As you know doubt have heard, Silk Road has been shut down by the FBI and its alleged operator, Ross Ulbricht, has been arrested. I've been getting a lot of questions about this and what it means for Bitcoin. Here are some initial thoughts.
The price of Bitcoin is dropping. What does that mean? It means that speculators are speculating. That said, here's how I'm going to read it: If the main value of Bitcoin is that it can be used to buy drugs on Silk Road (as some contend), then we should see the value drop to zero is short order. If Bitcoin has other value, we should see it weather this jolt. One year ago a Bitcoin traded for about $14. As I type this, it's hovering at about
How did they catch the guy? Good question. I don't know the answer, but that won't stop me from speculating. I will point out two things. First is this from the criminal complaint against Ross Ulbricht:
During the course of this investigation, the FBI has located a number of computer servers, both in the United States and in multiple foreign countries, associated with the operation of Silk Road. In particular, the FBI has located in a certain foreign country the server used to host Silk Road's website (the "Silk Road Web Server"). Pursuant to a mutual Legal Assistance Treaty request, an image of the Silk Road Web Server was made on or about July 23, 2013, and produced thereafter to the FBI.
OK. So how did the FBI "locate" the servers that hosted the Silk Road Tor hidden service? The FBI has recently admitted that they have exploited vulnerabilities in Tor to identify users. Could it be that they exploited some vulnerability in this case? I look forward to finding out.
That said, here is another possibility. Also according to the criminal complaint (emphasis added),
On or about July 10, 2013, [Customs and Border Patrol] intercepted a package from the mail inbound from Canada as part of a routine border search. The package was found to contain nine counterfeit identity documents. Each of the counterfeit identification documents was in a different name yet all contained a photograph of the same person.
That person was Ulbricht and the package was addressed to him. Maybe it was from this lead that the FBI was able to begin the process of identifying the servers, once they had a suspect. If so, and if this indeed was a "routine" search, then the authorities got completely lucky!
Finally, I'll point out that Bitcoin was in no way involved in the identification of the suspect. In fact, in the criminal complaint the FBI argues that because the blockchain (Bitcoin's public ledger) is pseudonymous, that it is not useful in tracing transactions. I don't think that's quite right, but that's how the FBI sees it in this case. So, in this case at least, the privacy Bitcoin affords was not compromised in any way.
UPDATE: As I think about this some more, it's clear that the FBI was able to identify Ross Ulbricht because he posted his Gmail address to the Bitcoin Talk forum using the same username that first mentioned Silk Road ever. So, what are the chances that the CPB search that turned up the package of fake IDs bound for Ulbricht was routine? If it was routine, it was routine in the sense that packages to people on a watchlist might be routinely searched. I'm still not clear how the FBI got from identifying a possible suspect to locating the server for the Silk Road Tor hidden service.
How do you seize Bitcoins? I'm surprised by how many times I've been asked this question. It's amazing what it is that people seize upon in a story. < cough > I don't know how the authorities have carried out the seizure, but it's not to difficult to conceive how it could be done. Basically they would have to get the private keys to the suspect's Bitcoin addresses. (Think of it essentially like getting the password to an account.) They could either get that with his cooperation or if he had stored it somewhere now accessible to the authorities. Once they have the private keys, they would be able to transfer the bitcoins and I imagine that they would transfer them to a Bitcoin address that only they control.
UPDATE: So I got ahold of the seizure order and indeed I was correct that this is how the government will try to go about seizing the bitcoins. From the court order:
The United States is further authorized to seize any and all Bitcoins contained in wallet files residing on Silk Road servers, including those servers enumerate in the caption of this Complaint, pending the outcome of this civil proceeding, by transffering the full account balance in each Silk Road wallet to a public Bitcoin address controlled by the United States.
But to be clear, to seize bitcoins you do need to get the "password" that controls them. You can't just go to an intermediary and order that an account be frozen as you can do with traditional financial intermediaries like banks or PayPal.
I'll be tweeting and posting more as I learn more about what happened, but those are my initial thoughts. Shoot me any questions or thoughts you have. I'm at @jerrybrito on Twitter. And by the way, you can follow all the coverage of the Silk Road arrest and seizure on my site Mostly Bitcoin.