Criminal, Civil Complaints against Silk Road Mastermind

by , Oct 4, 2013 | 9:23 am

Journalist Brian Krebs broke the news on Oct. 2 that US federal authorities shut down Silk Road, the most famous, or infamous, Tor network online contraband bazaar. Pursuant to a criminal complaint and related civil complaint and protective order, Ross William Ulbricht (a.k.a. Dread Pirate Roberts) was arrested in San Francisco as the FBI seized the Silk Road web domain and millions in bitcoin.

But given the role of BTC in Silk Road, one question I have is what this case means for bitcoin, if anything. This case may put virtual currency more front and centre for some, but I don’t think it should have much of a long-term effect on how policy-makers and regulators look at it. That’s because this is fundamentally a drug case, not a bitcoin case. Paragraph one of the criminal complaint emphasizes that the defendant and others agreed to violate the narcotics laws of the United States. Bitcoin was just one of the instrumentalities in the alleged criminal scheme: good technology used for criminal ends.

Ulbricht was charged with one count of narcotics trafficking conspiracy (undercover agents apparently procured ecstasy, cocaine, heroin, and LSD on Silk Road), one count of computer fraud conspiracy, and one count of money laundering conspiracy. A panoply of illicit goods and services were available on Silk Road, including controlled substances and other drugs, computer hacking services, and forged documents. In an allegation that may make for a future bar exam question, Ulbricht is also alleged to have used Silk Road to orchestrate a murder for hire. If the allegations are true, Ulbricht contracted with a drug dealer to murder a Silk Road vendor, paid the drug dealer, received photographic evidence of the killing, and apparently believed that the hit was successful. But apparently the murder did not in fact take place.

This is the first complaint in the matter. Given the scope of the alleged wrongdoing, subsequent amended criminal complaints expanding the charges against Ulbricht and pulling in others for distributing narcotics would be unsurprising.

A few things struck me as I read the criminal complaint. First were the bitcoin parallels to cash being used to facilitate illicit transactions. Cash (and by that I mean notes representing fiat currency) can be used in criminal enterprises. Bitcoin provides similar functionality, and potentially more so because of its purely virtual nature. At one point, the complaint postulates that “Bitcoins are not illegal in and of themselves and have known legitimate uses. [Both of those statements are true. –SH] However, bitcoins are also known to be used by cybercriminals for money-laundering purposes, given the ease with which they can be used to move money anonymously.” Setting aside the basis for such knowledge and ignoring the broad reference to anonymity, if you substitute “cash” for “bitcoins” in the second sentence and strike “cyber,” you have an equally convincing statement.

Cash can be exploited for criminal purposes, and so can bitcoin. The criminal acts — drug-dealing, murder-for-hire — should be prosecuted vigorously by law enforcement, but cash and bitcoins shouldn’t be vilified in the process. A candid and productive discussion about bitcoin acknowledges its vulnerabilities but also its tremendous power and potential for good.

The second thing I found interesting was how Silk Road essentially appropriated bitcoins and used them in a way that would surely offend some bitcoin enthusiasts. To make purchases on Silk Road, the complaint alleges that one had to fund a separate bitcoin wallet on a Silk Road server. When purchases were made, the bitcoins paid by the buyer were held in escrow pending completion of the transaction. Furthermore, Silk Road charged a commission on each and every transaction: 8-15 percent according to the complaint. I expect the concept of being forced to hold one’s own funds on another’s server, the escrow service, and 15 percent transaction fees offend many in the bitcoin community, irrespective of the nature of the things for sale on Silk Road. (For the record, if it needs to be said, I take greater umbrage at murder conspiracy than 15% commission fees.) The driving force behind bitcoin is the elimination of trust or counterparty risk in the financial sector, let alone trust in a bunch of criminals.

The larger point coming out of this is the centralization element that seems to be important in some of these criminal enterprises. Silk Road essentially tried to centralize and control the transactions in the marketplace, in part to hide them. Consider the Liberty Reserve indictment from earlier this year, also out of the Southern District of New York, where the enterprise created its own centralized currency, to both control it and obfuscate transactions using LR. It seems obvious, but it’s worth stating: criminal elements may often prefer to centralize and control their activities, precisely because they want to hide from law enforcement within some trusted circle. Bitcoin’s nature abhors this centralization and oftentimes, though not always, leaves a public transactional record on the blockchain.

Finally, some of the errors about bitcoin and what it does and doesn’t do in the complaint were disappointing, if not wholly surprising, to see. For example, not all bitcoin transactions are or need be recorded on the blockchain. (This cuts against the point I made above re: public notification of blockchain transactions.) Bitcoins are not an “anonymous” form of digital currency. A blanket conclusion of that sort is an overreach in the context of research that’s been done on bitcoin and anonymity (also here). These misconceptions about bitcoin are perhaps the biggest problem that the Ulbricht case poses for the virtual currency in the short term. Policy makers may well judge and seek to regulate people in the bitcoin space based on what they think they already know, whether their knowledge is or isn’t complete. Then again, some believe shutting down illicit sites like Silk Road could actually make people more comfortable with bitcoin as it “weeds out” the criminal element from the bitcoin space.

Silk Road has been in the crosshairs for some time. It’s even been discussed in Congress. It should be shut down. But this case tells us very little about how to regulate those using bitcoin.


Pokerati contributor Stu Hoegner was one of the first attorneys in North America to accept bitcoin as a means of payment. Follow him on Twitter @GamingCounsel.


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