Silk Road: Why Bitcoin Value has Dropped 20% Today

If you haven’t heard, the value of Bitcoins has plummeted by 20% so far today because the Silk Road website has been shut down according to sources who also say the founder of the site has been recently arrested. Silk Road has become an underground site which allows illegal transactions which often involve Bitcoins. The value of the virtual currency has decreased potentially because investors fear future government regulation of Bitcoins and other online currencies.

Ross William Ulbricht, a 29-year-old graduate of the University of Pennsylvania School of Materials Science and Engineering known by the online alias “Dread Pirate Roberts,” was in fact arrested by the Federal Bureau of Investigation yesterday for his alleged involvement in the Silk Road online marketplace, according to court papers published this week.

The Silk Road website was shut down following Ulbricht’s arrest.

The value of the virtual currency has been volatile today – here is a link to the latest prices.

A 3-hour chart of Bitcoin prices as of today


Federal prosecutors in New York charged Ulbricht with narcotics trafficking conspiracy, computer hacking conspiracy and money laundering conspiracy. A criminal complaint also alleges that in March 2013, Ulbricht engaged in a “murder-for-hire” scheme where he enlisted one Silk Road user to murder another Silk Road user who was threatening to release the identities of all of the website’s users.

The operation that led to Ulbricht’s arrest was a collaboration between the FBI, police, and prosecutors in the Southern District of New York; since November 2011, agents claim to have made over 100 different drug purchases through Silk Road. The complaint estimates that Silk Road has processed transactions worth over a total of 9.5 million Bitcoins, which adds up to roughly $1.2 billion in sales.

The specific complaint is packed with offenses such as

The controlled substances involved in the offense included among others, one kilogram and more of mixtures and substances containing a detectable amount of heroin, five kilograms and more of cocaine-containing mixtures, 10 grams of substances containing LSD and likewise for methamphetamine.

The interesting issue here is can the website owner be liable for illicit activity taking place on a site? Certainly this is the case with Megaupload but not the case with an array of sites where comments and photos uploaded can be deemed to be breaking the law.

The feds are making the case that the site was created to sell illegal drugs – in other words if a site is designed expressly to break the law there is potential liability. This is the case here according to court documents – by the way aren’t the feds off because of the government shutdown? Certainly there is some interesting timing happening here.

Its also worth pointing out this case could certainly be a concern for Bitcoin investors as it mentions the virtual concurrency was used as a money-laundering vehicle.

Moreover, the complaint goes on to explain that Dread Pirate Roberts or (DPR) intentionally hid his server location by utilizing the TOR network and used Bitcoins to anonymize the financial interactions.

The agent who is quoted in the report says that the goal of Silk Road was to make illegal transactions as easy to conduct as a mainstream e-commerce site and that it received in commissions of over 600,000 Bitcoins or $80 million dollars

In further reading of the document, the case is made that the site is designed primarily to sell illegal drugs – but it does not seem to make the case. In other words if the site was also able to be used to sell Pez dispensers as well as drugs does that mean it is expressly being designed to support illegal activities?

To counteract such arguments the complaint explains that sellers are advised to vacuum-seal packages containing narcotics in order to avoid detection. It also points out that the site gives information on how to keep site activity anonymous – not that there is anything illegal about such suggestions (yet anyway).

There is also mention of a Silk Road using a tumbler when processing  transactions in order to divide up the transaction into difficult-to-detect random dummy transactions obscuring the transaction details between the buyer and seller. Quite often throughout the complaint the agent uses the phrase “Based on my training and experience” when trying to frame conduct of the defendant in a negative light. In one case he uses this phrase to support his feeling that the only function served by such tumblers is to assist with the laundering of criminal proceeds. If there is a weakness in the complaint (which I didn’t read in-full) it is this statement – buyers and sellers could want to keep their transactions personal for any number of reasons.

When Napster was shut down, a number of P2P sites allowed file sharing… One has to imagine that this shut down will only temporarily halt the trafficking of illegal goods online. As a result of this case, we can expect more sites to become popular – perhaps based outside the US that will be even more difficult for law enforcement agencies worldwide to get to. One would imagine the value of Bitcoins should be unaffected over the long-term.

See also my past posts:

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