Bitcoin's Bottom Line

Earlier this week, the FBI arrested Ross William Ulbricht, founder of an online marketplace for the sale of illegal drugs and other illicit goods and services. Transactions on his site, Silk Road, operated using Bitcoin currency. When the site was shut down, 26,000 bitcoins, worth almost $3.6M, were seized, making it the largest Bitcoin seizure in the currency's short, four year history. Although Silk Road users have now lost any bitcoins that they had tied up in the online marketplace at the time of its seizure, the anonymity offered by Bitcoin made it the ideal currency for the illegal transactions that took place on the site.

Last November, at a workshop hosted by the Urbanization Project on the implications of a cashless society, UP Director Paul Romer discussed some of the crime-reducing potential that the transition to a paperless economy might afford a society.

Within any jurisdiction, a prohibition on the use of paper currency could displace certain types of criminal activity, e.g. money laundering that brings cash from drug gangs into the banking system. It could raise the cost and/or reduce the incidence of some local criminal activities, but only if some substitute form of payment did not develop that provides an equal level of anonymity. Hand-to-hand exchange of a commodity like gold is one possibility. Electronic systems like bitcoin, coupled with pervasive internet connected mobile devices, might be another. But all such systems leave extensive electronic records of transactions, so they might expose criminal enterprises to more risk of detection and prosecution than systems based on hand-to-hand currency.

And it seems that Silk Road has proven Paul right. An article in The Washington Post discusses the potential implications for Bitcoin.

The Silk Road case could be a blow to one of Bitcoin’s greatest selling points: its reputation for secrecy, said Garth Bruen, president of the KnujOn spam-reporting service and a member of the DCA’s advisory board. That reputation was central to Silk Road’s ability to operate, and to Bitcoin itself, he said. But the federal investigation that led to Ulbricht’s arrest shows that even purchases made with anonymous profiles on an anonymous site are still trackable, he said.

“This goes to show you that though this is an anonymous currency, if you use it for illegal purposes, you will get caught,” Bruen said.

Going forward, Bitcoin's future may depend on the lesson its creators choose to take (or not to take) from Silk Road's downfall.

However, that crack in anonymity could turn out to be a positive thing for Bitcoin, he added, particularly among those who want to shed its reputation as the currency of choice for seedy online activities.

“This could be a way to say that Bitcoin is clean,” Bruen said, “or it could dirty its reputation as a currency that just exists to do illegal, nasty stuff.”

Tile Image: Zach Copley

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