October 2013

Some quick thoughts on Silk Road’s demise and what it means for Bitcoin

by on October 2, 2013 · 0 comments

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 $118 $127.

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.

SHARE: 0 comments

The FTC should provide ammo for software patent abolitionists

by on October 2, 2013 · 2 comments

Last week, the FTC proposed to use its Section 6(b) power to investigate patent trolls. Its clear from the agency’s comment request that what they’re really interested in examining is the practice of patent privateering.

For The Umlaut, I wrote an article explaining what patent privateering is and how it upsets the fragile state of affairs in the software industry.

Because patent trolls are non-practicing, they are not subject to threats of counter-suit and mutually assured destruction. Because they are not members of any SSOs, they do not have any obligation to license on a FRAND basis; standard-essential patents can be transferred to privateers and then asserted against all users of the standard. And because the transfer of patents to patent trolls is often done through various shell companies or other shadowy means, the defendant and the public often cannot know on which practicing software company’s behalf the privateer is working. This means the defendant cannot retaliate through countersuits or a public relations offensive.

I think that understanding how patent privateering actually works and how it disrupts companies’ attempts to innovate makes one much more sympathetic to simply abolishing software patents outright. Given that the practice is not widely understood, the FTC could add value by simply disseminating information about it to a wider audience. I don’t think that the FTC has the authority to regulate patent enforcement, since patent rights are explicitly authorized by Congress, but they can and should send Congress the message that software patents are being used to stifle innovation, not promote it.

SHARE: 2 comments

Mel Watt proposes true Internet radio fairness

by on October 1, 2013 · 0 comments

Over the past year, as the debate over internet radio royalty rates has raged, I have been a lonely voice calling for the repeal for compulsory licensing of digital performance rights altogether. I did so at the Cato event for my book, Copyright Unbalanced, in January at a State of the Net panel, and in my Reason column. The reaction I often received was either one of outrage by the Pandoras of the world, or condescension for my naive optimism. Well, optimism can pay off. Yesterday Rep. Mel Watt, ranking member of the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet, introduced the “Free Market Royalty Act,” which among other things gets rid of compulsory licensing.

The problem with the compulsory licensing scheme is twofold: Not only does it rely on federal bureaucrats to set the rates that artists must accept for their music (rather than allowing a free-market negotiation take place between copyright holders and those who want to broadcast their songs), but it also allows Congress to pick winners and losers by assigning different royalty rate standards to different users. As I explained in Reason:

While AM, FM, cable and satellite radio, and Internet radio services like Pandora can all opt for compulsory licenses, they each pay different royalty rates. The rates are set by a panel of government lawyers called the Copyright Royalty Board, and they have the effect of favoring some business models over others. Internet radio services pay over 60 percent of their revenue in royalties, while Sirius XM, the only satellite radio company, pays only 8 percent. AM and FM radio aren’t subject to a digital sound recording right, so it pays zero.

Watt’s bill would blow all this up, making terrestrial broadcasters, Internet radio services, and the rest to give up their price-fixed compulsory licenses and have to negotiate in a market the rates they pay. This truly levels the playing field, especially vis-a-vis interactive music services like Spotify and Rdio that have never benefited from compulsory licenses.

Whether you talk to supporters of Rep. Chaffetz’s Internet Radio Fairness Act or Rep. Nadler’s Interim FIRST Act, they each will say their bill is the true fre market approach, and that their rate-setting standard would best approximate a market. To them I say, nothing better approximates a market than the market itself, so if they are truly concerned about ensuring a free market level playing field, here is the way to do it.

One advantage of compulsory licensing is that it can reduce transactions costs. The Watt bill retains some of this advantage by designating SoundExchange, a nonprofit agency, as the common agent for copyright owners to facilitate negotiations, but allowing labels and artists to retain the right to opt-out and negotiate on their own. If this bill passes, I think we’ll see some very interesting experimentation with business models on the part of both the artists and the radio stations.

Finally, looking at the) press coverage of this bill, what has gotten the most attention is that it would, for the first time, require terrestrial AM/FM radio stations to negotiate and pay royalties for the sound recordings they broadcast. The way I see it, it’s not clear to me why broadcasters deserve yet another subsidy, so I shed no tears for them if this bill passes. Broadcasters argue that they provide promotional value for the songs they broadcast, that this benefits copyright holder, and that they should therefore continue to pay nothing. If it is indeed the case that airplay provides substantial promotional value, that will be taken into account in the course of negotiations and we should expect the ultimate rate to reflect that. Indeed, you can even imagine an outcome where the free market rate for terrestrial stations would remain at zero, or even that copyright holders would want to pay the stations. That’s the beauty of the market, so let’s unleash it.

SHARE: 0 comments

Randall Stross on Y Combinator

by on October 1, 2013 · 2 comments

Randall Stross discusses his recent book: The Launch Pad: Inside Y Combinator, Silicon Valley’s Most Exclusive School for Startups. Stross’s behind-the-scenes look at Y Combinator details how the seed fund has been able to produce young entrepreneurs and successful startups such as Dropbox and Airbnb. Stross also discusses Y Combinator’s early history, the typical Y Combinator participant, the fund’s rate of return, the gender gap in the program, and the reason Silicon Valley has become the epicenter for startups.

Download

Related Links

SHARE: 2 comments

Next Entries →