Month: July 2012

A moderator of the chat at BTC-e known as “Dev” indicates that a malicious entity was able to deposit fake Liberty Reserve funds, and use them to purchase Bitcoins. The moderator went on to state that “they [were] able to withdraw [a] small amount of BTC on our bitcoin server”. The exact amount is still unknown. The European Bitcoin exchange intends to perform a rollback on the fraudlent deposits and resulting trade transactions at around 7:10 AM GMT 7/31/12.

Quick tabulations based on volume reported by Bitcoin Charts indicate around 63,500 Bitcoins have been fraudulently purchased at prices of up to $99/coin. With MtGox prices still hovering around $9.30/coin, such a differentiation in price has already caused panic on the exchange, with many users hovering on the website’s chat, trying to ensure that their funds are safe.

As of 7:34 AM GMT, a rollback of the fraudulent transactions has not yet been performed. More updates to come.

[UPDATE 7/31/12 4:12 PM GMT]

BTC-e officially confirms that their Liberty Reserve API key was compromised, leading to the falsification of funds on the exchange.  Approximately 4,500 bitcoins were actually withdrawn and stolen by the attacker.  The exchange will cover the stolen funds, remain open, and, according to BTC-e, all transactions performed after 12:00 AM GMT were reverted.

While BTC-e is still working on finalizing legitimate user account balances, they expect new trading and depositing should be available within 1-2 days.

[UPDATE 8/2/12 6:05 AM GMT]

BTC-e has opened back up for trading as of 15:10 GMT on 7/31/12.

Were you affected by the attack? Post your comments below, or send your story to ed@bitcoinmagazine.net.

 

On July 26, AurumXChange, MtGox and BitInstant posted a thread on the Bitcointalk forums with new evidence relating to the theft that had taken place on July 13, in which an unknown individual gained access to Bitcoinica’s MtGox account and was able to withdraw the maximum 40,000 BTC and $40,000 USD. According to AurumXChange, the hacker proceeded to transfer the $40,000 USD through their service into Liberty Reserve. However, soon after the incident, AurumXChange found a request by Zhou Tong to exchange $40,000 USD on Liberty Reserve for an equivalent (minus fees) deposit into his bank account in Singapore. Zhou Tong had never dealt with AurumXChange before as an exchange customer. Furthermore, the email address used by the hacker, stevejobs807@gmail.com, was the same as the one used to open a MtGox account, which is beyond doubt linked to Zhou Tong and Bitcoinica.

This evidence looks rather damning to Zhou Tong’s case, but he has put forward an alternate story: that he was framed. As he describes it, the email account was an insecure one with a heavily reused password that he only used to make accounts with websites to which he had no interest in giving up his private information, and the $40,000 USD exchange was an unrelated transaction that he was making for a friend. Furthermore, he has even found a suspect, the Chinese multimillionaire Chen Jianhai, that he claims has admitted to the crime when Zhou pointed out to him that it was a matter of an international scale with many highly intelligent netizens around the world investigating. Jianhai is a former business associate of Zhou’s, and used Zhou’s identity because he felt that “it would be impossible to discover the hacker” and “it would be much easier to deny if the suspect account is an insider because you (Zhou Tong) can always distract people from investigating”.

Regardless of who is guilty and who is being framed, however, there is another matter at stake: what happened to due process? Any concept of separation of powers appears to be thrown overboard and the investigator, prosecutor, judge, jury and executioner are one and the same. Zhou Tong himself did not know that he was a suspect before the public posting was made, and the situation has quickly devolved into what is essentially a public self-proclaimed judicial process where Zhou is forced to scramble to present his own side of the case in a race which he cannot win. As some have pointed out, people have killed for less than $200,000, and it is important to treat matters involving such large sums of money with the same level of prudence as they are afforded in the rest of the world.

What this ultimately boils down to is that the Bitcoin community needs to have a serious conversation about the way that it handles the judicial process. So far, everyone involved has been very unwilling to make any overtures to established police authorities, presumably wishing instead to establish an alternate extralegal “lex mercatoria” to handle Bitcoin-related cases in an ad-hoc fashion. There are, of course, legitimate reasons to do so. One of the major ideological reasons why people participate in Bitcoin is the desire to avoid the stifling bureaucracy of existing governmental justice systems, and so far, Bitcoin has never been tested against them. If the US, Chinese, Australian or Singaporean courts are forced to make their first landmark “Bitcoin ruling”, there is no telling what that ruling will be. They may decide that bitcoins are simply worthless virtual tokens, and stealing them is simply part of the game. Alternatively, they may decide that Bitcoin exchanges are a form of illegal money laundering, leading to the majority of such exchanges being forced to shut down and relegating Bitcoin to the realm of small islands of circular commerce and illegal weapons and drugs.

