Last week’s arrest of the alleged ringleader of the illicit marketplace raises doubts about the digital currency’s viability.
This article is the second in a four-part series on the viability and future of Bitcoins.
After Wednesday’s arrest of Ross William Ulbricht — the so-called “Dread Pirate Roberts” — and seizure of his Silk Road Anonymous Marketplace, the future of the Bitcoin became a question of great concern. Due to the assumption of anonymity that comes with their use, Bitcoins were the currency of choice for Silk Road; the underground drug market was the largest user of the virtual currency with some $1.2 billion in sales from February 2011 to July 2013.
Within three hours of the news breaking of Silk Road’s closure, the value of the Bitcoin dropped from $135 per Bitcoin to $85, before rebounding to $111.55. With the freezing of over $3 million in Bitcoins sitting in Silk Road accounts — significant because Bitcoins have a fixed maximum note capacity — users’ faith in the currency has been rattled.
“I am DEVASTATED That SR is permanently down! But what happens to the amount of BitCoins I had in my wallet?!?! Where the fuck did they go?!?” Silk Road user prophexy exclaimed, as reported by the Verge. “They can’t just take EVERYONE’S coins can they?” another user asked.
While it may takes days or even weeks for the fluctuations in the Bitcoin’s exchange value to stabilize, bigger questions are waiting to be answered. For example, how was it possible for the government to say that there were “146,946 unique buyer accounts and 3,877 unique seller accounts” in a five and a half month period on Silk Road?
The truth about being anonymous on the Internet
Silk Road was a Darknet site on the Tor network. The Darknet, when the Internet was still the ARPANET, was a private internet that was capable of receiving TCP/IP transmission but broadcasted using a private protocol on bandwidth-restricted pathways. This prevented the “sharing” of Darknet resources by TCP/IP servers, rendering the communiques “dark,” even when transmitted over mainstream feeds. Because of this, the Darknet survived the commercialization of the ARPANET and is still in use today by those seeking to preserve their online privacy.
Tor, or The Onion Router, represents one of the private protocols running in the Darknet. A communique is encrypted repeatedly by multiple privately controlled servers, with only the address of the next server readable. Each new server decrypts the data feed and re-encrypts it, again only leaving the address of the next server readable. This repeated layering of encryption, known as onion routing, both strips the original message of its origin data and distorts the path the message took through the Internet, as there is no common unique identifier for the feed. Even if it was possible to intercept and decrypt an encrypted data feed (which, in a previous article, was proven to be theoretically impractical without some indication of what the key may be), it is unthinkable to think that a Darknet data feed can be traced all the way back to its source.
Yet that’s exactly what happened. Many believe that the government didn’t necessarily hack the Tor network or infiltrate the Darknet, despite reports that the government has the capability to do so. Instead, the suspicion is that the weak link in the security chain was the Bitcoin itself.
New research from the University of California, San Diego, reveals that while Bitcoins are capable, in theory, of privacy, in practical use, they are far from anonymous. “The Bitcoin protocol still has huge potential for anonymity,” said Sarah Meiklejohn, who led the research project, “but the way that people are using it is not achieving anonymity at all.”
The problem lies in the digital trail a Bitcoin leaves. In lieu of a central banking authority, a Bitcoin records its history of transactions to verify that it was created legitimately and has not been improperly split or manipulated. The ledger of these transactions is known as the blockchain. The blockchain records the unique addresses of each “wallet,” or online account that stored the currency. While a Bitcoin wallet cannot point to a particular user, enough of them can point to a common point — say, a Bitcoin exchange they all utilize or a business where they all regularly send Bitcoins for purchases. These points can then be subpoenaed for its users’ records.
The notion that a Bitcoin can point to an exchange is problematic. Exchanges hold and trade in millions of dollars in Bitcoins each month. This gives them a clear incentive to “play nice” with regulatory examiners and to adhere to banking regulations. For example, Mt. Gox — the largest Bitcoin exchange in operation — requires a copy of a government-issued photo ID and proof of address before it allows its customers to engage in non-virtual-to-virtual currency trades.
The end of “anonymous” Bitcoins
While there are possible solutions that could restore the anonymity of Bitcoins — such as plugins like Zerocoin, which blocks zero-knowledge or blind proofs to the blockchain to prevent a trackable link to a wallet or service from being discovered, or mixing services, which collect Bitcoins into a common pool and randomizes their redistribution, disrupting the chain of custody — the biggest threat to Bitcoin security is the fact that users don’t know just how insecure a Bitcoin actually is.
“Although the Bitcoin developers themselves and some of the community are highly aware that Bitcoin is at least theoretically not private, it’s not clear that the general user population is,” said Ian Miers, a grad student at John Hopkins University that worked on Zerocoin.
Meiklejohn argues that the addresses and identities of an entire community can be ascertained from a map drawn from just a few Bitcoins. Based on just four deposits and seven withdrawals in accounts held by Silk Road, Meiklejohn and her team were able to positively identify 295,435 addresses belonging to Silk Road customers.
This, however, does not amount to any indications of guilt. In “the Dread Pirate Roberts”’ interview with Forbes, Ulbricht explained that steps are made to randomize received Bitcoins upon receipt to prevent a chain of custody being formed between any particular product being sold on Silk Road. “We employ an internal tumbler for when vendors withdraw their payments, and a more general mix for all deposits and withdrawals. This makes it impossible to link your deposits and withdrawals and makes it really hard to even tell that your withdrawals came from Silk Road,” he explained.
An investigator that chased a Bitcoin’s trail all the way to Silk Road would find that his targeted Bitcoin may have been used to buy something illicit or may currently be sitting in a Silk Road account with no true way to tell. This reflects the realities of privacy with Bitcoins — ultimately, the anonymity of the currency is determined by the actions of its users and not by the nature of the currency alone.
However, an end of anonymous use of Bitcoins has been argued as being essential for the future health of the Bitcoin industry. “I think in general it’s a positive thing,” said Patrick Murck, the general counsel for the Bitcoin Foundation in regards to the shutdown of Silk Road. “It demonstrates quite clearly that the illicit activity on the Bitcoin network is a tiny percent of what people use the currency for. If you believe that the useful purpose for Bitcoin was to conduct illicit activity, you’d expect the price to be zero without the Silk Road. And it’s not. Last I checked, it was around $110. Clearly the market has spoken and there are greater uses than illicit activity.
“So the Bitcoin community can move on from stories about Bitcoin facilitating anonymous transactions and move onto the real story which is Bitcoin creating opportunities for online commerce, a remittance lifeline for diaspora populations, financial inclusion for the global south. That’s what people are investing in when they invest in Bitcoin right now. Those are the interesting stories and the interesting use cases.”
Here are the questions that remain: if the Bitcoin is to have a future after Silk Road, what form will it take? How will it meet governments’ anti-laundering and taxation requirements? Most importantly, how will the Bitcoin remain relevant to those that seek in it solace from the market if it must meet market conditions themselves?