On October 2, 2013 the FBI arrested the alleged owner and operator of an illicit website that facilitated the sale of drugs, stolen bank information, hacking tools, firearms, and countless other illegal products and services. The website, known as “Silk Road,” functioned as a black-market eBay, connecting buyers and suppliers through a seemingly untraceable underground website. Before it was seized and shut down by the United States government, Silk Road was a massive criminal enterprise that generated $1.2 billion in sales over the course of only two years. The site enabled several thousand drug dealers and other criminal vendors from over ten countries to conduct transactions anonymously over the Internet. The alleged mastermind of Silk Road is 29-year old Ross Ulbricht, a former physicist who went by the username “Dread Pirate Roberts,” a reference to the movie, “The Princess Bride.” Ulbricht made approximately $88 million by charging a commission for every transaction conducted on Silk Road. As owner and operator of Silk Road, Ulbricht is accused by U.S. Attorneys of narcotics trafficking conspiracy, computer hacking conspiracy, and money laundering conspiracy. It is also believed that Ulbricht had hired a hitman to execute two people, one a former employee, and the other, a man attempting to blackmail Ulbricht.
Silk Road operated on the “Deep Web,” an area that cannot be found using standard search engines like Google or Yahoo. Silk Road operated on the “Tor” network, (a.k.a “The Onion Network”) a special network on the Internet designed to mask users’ IP addresses, making it nearly impossible to physically locate the computers hosting or accessing websites on the network. To access the site, a user would first download the necessary Tor browser software, usually available for free. From there a user would simply type in the Silk Road’s “.onion” address into their newly downloaded Tor browser. However, one could not simply stumble upon Silk Road while using a search engine, even if they were using Tor browser software. The actual Silk Road’s domain name had to be discovered, either through word-of-mouth or by searching Internet forums and chatrooms.
To further ensure anonymity, the only currency permitted on Silk Road was Bitcoins, a new form of virtual currency. It is an anonymous, decentralized form of electronic currency, not backed by any government or bank. The currency does not have any tangible form and instead exists only on the Internet. Bitcoins are legal and can typically be purchased from Bitcoin exchanges, such as www.Mtgox.com. These exchanges also allow users to exchange their Bitcoins for conventional currency, which is valued based on a fluctuating exchange rate. The number of Bitcoins in existence is limited, however, at 21 million (though only 11.7 million are currently in circulation), to protect its value from inflation. Each individual Bitcoin is represented by a unique online registration number, 64 digits long. To receive a Bitcoin a user must also have a Bitcoin address, a randomly generated string of 27-34 numbers and letters. This address acts as a virtual mailbox to and from which Bitcoins are delivered. There is no registry of these virtual Bitcoin mailboxes, which allows users to remain anonymous. However, all Bitcoin transactions are recorded to a public ledger known as the “Blockchain,” although the ledger only illustrates the movement of funds between anonymous Bitcoin addresses. This prevents a user from spending the same Bitcoin more than once.
As this investigation proves, however, maintaining anonymity on the Web, even the Deep Web, is no easy task. The FBI was able to trace and finally arrest Ulbricht by scouring Internet forums. After identifying the first ever mention of Silk Road in a forum, the Feds proceeded on a hunch that this initial post originated from or would lead to Silk Road’s founder. The FBI was correct in its assertion and was able to uncover and track countless communications from Ulbricht regarding his operation of this digital black market. This investigation also demonstrates that Bitcoins are not untouchable. The FBI has thus far seized Bitcoins from Silk Road worth approximately $3.6 million as a result of this investigation. In turn, the value of the Bitcoin dropped about 20% when the news of Silk Road’s shutdown was first announced, October 2, 2013. It has since clambered back in value, though not to its previous levels.
The entire copy of the Federal complaint against Ross Ulbricht and Silk Road can be found here.
(Blog entry written by Alex Diamond, IBLT/Carter DeLuca Entrepreneurship Support Fellow for the Fall 2013 semester)
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