On the other hand, there are reasons to believe that legal attention would actually be good for Bitcoin. Many businesses are holding back from accepting it due to legal uncertainty, and having a solid judicial confirmation that bitcoins do have value and are a valid and legally protected means of conducting exchange would arguably be a great boon to Bitcoin’s perceived legitimacy. Some have claimed that “there are no Bitcoin police” as an argument against Bitcoin, and a legal prosecution for a Bitcoin theft would greatly help alleviate these fears.

However, if the Bitcoin community does reach a general consensus that, even if for only a short time, an informally self-regulated Bitcoin is the way to go, then everyone in the Bitcoin community who is in a position to be an administrator of justice should take their job far more seriously than they do now. Many thousands of bitcoins have been lost in the community’s slow process of re-learning the progress that the outside world has made in the field of security, and it would be a great tragedy if even greater losses are suffered because we are being equally slow in re-learning the need for sound justice. On the other hand, if we handle the Bitcoinica case fairly and professionally, whether independently or in a spirit of mutual cooperation with the relevant legal authorities when the time comes, and reach an equitable resolution based on principles of justice and restoration, and not vigilantism and vengeance, it would be a great opportunity to prove that the lex mercatoria can work after all.

Correction: The July 13 Bitcoinica Investigation and Sound Justice

In a comment in the above titled article posted on July 18th it was misstated that both MtGox and AurumXChange have broken their own privacy agreements regarding information they released on the forums suggesting Bitcoinica’s founder Zhou Tong is connected to funds stolen in a hack of their exchange accounts. In the absense of a court ruling on the matter, a statement of such by the article’s author cannot yet be made in the manner it originally was worded, which may have been erroneously perceived as a statement of fact instead of the opinions of the author as is the case. Innocence for all parties will be assumed until a court of law decides otherwise based on factual evidence, including any connection between the theft and Zhou Tong. Bitcoin Magazine apologizes for the miswording on this matter and do not purport ourselves as a judge or jury on any legal matters that affect the community regardless of how passioniate our authors may be.

 

Last November, Mitchell Bourne, with the aid of the Bitcoin Consultancy, organized a highly successful Bitcoin conference in Prague, featuring speakers from both inside the Bitcoin community, like We Use Coins creator and BitcoinJS developer Stefan Thomas and Bitcoin Consultancy member Amir Taaki, and outside of it, like Pirate Party founder Rick Falkvinge and digital money theorist David Birch. This year, the Bitcoin Consultancy intends to hold a conference again on 15-16 September, this time in London. The last conference was held in Prague because the venue was less expensive and it was not clear how many people would attend, but with the Prague conference behind them this time, the team is more certain that the conference will succeed, and are expecting over 300 attendees.

Hosting the conference in London will have a number of advantages. London is the home of the Bitcoin Consultancy, as well as many of the speakers that are invited to the conference, and even for those who do not live in the United Kingdom, London is much easier to reach than Prague is, with several international airports around the city allowing for direct flights from many cities around the world.

The list of speakers is already a long one, and includes a number of individuals from within the Bitcoin community. This year’s selection is heavy on the technical side, featuring Mike Hearn, developer of the Java-based Bitcoin platform BitcoinJ, once again the BitcoinJS developer Stefan Thomas, Patrick Strateman, Bitcoin Consultancy member and the chief technology officer of Intersango and Jim Burton, lead developer of the Bitcoin client Multibit. On the less technical side will be Max Keiser, in charge of his finance-oriented show on Russia Today, the Keiser Report, and Matthew N Wright, who is involved in a number of Bitcoin-related projects, including Bitcoin Magazine itself.

