government must make sure that potential threats and risks are dealt with swiftly,” Committee Chairman Tom Carper, a Delaware Democrat, and the committee’s top Republican, Tom Coburn, wrote in the letters. “However, we must also ensure that rash or uninformed actions don’t stifle a potentially valuable technology.”

Bitcoin can be a force for good. “We’ve grown used to the idea that virtual transactions should be tracked because they can be; whereas Bitcoin brings anonymity back into online commerce,” says Sasha Meinrath, director of the New America Foundation’s Open Technology Institute. “It’s amazing how scary this notion is to law enforcement. But I see it as akin to trade in gold, cash transactions, and barter: not something to be feared, but simply another useful tool for commerce.”

And yet, virtual currencies have a complex past. In recent years, Liberty Reserve and e-Gold both ran afoul of the law, mostly for money laundering. U.S. Immigration and Customs Enforcement seized funds from the world’s largest Bitcoin exchange, Mt. Gox, in May charging that the company was operating an unlicensed money transmitting service. Mt. Gox has since moved to put names to Bitcoin transfers and register with federal and state governments. There is about $2 billion Bitcoin in existence today. Authorities say Silk Road transactions amounted to $1.2 billion in Bitcoin.

Indeed, regulators have already taken an active interest in Bitcoin. The Senate Finance Committee is looking at language to regulate virtual currencies its tax code overhaul. They’re also considering giving the IRS more money to track virtual tax havens, Senate sources tell TIME. A Government Accountability Office report in June warned that virtual currencies like Bitcoin could be abused as tax havens. New York Financial Services Superintendent Benjamin Lawsky sent subpoenas to 22 Bitcoin businesses this summer saying it was considering new regulatory guidance on virtual currencies. “If virtual currencies remain a virtual Wild west for narcotraffickers and other criminals,” he said announcing the subpoenas, “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.” A Commodities Futures Trading Commissioner said his agency is looking into regulating Bitcoins as a commodity. And Treasury’s Financial Crimes Enforcement Network put out guidance in March saying Bitcoin brokers would have to follow wire service regulations—a potentially onerous requirement as each wire service must register state by state.

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All of this means that no one is quite sure how to handle bitcoin: is it a currency? A bond? A commodity? Should dealers be regulated like wire services or brokers? Should profits be taxed as capital gains? Few in Washington have even begun to consider these questions, and yet given the rapid growth of Bitcoin, the Deep Web and websites like the Silk Road they will surely be forced to soon.

Internet users are increasingly looking for anonymity as their preferences and personal information are tracked and traded like pork belly futures. For many, the Deep Web represents a haven from those prying eyes. But, as in real life, when there’s anonymity, there are dark alleys where people will abuse it. In the physical world, should we choose it, we can live a cash-based anonymous existence. Should we be able to do so online, even if it means anyone can buy drugs, fake IDs or illicit weapons as well? These are the questions Washington must grapple with as it looks at how to regulate cyrpotcurrencies and police the Deep Web.

Click here to join TIME for as little as $2.99 to read Lev Grossman and Jay Newton-Small’s full cover story on the Deep Web.