Will ‘Silk Road’ Bust Kill Bitcoin? Bitcoin Prices Plunge on Bust of Online ‘Black Market’

Will ‘Silk Road’ Bust Kill Bitcoin?

The eBay of the black market has met its demise. The U.S. Justice Department has shuttered Silk Road and indicted its alleged founder.

An online marketplace founded in 2011, Silk Road facilitated commerce in illegal goods and services, including narcotics, counterfeit currency and hacking services, with payments processed in the digital currency Bitcoin. Perhaps not coincidentally, the price of Bitcoin fell to about $119 at 3 p.m. EST, down from $145 at the end of September.About 600,000 bitcoins worth about $1.2 billion have been exchanged on Silk Road, which prosecutors called “the most sophisticated and extensive criminal marketplace on the Internet.” The feds seized 26,000 bitcoins — worth about $3.6 million — from the Silk Road in what prosecutors called the largest bitcoin haul in history.

Ross William Ulbricht, 29, known on Silk Road as “Dread Pirate Roberts,” was arrested yesterday in San Francisco and charged with narcotics-trafficking conspiracy, computer-hacking conspiracy and money-laundering conspiracy. Ulbricht calls himself an “investment adviser and entrepreneur” on his Linkedin profile, but prosecutors said his activities included making a death threat against a Silk Road user who had threatened to reveal information about the site.

While the feds celebrated, Silk Road travelers took to Reddit where they are freaking out about lost money, unconsummated drug deals and the declining value of Bitcoin.

What will Silk Road’s end mean for the popular crypto-currency? Before Bitcoin was sufficiently mainstream to constitute nonprofit donations or warrant its own exchange-traded fund, it was best known for its utility (and ubiquity) on Silk Road. Bitcoin’s association with illicit trade was once central to its identity — and is still an impetus to government scrutiny.

But Bitcoin no longer needs Silk Road. For one thing, there are other online marketplaces where Bitcoin could be used illegally. Perhaps more important, as Reuters reported yesterday, in the three months ended in June, Bitcoin startups raised almost $12 million from venture capital investors. Bitcoin may still be high-risk, but a customer base of legit startups and fewer drug lords probably bodes well.

(Kirsten Salyer is the social media editor of Bloomberg View. Follow her on Twitter.)

‘Silk Road’ Operator Charged in Bitcoin Drug Conspiracy

The operator of the “Silk Road Hidden Website” was charged with running a “sprawling black-market bazaar” where anonymous users paid Bitcoin digital currency for illegal drugs and phony identification documents.

U.S. prosecutors said Ross William Ulbricht, known on Silk Road as “Dread Pirate Roberts,” ran the site as “the most sophisticated and extensive criminal marketplace on the Internet” from January 2011 to September 2013. He tried to have one user killed for attempting to extort money from the site, prosecutors said in a criminal complaint unsealed today in Manhattan federal court.

“The site has sought to make conducting illegal transactions on the Internet as easy and frictionless as shopping online at mainstream e-commerce websites,” the government said in a civil forfeiture complaint unsealed today. The site generated sales of about $1.2 billion and about $80 million in commissions for Silk Road, prosecutors said.

Ulbricht, 29, was charged with narcotics trafficking conspiracy, computer hacking conspiracy and money laundering conspiracy. The government seized the website and is seeking control of millions of dollars of Bitcoins held by Silk Road.

He was arrested yesterday in San Francisco and scheduled to appear this morning in federal court there, according to Julie Bolcer, a spokeswoman for Manhattan U.S. Attorney Preet Bharara.

The criminal case is U.S. v. Ulbricht, 13-mg-023287; the civil forfeiture case is U.S. v. Ulbricht, 13-cv-06919, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

Bitcoin Prices Plunge on Bust of Online ‘Black Market’

The price of Bitcoins listed on the Bitstamp Ltd. exchange plunged as much as 33 percent after charges were unsealed for the operator of an online marketplace for drugs and other illicit goods.