However, what is more impressive are the non-Bitcoin speakers. Looking at the list of speakers, the conference can just as easily be described as a Linux conference as a Bitcoin one. On the list are many developers who are focused on Linux and Bitcoin at the same time, although typically with more attention toward Linux, as Linux offers more opportunities for developers to express themselves than Bitcoin, where the technical side is already largely settled. Among these are Dennis Rolo, also known as Jaromil, both an advocate of underground economies and a developer of Linux multimedia systems, Nils Schneider (tcatm), known to the Bitcoin community for Bitcoin Watch and Bitcoin Charts but also the creator of the iPod Linux project, Jeff Garzik, a prominent Linux kernel developer who also spends time on Bitcoin development, and, most important of all, Richard Stallman, the free software advocate who created the GNU operating system that forms the basis for most of the Linux distributions that we use today.

There will also be several speakers outside of both the Bitcoin and Linux communities. Once again on the technical side, there will be Andrew Miller, co-founder of a computer vision consulting firm and contributor to OpenKinect and the decentralized file storage system Tahoe-LAFS. On the non-technical side, David Birch, who spoke at the 2011 Prague conference, will once again be attending, and from the civil liberties community there will be a new guest: Birgitta Jónsdóttir, the Icelandic parliament member responsible for creating the Icelandic Modern Media Initiative, which introduced anti-censorship, freedom of information and whistleblower protection laws that have placed Iceland at the top of the Press Freedom Index in the world.

To the Bitcoin Community, what this conference signifies most of all is the growing integration of Bitcoin into the larger technology and civil liberties community. Even one year ago, Bitcoin was largely on its own, and the rest of the technology community was largely watching the currency from the sidelines. The only prominent individual who made a serious attempt to conceive of Bitcoin as being part of a larger philosophy of individual empowerment was arguably Rick Falkvinge. After surviving a bubble and crash and continuing to attract more attention, however, a growing number of people are realizing that Bitcoin is only one tool in a much larger arsenal, and this year’s list of speakers reflects that reality. Hopefully, this conference will prove to be of major benefit to both the Bitcoin Consultancy, desperate to recover its public image after the Bitcoinica fiasco, the Bitcoin community, as the event has the potential to bring Bitcoin considerable media attention, and the free software and civil liberties community as a whole.

 

The Middle East and North Africa remain one of the more difficult parts of the world in which to acquire bitcoins. Although largely justified by the region’s low GDP, the concentration of Bitcoin clients in the region is low, and options for exchanging the local forms of digital money for bitcoins were hard to find – until now. Bitcoin Nordic recently introduced CashU as a payment option. Bitcoin Nordic is a Bitcoin exchange based in Denmark launched on April 2 with its main feature being instant delivery of bitcoins for payments by credit card. This activity was soon suspended by Visa and MasterCard, but the company remained, and continues to offer bitcoins for bank transfers (and vice versa) and anonymous cash in the mail, expanding their range of payment offers with this new addition.

CashU is a popular online and mobile payment method in North Africa and the Middle East, as the region’s large and young population currently has very limited access to credit cards. It works as a prepaid system, allowing users to top up their CashU accounts through CashU prepaid cards sold in the Middle East and Africa, Ukash vouchers which can be found around the world including the UK, mainland Europe, South Africa, South America, Canada and Australia, and a number of other methods. Users can then spend their CashU account balance at a number of online sites. Bitcoin Nordic claims that by introducing CashU as a payment option, they will have made Bitcoin accessible to over 300 million people who did not have a convenient way to buy it previously.

Bitcoin Nordic’s prices are steep; they charge a 15% commission on top of the 24-hour average MtGox price, higher than the 10% that they charge for cash and check payments, and much higher than the 0-7% fees typical for cash deposits and wire transfers in the United States. However, relative to other fees in the CashU market, Bitcoin Nordic’s rates are hardly exceptional. Although credit card payments and some other methods like Fawry and BEE are processed with a fee of 5-7%, UKash vouchers take 9% plus foreign exchange rates. Comparing these rates to Google’s baseline rates, we see that this constitutes an additional commission of roughly 5% – in total a 14% fee, almost exactly as much as what Bitcoin Nordic charges for converting CashU to Bitcoin.

Nevertheless, even with net fees of 20-30%, Bitcoin Nordic has potential to carve out a viable niche for itself for one simple reason: it has no competition. Although CashU is the established payment method of the region and is already used by much of the population, the range of sites that accepts it is fairly small. Though many major products like World of Warcraft and iTunes gift cards can be bought with CashU, the majority of the products and services that we are used to in Europe and North America do not support it. Bitcoin, on the other hand, does – both by itself and as a gateway to other stores through services like SpendBitcoins, which offers gift codes for stores like Amazon, the Apple store and Thinkgeek for bitcoins and even features a Buy Anything service that allows you to use Bitcoin as a proxy for any purchase online.

