Silk Road Bust Could Halt Bitcoin Economy

Many of the bitcoins in existence could likely be traced back to the Silk Road marketplace seized by the FBI today.

Tom Simonite

October 2, 2013

News that the FBI had arrested a man on suspicion of running the notorious online marketplace Silk Road, where bitcoins were traded for illegal drugs, sent many people scurrying to watch how the value of the bitcoin reacted. After an initial 20 percent plunge in the value, the currency soon recovered–which some virtual-currency enthusiasts saw as proof that the bitcoin economy could easily handle the bad press and loss of Silk Road.

In fact, it’s too early to make that call. There’s good reason to believe that the Silk Road bust may cause a freeze in bitcoin transactions that could trouble its still-nascent economy. Silk Road was popular in part due to bitcoin’s reputation for providing anonymity. But recent research shows it is relatively easy to track their flows and identify their owners. Many people that used Silk Road - likely a significant proportion of bitcoin users - are at risk of being traced. They are probably understandably wary of spending their bitcoins.

Research by Nicolas Christin of Carnegie Mellon University published this year suggested that Silk Road alone comprised between 4.5 and 9 percent of daily bitcoin transactions. Figures in the criminal complaint published today underline that the marketplace was a giant in the bitcoin economy. Silk Road is said to have brought in 9.5 million bitcoins since 2011. Although some of the cryptocoins will have passed through the marketplace twice, that’s a striking figure given that only 11.75 million bitcoins have ever been created.

We learned earlier this month that law enforcement could likely already identify many people that had done business on Silk Road thanks to the way bitcoin transactions are publicly logged (see “Mapping the Bitcoin Economy Could Reveal Users’ Identities”).

Sarah Meiklejohn, the University of California San Diego researcher who led that research told me that she had briefed a law enforcement agency on her techniques. She also demonstrated their power by tracing a Silk Road transaction made by Forbes journalist Andy Greenberg. Combined with the information the FBI gathered through its Silk Road investigation and seizures, many more people now stand at risk of being traced.

That could mean we see a string of secondary arrests in coming days of people that made use of Silk Road. It surely means that many people are in possession of bitcoins that could tie them to Silk Road, and that they would be unwise to spend.

http://www.technologyreview.com/view/519846/silk-road-bust-could-halt-bitcoin-economy/