Ross William Ulbricht, who runs the “Silk Road Hidden Website” was charged in federal court in New York today for running a “sprawling black-market bazaar” where anonymous users conducted transactions with Bitcoins.

Bitcoins exist as software that’s designed to be untraceable, making it an attractive tender for those seeking to trade anonymously via the Web. The price for one unit dropped today to about $85 from $127. That’s probably due to speculation that demand for the digital money will shrink after the U.S. government said it seized the Silk Road website, according to Jered Kenna, Chief Executive Officer of virtual-currency exchange Tradehill Inc.

“The question here is: What is it going to do to the Bitcoin ecosystem?” Kenna said in an interview. “Are we going to find out that 90 percent of Bitcoins were used on Silk Road, or that 1 percent of Bitcoins were used there? The Silk Road just threw a lot of uncertainty into it.”

U.S. prosecutors said today that Ulbricht, known on Silk Road as “Dread Pirate Roberts,” ran the site as “the most sophisticated and extensive criminal marketplace on the Internet” from January 2011 to September 2013. The site generated sales of about $1.2 billion and about $80 million in commissions for Silk Road, they said.

Virtual Money

Since being introduced four years ago by a programmer or group of programmers going under the name of Satoshi Nakamoto, Bitcoin has become popular way to pay for goods and services on the Internet, with 11.8 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks the digital currency’s activity.

While Bitcoins are designed to be untraceable, that’s not always guaranteed since most transactions leave a record of the exchange. Although the currency can be used for illicit goods, it’s also becoming a popular way to buy and sell legitimate products and services, from cupcakes to Web hosting.

Bitstamp and several other online exchanges have emerged where Bitcoin holders are able to trade the digital currency for dollars, euros and other legal tender. With the growing use of Bitcoins, driven in part by speculative demand, the currency is up about tenfold over the last year, according to Bitcoincharts.

Benjamin Lawsky, superintendent of New York’s Department of Financial Services, said that any regulation of the nascent Bitcoin industry has to include transparency on who does the trading of the virtual currency. He said in an interview with Bloomberg editors and reporters that his primary concern involved adding anti-money-laundering safeguards.

Illegal Transactions

Ulbricht, 29, was charged with narcotics trafficking conspiracy, computer hacking conspiracy and money laundering conspiracy. He tried to have one user killed for attempting to extort money from the site, prosecutors said in a criminal complaint unsealed today in Manhattan federal court.

“The site has sought to make conducting illegal transactions on the Internet as easy and frictionless as shopping online at mainstream e-commerce websites,” the government said in a civil forfeiture complaint unsealed today.

Ulbricht was arrested yesterday and appeared in federal court in San Francisco today, according to Julie Bolcer, a spokeswoman for Manhattan U.S. Attorney Preet Bharara.

The criminal case is U.S. v. Ulbricht, 13-mg-023287; the civil forfeiture case is U.S. v. Ulbricht, 13-cv-06919, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

Silk Road ‘Dread Pirate’ Seen Running Online Drug Bazaar

An online $1.2 billion “black-market bazaar” where anonymous users paid Bitcoin digital currency to buy heroin, LSD, phony passports and computer hacking services was shut down by the U.S. and its alleged 29-year-old mastermind arrested.

Ross William Ulbricht, who the U.S. said ran the “Silk Road Hidden Website” from January 2011 until last month, was known as “Dread Pirate Roberts” or “DPR,” after a character in the 1987 film “The Princess Bride.” Prosecutors said he operated “the most sophisticated and extensive criminal marketplace on the Internet.”

Ulbricht was also indicted in federal court in Maryland for allegedly trying to arrange the murder of an employee.

Federal agents seized Silk Road, along with Bitcoins worth $3.6 million, and shut down the site today, according to Julie Bolcer, a spokeswoman for Manhattan U.S. Attorney Preet Bharara. Ulbricht was arrested yesterday in San Francisco, and made his initial appearance today in federal court there.