In the past few months, Bitcoin has seen a massive increase in its reach all across the world. Chinese adoption spiked rapidly in May, BitInstant added 700,000 locations to buy bitcoins in the USA, Russia and Brazil, and, although with no evidence of success so far, efforts to bring Bitcoin into Africa are underway as well. With this move by Bitcoin Nordic, the Middle East and North Africa will now be able to participate in Bitcoin’s worldwide growth in adoption, and millions of people will gain access to products and services that they had no way of getting to before, both inside the Bitcoin community and outside of it.

 

Bitcoinica has fallen far in these past four months. The margin trading service that was once hailed as a revolutionary margin trading service and a shining beacon of success in the Bitcoin economy has become a locus of scandals and thefts, as skilled online intruders continue to peck at the now defunct service’s diminishing million-dollar supply of customers’ funds and its operators continue to struggle to pay users even a 50% share of what they are owed.

Bitcoinica’s downfall started on March 1. Linode, a web hosting provider then used by Bitcoinica, Slush and the Bitcoin Faucet, was hacked by an unknown intruder, who proceeded to empty all Bitcoin wallets that were running on the service, taking 5 BTC from the Bitcoin Faucet, 3,000 BTC from Slush and 43,000 BTC, then worth about $220,000 USD, from Bitcoinica. The loss was a large one, but the site nevertheless kept running and was able to guarantee its users’ deposits.

Then, however, came a second attack. On May 11, an intruder managed to break into Bitcoinica through a compromised email account, and proceeded to lift 18500 BTC from Bitcoinica’s hot wallet. This time, the site could not keep operating, and it shut down and opened up a claims process through which users could petition for a refund on their deposits. However, the intruder also managed to delete Bitcoinica’s account registry, leaving the team in charge of the claims process no way to verify user account balances was to look through a collection of various trading records, causing the claims proceedings to slow down to a crawl.

Now, Bitcoinica has been struck yet again. On July 13, another thief withdrew the maximum possible from the MtGox account that was holding the remaining portion of Bitcoinica users’ funds, clearing out 40,000 BTC and 40,000 USD, or a net total of $350,000 USD at the time of the breach. The attack was possible because the LastPass account that was storing the passwords needed to access the MtGox account was set to the same password as the MtGox API key used by the Bitcoinica server to access funds when Bitcoinica was still running. While the original thief had the opportunity to steal these funds at any point after the breach on May 11, the opportunity became accessible to anyone a few days before this latest theft, when the Bitcoinica server’s source code was publicly released to the internet. The API key was stored in the source code, and another thief discovered that the key was also the LastPass password, and that no form of additional second-factor authentication was required to use the Last Pass account, and proceeded to log on to MtGox and withdraw the funds.

Regardless of his level of responsibility for earlier breaches that had to do with the security of Bitcoinica itself, this time Zhou Tong is clearly innocent. He writes in a thread on Hacker News on the subject: “I didn’t set the password. I didn’t have the power to change the password. I shouldn’t have access to the account. The root cause is LastPass account being stolen.” And the other parties agree; both Bitcoin Consultancy and Tihan Seale, Bitcoinica’s secretive investor, much prefer to blame each other, the core issue being who is responsible for setting the two passwords to the same value. As Bitcoin Consultancy’s Amir Taaki writes, “The breach today occurred because the password for LastPass was in fact a duplicate password which had been compromised during the hack. Unbeknownst to us, Tihan was using the mtgox api key as the password for a website called LastPass.” Tihan, on the other hand, showed himself for only the third time so far on the Bitcointalk forums and wrote :”I claim no expertise to judge the security of the master password but it was very long. Its status as a master password and its use in all respects were fully understood by the Consultancy upon acceptance. If the Consultancy deemed this password to be unfit for ongoing use, they certainly had the opportunity and the duty to change it.” This miscommunication appears to be the core of the problem, regardless of whether the greater problem was Tihan not clearly speaking or Bitcoin Consultancy not clearly listening.

