Under-fire Bitcoin paying the price for virtual growth with Silk Road arrest

Online currency seen as easy payment system for criminals, as Silk Road arrest shows, but backers see crackdown as part of its evolution

PUBLISHED : Saturday, 05 October, 2013, 12:00am
UPDATED : Saturday, 05 October, 2013, 4:07am


The once-obscure bitcoin has been making news all year. There have been stories about the wild swings in the virtual currency's exchange rate, moves by financial regulators to shut down some bitcoin-related businesses, and attempts by its boosters to gain more mainstream credibility.

But this week, the bitcoin community was hit with a story potentially bigger than all the others: the seizure of the illicit Silk Road website and the arrest of its founder, Ross William Ulbricht, a 29-year-old former physics student from San Francisco.

For the past two years, Silk Road has been the bogeyman for bitcoin critics. They pointed to the ability to buy drugs and guns on the site using bitcoin as evidence the virtual currency could enable terrorist and criminal activity.

The service gained widespread notoriety in 2011 when United States Senator Charles Schumer singled it out as the poster child for how bitcoin could potentially be used by terrorists and criminals.

"Literally, it allows buyers and users to sell illegal drugs online, including heroin, cocaine and meth, and users do sell by hiding their identities through a program that makes them virtually untraceable," Schumer said in June 2011, calling for a crackdown on the service.

"It's a certifiable one-stop shop for illegal drugs that represents the most brazen attempt to peddle drugs online that we have ever seen. It's more brazen than anything else by light years."

So, with the crackdown this week, it would seem like a dark day for the growing bitcoin community. But several Bitcoin observers took a more nuanced view of the Silk Road story.

Adam Levine, editor-in-chief of the Let's Talk Bitcoin blog and podcast, saw the arrest as part of bitcoin's natural evolution from renegade currency to mainstream adoption.

"When you tame the West, you've got to hang all the outlaws," Levine said. "It's an inevitable transitional phase. If bitcoin is going to turn into a mainstream thing, this has to happen. The legitimate uses cannot be overshadowed by the illicit uses."

Jerry Brito, a senior research fellow at the Mercatus Centre at George Mason University in the US, noted the shutdown of Silk Road was very different to other government actions against bitcoin-related endeavors.

In recent months, US state and federal regulators have moved to shut various bitcoin-related businesses. Those businesses were attempting to operate legitimately but were accused of violating various currency rules and regulations, Brito said.

By comparison, Silk Road was focused on using bitcoins to foster transactions.

The actual Silk Road marketplace, however, was not simple to find or trace. It was cloaked by an internet encryption standard known as Tor. Once on the service, all transactions had to be paid in bitcoin.

Bitcoin, created in 2009 by a programmer using the pseudonym Satoshi Nakamoto, is really an open-sourced protocol that anyone can add to or alter. These protocols run across a wide number of servers around the world for regulating the creation and trading of bitcoins.

People can get bitcoins either by buying them with traditional currency or by "mining" them. The mining process involves solving complex computing puzzles that reward a person with bitcoins.

Bitcoin boosters like it because it is a currency that's decentralised, not controlled by any government or company.