Shocked Bitcoin backers reel after raid

Last updated: October 3, 2013 8:30 pm

Shocked Bitcoin backers reel after raid

By Stephen Foley and Tracy Alloway in New York

“Sit him down at his computer and make him do it … Give him the note, let him use his computer to send the coins back, and then kill him … Considering his arrest, I have to assume he will sing.” For the libertarians who championed Silk Road as a free market for drugs and other goods that governments have no business banning, and who back Bitcoin, its currency of choice, the indictment of the website’s founder has been a shock.Not shock at the fact that “Dread Pirate Roberts” has been unmasked and caught, per se, but by the lurid nature of the charges against Ross Ulbricht.

As well as conspiracy in narcotics trafficking, computer hacking and money laundering, these include allegations he tried to hire hitmen to murder a former associate, supported by evidence from internet message traffic.

The discovery that an ultra-free market experiment, in its conception designed to evade drugs laws and other rules, may have descended into violence has put the libertarian supporters of Bitcoin on the back foot. By contrast, it has raised a cheer among the businessmen and entrepreneurs who are hoping to bring the virtual currency into the mainstream.

“When we talk to regulators and bankers, the emphasis on Bitcoin being used for illegal things has already lessened recently, but when they can see the bad guys can get caught, then that helps us in our conversations,” says Jaron Lukasiewicz, founder of a Bitcoin trading platform Coinsetter.

New businesses such as Coinsetter, along with former Bitcoin trading firms such as Tradehill and Bitinstant, are struggling to find banks willing to work with them so that they can deal with customer accounts.

The virtual currency, which runs on a global peer-to-peer computer network outside the traditonal banking system, was an obvious choice as a currency for trading on Silk Road because transactions are anonymous.

Many early users of Bitcoin were attracted by the privacy.

“I think these people may have rallied to Mr Ulbricht’s side,” said Mr Lukasiewicz, “but when you read about murderers for hire, that’s where you start to remember, this is why we have a government and laws.”

A new wave of entrepreneurs believe Bitcoin has the potential to become a cheaper alternative to international bank transfers, and they are keen to make sure that money going into and out of the currency can be traced back to users.

The US Treasury said it had no problem with virtual currencies as long as exchanges and other traders are regulated and can properly implement anti-money laundering checks on customers.

Still, efforts to make Bitcoin a mainstream investment face an uphill battle without further regulatory clarity, including from US states, where many authorities are investigating the potential for illegal uses of the currency.

A recent proposal by the Winklevoss twins to create an exchange-traded fund (ETF)that would replicate the price performance of Bitcoin, for instance, was met with intense scepticism. It is unclear what stance the US Securities and Exchange Commission will take on the currency, although another regulator, the Commodity Futures Trading Commission, has already been eyeing whether Bitcoin might fall under its own supervisory remit.

Last week, SecondMarket, an exchange that came to prominence as a venue for trading shares in private companies such as Twitter, said it would offer a Bitcoin fund to wealthy investors.

Barry Silbert, SecondMarket chief executive, described the closure of Silk Road as “the end of one chapter and the start of another” for the virtual currency.

“Bitcoin’s acceptance by legitimate merchants is growing very fast and my view is the closure of Silk Road will not have a significant effect on the near-term or long-term future of Bitcoin.”

A tumble in the price of the currency on Wednesday – from above $141 to as low as $109.7 at one point – after news of the indictment of Mr Ulbricht, had ended by midday on Thursday. But it will take some time to discover how much of the currency’s value has been related to its use in illegitimate trading.

And not all the libertarian supporters of Bitcoin believe the new wave of entrepreneurs, or even the FBI for that matter, should be crowing.

Roger Ver, founder of Bitcoinstore.com and an angel investor in Bitcoin start-ups, responded to a question about the closure of Silk Road by emailing an image: a screenshot of BlackMarket Reloaded, one of numerous other websites that have sprung up to take its place.