As for what this means for the users, the result is that claimants will be forced to take a 30% cut on their deposits. Because of the difficulty of figuring out some users’ exact balances, the claims fund had settled on a strategy of paying claims in two stages – 50% as soon as the claim is processed, and the remainder of the claims fund proportionately to all depositors once all claims are processed. About 40% of claims have been processed so far, and, as far as can be determined for certain, so far no one has received more than 50%, so the general strategy for determining and paying claims is expected to hold even if the second round of payments will be in the form of 20% of claimants’ funds rather than the entire remaining 50%. However, the implementation of the strategy will be a problem – Amir Taaki reported in his post on the subject that “The payments process was looking good, but now Patrick [the sole individual responsible for handling claims up to now] has walked away and I’m unsure what happens next.” Meanwhile, Zhou Tong has come up with his own solution: he created his own claims processing service, voluntarily contributing 5,000 BTC out of his own profits from running and selling Bitcoinica to spread among all claims that he deemed valid. Over 80,000 BTC worth of claims were filed, and claimants received a 6.239% share of their losses. Zhou Tong emphasizes that his process was independent from Bitcoinica, and that both his claimants and those who missed the opportunity should seek their 70% payment from the official claims process as well.

Many victims of the crisis have already written off the situation as hopeless and are content to simply wait and see if they ever do get any of their money back, but others are not so willing to back down. The possibility that there will be a lawsuit against Bitcoinica is very real, and what will happen to the claims process in that case is unknown – Bitcoinica Consultancy’s Patrick Strateman, at least, believes that “if anybody decides to file a criminal complaint you will effectively guarantee that it will be months or even years before anybody sees their funds.” Whatever direction Bitcoinica Consultancy chooses to take the claims proceedings from here, one can only hope that depositors will be able to collect the remaining portion of the funds from Bitcoinica’s supply faster than the thieves will.

On Tuesday, Bitcoin finally exceeded the $7.22 high that the price reached in January, briefly touching $7.25 in the (North American) afternoon before temporarily sliding back down to $7.10-$7.20 for the rest of the day.

The January high was set in anticipation of an episode of the TV show The Good Wife) airing an episode featuring Bitcoin, bringing the price from a medium-paced recovery after its November low of $1.994 suddenly up to $6.5-$7 for about two weeks. When the episode aired, immediately came a large spike in online attention on Bitcoin as some portion of the show’s 12 million viewers wondered what the online cryptocurrency that they had been suddenly introduced to was. However, the aftermath was a disappointment. Susan Toepfer, in her extensive summary and review of the episode, called it “a fairly low energy episode, requiring far too much attention to tedious detail”, and the markets shared the sentiment. One day after the episode aired, the Bitcoin price precipitously fell from $6.8 all the way down to $4.64 before making a temporary, partial recovery, although the drop was exaggerated by instability in the margin trading service Bitcoinica. It can be argued that the airing was nevertheless a significant turning point in Bitcoin’s public image for the long term, but in the short term it is clear the the Bitcoin traders’ impression of the airing’s effect was wildly exaggerated.

The current rise is different from both this increase and the June bubble that brought us the all-time high of $31.91 per bitcoin in a very significant way. While the previous two bubbles were both accompanied by sudden increases in search volume, both of which are clearly visible on Google Trends, the current rise is accompanied by no such thing. That is not to say the rise is causeless; the news on Chinese adoption, the reports of BitInstant and BitPay seeing rapid growth in transaction volume, the emergence of ASIC mining computers and even the release of Bitcoin Magazine itself did come together to cause a marked shift in mood toward the end of May, even as Bitcoinica had just announced its permanent shutdown as a result of an 18,750 BTC hack. However, the key difference is that while the causes of the previous two bubbles were external, being dependent either directly or indirectly on a sudden influx of attention, the factors behind this increase are internal, indicating a change in sentiment, and possibly a recovery from a level that had been somehow unnaturally suppressed for months before. The fact that the rise came soon after Bitcoinica went down lends some support to the latter theory, as shorting, or effectively owning a negative quantity of bitcoins is no longer possible.

There is indeed much to hope for from Bitcoin in the coming months, but the fact that the search volume on Bitcoin is not increasing is a potential source of worry. Although Bitcoin is getting stronger, and its individual projects are progressing and getting more and established with each passing month, at least this indicator of the size of the community as a whole has remained the same since January. While the argument can be made that there is a substitution effect of people moving away from the casual curiosity form of attention to a deeper and more involved level of involvement with the currency and its increasingly disparate communities, and even that search volume represents the flow of incoming users more than it does the activity of existing ones, the fact that the one major indicator of the size of Bitcoin’s community that is better than any other at being guided by reality rather than sentiment gives reason to be cautious. But unlike the previous two bubbles, it has so far taken one and a half months for the price to climb only 40%, so it may be that caution is a lesson that the community has already learned.

