This week, another scandal marked the saga of Silk Road, the dark web marketplace that promised its buyers and sellers anonymity by way of encryption and bitcoins before it was shut down in 2013.
The US Department of Justice announced charges on Monday against two former federal agents accused of stealing large amounts of bitcoin during their investigation of Silk Road. Carl Force, a former Drug Enforcement Administration agent, and Shaun Bridges, a special agent with the Secret Service, belonged to a Baltimore-based federal task force investigating the site. Mr. Force was the lead undercover agent who communicated with Ross Ulbricht, the man pegged as Silk Road's founder and convicted in February on charges of money laundering, drug trafficking, and more for his role in overseeing Silk Road.
Now prosecutors say that Mr. Force used the aliases created during the investigation to extort $250,000 from Ulbricht. The also say he stole $90,000 in bitcoins that Ulbricht paid to an officially sanctioned alias used for the undercover investigation.
Mr. Bridges, meanwhile, diverted over $800,000 worth of bitcoin to his account during the operation, authorities say.
If there is one thing the rise and fall of Silk Road has revealed, it is just how easy it is to get caught using bitcoin. The peer-to-peer electronic payment system that bypasses banks, is not anonymous. In fact, despite numerous assertions to the contrary, it never was.
Created as recently as 2009, bitcoin gained notoriety in large part due to the mystique surrounding the Silk Road website, which was only accessible through an anonymous browsing network. Bitcoin was the only form of currency accepted on the site, so individuals trading in illicit goods and services made millions of dollars worth of bitcoin transactions each year.
But after Ulbright was tracked down through bitcoin transactions traced between the site’s IP address and the wallets stored on his laptop, the jig was up. The myth that using bitcoin would allow criminals to avoid getting caught was officially dispelled. Instead of abandoning the digital currency however, bitcoin enthusiasts are leaning in and calling for greater regulation.
“It’s sad to see the public perception being affected by negative headlines," says Alex Waters, the founder of Coin.co, a private company that enables online merchants to accept bitcoin for their goods and services, in a phone interview. "It is a fascinating technology that can help humanity on a very large scale. It’s a shame for people not to take it seriously because of the emphasis on its illicit use."
As more and more businesses begin to accept the bitcoin, advocates say, it is important that adequate regulatory laws be put in place.
“The[Silk Road] case just brought attention to the fact that bitcoin is not anonymous. But there are more uses for it now. People are using it for different things,” says Jesse Powell, co-founder and CEO of Kraken, a digital asset exchange with support for bitcoin.
Some observers were surprised to learn just how traceable bitcoin is, but those familiar with the system were not. Bitcoin has been easily traceable since the beginning because every transaction is recorded in its own global ledger, known as the blockchain. Meanwhile, every bitcoin holder has a personal wallet with an address, a lasting identity, and a wealth of data associated with that identity. If you don't know who is behind a specific wallet, it can seem as if a transaction is anonymous. But once a person’s identity has been connected to the wallet, as it was in Ulbricht’s case, their financial activity is instantly traceable.
Bitcoin's value peaked at approximately $1,240 per 1 bitcoin in 2014, but it has fallen drastically since, now sitting at $244.86 per 1 bitcoin. Some have claimed the cryptocurrency’s value dropped because Ulbright's trial revealed the inner workings of the system to a wider audience, but Mr. Powell claims the effects have been minimal. Instead, he says, it is regulatory uncertainty and the high cost for bitcoin startups of getting a money transmission license, which is required in most states for companies that provide money transfer services or payment instruments, like checks and money orders.
“People need regulatory clarity. People are not opposed to getting licenses; the states just need to give them. Currently, businesses operating with bitcoin need to get one for each state in which they have a customer. There is a heavy cost of operating a business in the US,” says Powell.
Experts say it is only a matter of time before bitcoin is regulated, and some companies are already capitalizing on the push for oversight. In January, San Francisco-based bitcoin storage company Coinbase opened Lunar, a bitcoin exchange that has regulatory approval in about half of US states. Bitcoin's value surged on the news.
“The days of anonymous transactions in bitcoin and operating an exchange with no outside interference are over. As virtual currencies develop, firms devoted to aiding trading, and perhaps even their users, will encounter greater government regulation, along with the costs that come with compliance,” wrote Peter J. Henning, a professor at Wayne State University Law School, in the New York Times.
The future of bitcoin regulation on a state-by-state level, however, is still uncertain.
“States need to have a unified approach so they don’t have a vastly different way of registering for licenses,” says Mr. Waters.
New York is currently revising a proposed draft of cryptocurrency regulations, and New York Financial Services officials expect that bitcoin startups will be running in 2015. However, it is likely there will be some growing pains as companies adjust to the new rules.
The more bitcoin use becomes normalized, the more those using it will need to behave like other financial institutions, said Benjamin M. Lawsky, New York’s Superintendent of Financial Services, to Forbes.
“There is a basic bargain that when a financial company is entrusted with safeguarding customer funds and receives a license from the state to do so – it accepts the need for heightened regulatory scrutiny to help ensure that a consumer’s money does not just disappear into a black hole. “And most of what virtual currency firms are being asked to do – whether it is examinations, anti-money laundering compliance, accounting, or record-keeping – is similar to what other financial firms must do.”