“The site has sought to make conducting illegal transactions on the Internet as easy and frictionless as shopping online at mainstream e-commerce websites,” the government said in a civil forfeiture complaint unsealed today in federal court in Manhattan.

The price of Bitcoins listed on the exchange Bitstamp Ltd. fell as much as 22 percent today. Bitcoins’ price has been unstable for months, plunging by more than 70 percent in the spring, to about $60. The latest drop is one of the sharpest in the virtual currency’s history.

$80 Million Commissions

The legal documents made public today provide a window into an enterprise that, according to the government, generated $1.2 billion in illicit sales and took in $80 million in commissions in less than three years. Electronic communications reviewed by federal agents show Ulbricht handled the routine personnel matters faced by any small-business man at the same time he was taking out a contract to kill one of the site’s users, prosecutors said.

Ulbricht graduated form the University of Texas with a physics degree in 2006, according to the complaint. He then attended graduate school at the University of Pennsylvania School of Materials Science and Engineering from 2006 to 2010.

DPR employed a small staff of administrators, whom he paid an average of $1,000 to $2,000 a week to help operate the site, FBI Agent Christopher Tarbell said in the complaint against Ulbricht. The administrators filed weekly reports on their activities, asked him for guidance in dealing with user inquiries and sought permission before taking leave.

Onion Router

Ulbricht ran Silk Road on “The Onion Router” or “Tor” network, an Internet network designed to hide the identities of users by making it almost impossible to identify computers used to access or host websites, prosecutors said.

On Sept. 23, Silk Road had almost 13,000 listings for illegal drugs, under categories including cannabis, dissociatives, ecstasy, intoxicants, opioids, precursors, psychedelics and stimulants, according to the complaint. Under its “services” heading, users could hire computer hackers, buy instructions for hacking cash machines or obtain a list of black-market contacts to get anonymous bank accounts, counterfeit money, guns, stolen credit card information and hit men.

A “seller’s guide” on the site advised users to vacuum seal packages containing drugs to avoid detection by police dogs and drug-detection machines.

On Aug. 5, 2011, DPR notified users of a new category of illegal items for sale on the site.

Forgeries Category

“We are happy to announce a new category in the marketplace called forgeries,” he said in a message posted on the site. “In this category, you will find offers for forged, government issued documents including fake IDs and passports.”

Beginning in November 2011, undercover agents made more than 100 drug purchases, including ecstasy, cocaine, heroin and LSD, from Silk Road vendors, according to the complaint.

In March, a Silk Road vendor known as FriendlyChemist told DPR through the site’s private message system that he had a list of the real names and addresses of Silk Road vendors and customers, which he obtained by hacking into the computer of another vendor, according to the complaint. FriendlyChemist threatened that he would publish the information on the Internet unless DPR paid him $500,000, which he said he needed to pay off his drug suppliers.

DPR corresponded with a Silk Road user called redandwhite who said he represented the people owed money by FriendlyChemist.

‘Wife +3 Kids’

“In my eyes, FriendlyChemist is a liability and I wouldn’t mind if he was executed,” DPR said March 27, according to the complaint. DPR provided FriendlyChemist’s name and address in White Rock, British Columbia, with “Wife +3 kids.” DPR later paid $150,000 to redandwhite to have FriendlyChemist killed, according to the complaint.

Tarbell said Canadian law enforcement authorities had no record of any Canadian resident with the name DPR passed on to redandwhite nor any record of a homicide in White Rock at the time. Ulbricht wasn’t charged in the alleged murder-for-hire scheme.

Ulbricht is charged with narcotics-trafficking conspiracy, computer-hacking conspiracy and money-laundering conspiracy. If convicted he faces as long as life in prison. He made an initial appearance in a five-minute proceeding today in federal court in San Francisco. Ulbricht said he can’t afford an attorney and was assigned a federal public defender. He remains in custody.

The criminal case is U.S. v. Ulbricht, 13-mg-023287; the civil forfeiture case is U.S. v. Ulbricht, 13-cv-06919, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in federal court in Manhattan at rvanvoris@bloomberg.net