 

For better or for worse, Silk Road has been a fixture in the Bitcoin economy ever since the currency first caught the attention of the mainstream media in early 2011. The service is an online black marketplace for goods such as drugs, pirated digital goods, books on topics such as computer hacking and drug manufacture, counterfeits and forgeries, complete with an Ebay (or Bitmit)-style user interface, an escrow system and a Bitcoin wallet that mixes all incoming and outgoing coins so as to obscure their origin. It operates completely anonymously, existing to the outside world only as a so-called “hidden service” on the Tor network, run by a user who is known to others only as “Dread Pirate Roberts”. It maintains the secrecy of its operators and location by combining two technologies: Tor, the largely US military-funded internet anonymizing service intended to help dissidents in authoritarian regimes evade the prying eyes of their governments, and Bitcoin. The former makes it extremely difficult to trace buyers and sellers’ communications, and the latter, combined with Silk Road’s proprietary mixing system, their financial trail.

Silk Road attracts people for many reasons. Some are simply interested in having a safe and easy place to buy and sell illegal items, of which drugs are by far the largest category. Others cite costs as a factor. One writer, Gwern, claimed in his review of Silk Road that he was able to find Adderall on sale for a “price per pill far superior to that I was quoted by one of my college-age friends (less than 1/3 the price) and also better than the Adderall price quote in the New Yorker, $15 for 20mg”. For others, Silk Road is an ideological mission far more than it is about the goods. Dread Pirate Roberts frequently promotes libertarian political principles on his own forum, and there is a common consensus that fining and imprisoning people for putting substances into their own bodies is morally wrong. The crypto-anarchist movement, which seeks to remove the potential for individuals and institutions to exert power over others by moving key social institutions onto mathematically secured, and often anonymous, internet-based protocols, also finds the service attractive. As governments continue attempting to push restrictive internet legislation such as SOPA and ACTA into law, the allure of using Tor to make such government machinations simply irrelevant will only continue to increase. Finally, there are some legal products available for sale on Silk Road, and even for those who are not interested in using Silk Road to circumvent the law the service provides an active community in which entrepreneurs can nurture their online business and potentially develop a second income from the comfort of their own homes.

Silk Road first truly broke into the public view on June 1, 2011, when an article on gawker.com made a detailed review of the service, and membership quickly jumped by an order of magnitude to over ten thousand. A few days later, the US government caught on, and senators Charles Schumer and Joe Manchin called for the website to be shut down immediately, proclaiming that “Never before has a website so brazenly peddled illegal drugs online” and “by cracking down on the website immediately, we can help stop these drugs from flooding our streets.” Since this brief spark, however, Silk Road has faded somewhat into the background. On June 9, the Bitcoin price bubble finally popped, and attention quickly turned to first this, then to further negative attention on Bitcoin’s economic properties, and finally a security crisis involving a series of unrelated events in late June, continuing in August as bitomat.pl was hacked and the first online Bitcoin wallet, MyBitcoin, disappeared with 51% of its users’ deposits.

Silk Road suffered as the price fell from $31 to $2 between June and November, making it difficult for sellers to make money, but the service retained a loyal following and its users were eventually rewarded with the price rebounding and stabilizing in early 2012. The number of accounts is currently at about 22000, and the largest number of people online at any given time is 126 – a stable community, but much smaller than those who see Silk Road as being the single shadowy force keeping up the Bitcoin economy behind the scenes imagine. About three quarters of its users are from the United States, although British and European users are a sizeable minority. One reason for this is the relative ease of buying bitcoins in the US, as well as the higher interest in drugs there, but the divide is also because Silk Road does little to cater to its non-US customers. For example, Silk Road users have the option of seeing prices in BTC or USD, but not any other currency. This is particularly of concern for non-US sellers, because they, unlike sellers who are based in the US, do not have the choice of setting a price for their goods that is fixed in their local currency. Language is another concern; foreign language support is nonexistent, and even dedicated subforums for second-tier languages are lacking.

