End of Silk Road may strengthen the bitcoin

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Posted: Saturday, October 5, 2013 12:00 am

The once-obscure bitcoin has been making news all year.

There have been stories about the wild swings in the virtual currency's exchange rate, moves by financial regulators to shut down some bitcoin-related businesses, and the attempts by its boosters to gain more mainstream credibility.

But this week, the bitcoin community was hit with a story potentially bigger than all the others: the seizure of the illicit Silk Road website and the arrest of its founder, Ross William Ulbricht, a 29-year-old former physics student from San Francisco.

For two years, Silk Road has been the bogeyman for bitcoin critics. They pointed to the ability to buy drugs and guns on the site with bitcoin as evidence the virtual currency could enable terrorist and criminal activity.

Silk Road gained widespread notoriety in 2011 when Sen. Charles Schumer, D-N.Y., singled it out as the poster child for how bitcoin could be used by terrorists and criminals.

“Literally, it allows buyers and users to sell illegal drugs online, including heroin, cocaine and meth, and users do sell by hiding their identities through a program that makes them virtually untraceable,” Schumer said at a June 2011 press conference calling for a crackdown on Silk Road.

“It's a certifiable one-stop shop for illegal drugs that represents the most brazen attempt to peddle drugs online that we have ever seen.”

So, with the crackdown this week, it would seem like a dark day for the bitcoin community. But several bitcoin observers took a more nuanced view of the Silk Road story.

Adam Levine, editor-in-chief of the Let's Talk Bitcoin blog and podcast, saw the arrest as part of bitcoin's natural evolution from renegade currency to mainstream adoption.

“When you tame the West, you've got to hang all the outlaws,” Levine said. “It's an inevitable transitional phase. If bitcoin is going to turn into a mainstream thing, this has to happen. The legitimate uses cannot be overshadowed by the illicit uses.”

Jerry Brito, a senior research fellow at the Mercatus Center at George Mason University, noted the shutdown of Silk Road was much different from other government actions against bitcoin-related endeavors.

State and federal regulators have moved to shut down various bitcoin-related businesses. Those businesses were trying to operate legitimately but were accused of violating various currency rules, Brito said.

By comparison, Silk Road was focused on using bitcoins to foster transactions.

The actual Silk Road marketplace, however, was not simple to find or trace. It was cloaked by an Internet tool for anonymous web use known as Tor. Once on Silk Road, all transactions had to be paid in bitcoin.

The virtual currency was created in 2008 by a programmer using the pseudonym Satoshi Nakamoto.

Bitcoin is really an open-sourced protocol that anyone can add to or alter. These protocols run across a wide number of servers around the world for regulating the creation and trading of bitcoins.

People can get bitcoins either by buying them with traditional currency or by “mining” them. The mining process involves solving complex computing puzzles that reward a person with bitcoins.

Bitcoin boosters like it because it is a currency that's decentralized, not controlled by any government or company.

Indeed, it turns out that, according to the indictment, a large portion of existing bitcoins seemed to have flowed through Silk Road at one point or another.

But Brito says some elements of the arrest and the reaction should provide some reassurance about bitcoin's future.

For instance, while the value of a bitcoin dropped sharply after the news of the arrest, from about $140 to $118, the currency has since rebounded. A year ago, one bitcoin traded for $14.

Brito said some folks have wondered whether services such as Silk Road represented the bulk of bitcoin-related purchases.

“A lot of folks have made the case that bitcoin's only value was that it could be used to buy drugs or guns on Silk Road,” he said. “If they're right, and that's bitcoin's only value, well, it should be trading at zero.”

Also, the fact that law enforcement officials were able to track down and seize Silk Road means they're developing the tools to fight more sophisticated digital crimes, Brito said.

“The fact that law enforcement could take it down shows there's nothing different about bitcoin,” Brito said. “Yes, it has a potential illicit use like any other tool. Law enforcement is going to have to develop new techniques to deal with it.”

Gary Kremen, a Silicon Valley entrepreneur, said he hopes the scrutiny of bitcoin enterprises by government agencies will get bitcoin entrepreneurs to take seriously issues such as auditing and compliance with financial regulations.

“If bitcoin is going to go mainstream and be respected, these issues must be addressed,” Kremen said.

>> Bitcoins are a digital currency that's increasingly used to make payments in online transactions. Bitcoin software is designed to be untraceable, making it an attractive tender for those seeking to trade anonymously.

>> There are an estimated $1.5 billion in bitcoins on the market. Users store them in digital wallets.

>> Bitcoins were introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto.

>> There are about 11.8 million bitcoins in circulation, according to the tracking website Bitcoincharts. The system Nakamoto designed caps the number at 21 million.

>> It's hard to buy bitcoins. Most bitcoin exchanges require users to wire money from their banks to the exchange. In theory, you could find (“mine”) a new bitcoin by using a high-powered computer to discover a hidden series of letters and numbers that matches up with the Bitcoin security keys specified by Nakamoto. But all the easy ones have been found.

>> Transactions are recorded on the Blockchain, a public online ledger.

>> Some enthusiasts have issued bills and coins that serve as physical proxies for the currency. Online exchanges have emerged where bitcoin holders are able to trade the virtual currency for real dollars, euros and other legal tender.

>> Some of the world's top computer security experts have tried to hack the open-source Bitcoin protocol and failed. While anyone can see transactions made from a Bitcoin address — a string of about 34 numbers and letters — the owner is hidden.

>> Bitcoins do not involve an intermediary like a bank, so there are no processing fees as with online money services such as PayPal.

— From World-Herald press services

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