So far, there have been no reports of anyone being arrested as a result of Silk Road activity, and there are good reasons to believe that while the DEA may find Silk Road worth keeping an eye on, they are not actively attempting to identify buyers or sellers. As one Silk Road user, vlad1m1r, who confines himself to the strictly legal activity of selling bitcoins in exchange for cash in the mail in the UK, writes, “I find it implausible that they are monitoring it on a daily basis as it’s simply not an effective use of resources due to the anonymous nature of the Tor network and the use of GPG encrypted messages to exchange personal information. Users occasionally speculate that this vendor or that may be LE (Law Enforcement) but I doubt very much that a Police officer would sell drugs in order to make arrests as this would be textbook entrapment.” The last claim, that a police officer selling drugs constitutes entrapment, is a legally complicated one; USLegal defines entrapment as being “when [a person] is induced or persuaded by law enforcement officers or their agents to commit a crime that he had no previous intent to commit”; someone actively searching drug listings on Silk Road would likely not fall under the definition. Nevertheless, the argument that it’s not worth it to spend the resources going after Silk Road is a valid one, and law enforcement officials who are more interested in mitigating the social consequences of drug sellers and gangs on the streets than in pursuing a prohibitionist agenda as an end in itself may well decide to leave Silk Road alone simply because buying drugs on the internet is much safer than the alternative.

The relationship between Silk Road’s users and its management tends to be a positive one. As vlad1m1r describes it, “we do get the occasional malcontent who complains that their thread was arbitrarily deleted or that the creator of Silk Road himself DPR hasn’t deigned to address their particular concern, but people are generally polite when asking for new products or help with using the site, and the admins largely reciprocate.” One of the factors contributing to Silk Road’s cohesive community is the high level of trust. Scams are a serious problem on the darknets because of the anonymity of the participants and the fact that going to the police for help necessarily implies confessing to a crime, and Silk Road is one of the few places that attempts to counteract this with a reputation system and a built-in escrow service.

However, there are problems. One major controversy among the service’s users is that of morality. There have been instances of people putting up images which constitute child pornography in some jurisdictions but are acceptable in others, and the Silk Road administration tends to stick to its own moral philosophy in such cases, not taking down consensual images which are slightly underage but strictly prohibiting products of genuine abuse. There have also been requests for credit card skimming devices, which are not allowed under Silk Road law, but which some people believe are no more immoral than counterfeits and drugs. Weapons were another concern, and Dread Pirate Roberts eventually resolved that particular concern with the middle-of-the-road option of banning them from Silk Road itself but allowing them on a specifically designed sister site called The Armory. Services such as theft and contract killing are banned from Silk Road and The Armory entirely, although some Silk Road users point buyers interested in such goods to a competing site with no moral restrictions at all, Black Market Reloaded.

The other issue, although not a controversy, revolves around the escrow system. The default way of making transactions in Silk Road is for the buyer to send his funds not to the seller directly, but to the escrow system, which notifies the seller that it received and is holding the funds. When the buyer receives his product, he notifies the escrow system that the transaction was successful, and the seller gets his money. Some sellers, however, ask their buyers to bypass this mechanism and send directly to them for convenience, a practice which is heavily frowned upon by the Silk Road administration and community, but is nevertheless sometimes done. On April 20, many sellers on Silk Road celebrated the service’s first birthday by hosting special sales of their products at reduced prices, and one established vendor, Tony76, used the opportunity to sell a large number of orders and ran off with the money. There is some speculation as to just how much Tony76 was able to steal, but it is known that he transferred at least $30,000 worth of bitcoins off the site. Since then, the use of escrow has gained in popularity once again, and the possibility of making escrow mandatory, while not currently implemented, is always under discussion.

Outside opinion on Silk Road is split. Some believe that the Bitcoin economy would be better off without such services tarnishing its reputation, as it would be better able to market itself as a currency with legitimate uses, while others openly embrace the underground economy either seeing its liberation as an end in itself or respecting its potential to act as a bootstrapping mechanism for Bitcoin. In terms of its size, Silk Road is currently Bitcoin’s largest e-commerce platform, having about twice as many products as its largest legal competitor, bitmit.net, but it is far from being Bitcoin’s economic powerhouse, a title to which businesses like Butterfly Labs and BitInstant hold a much greater claim. Both supporters of Silk Road’s particular brand of crypto-anarchic freedom and people concerned with Bitcoin’s public image can rest assured that Silk Road is nowhere near taking over the Bitcoin economy, but neither is it going away.