David Ben-Gurion once said, "In order for Israel to be counted among the nations of the world, it must have its own burglars and prostitutes." By analogy, a currency must have fuelled its share of crime before it becomes acceptable, if not necessarily legal, tender.
The virtual currency bitcoin has crossed that barrier, thanks to the Deep Web market, Silk Road. Silk Road could be accessed only through onion routing, which masked its server locales (both virtual and physical) as well as the identities and internet protocol (IP) addresses of visitors.
The market allowed drugs to be traded, along with weapons, art and jewellery of dodgy provenance. There were whispers that you could also hire "service providers" to perform murders or kidnappings.
The owner styled himself "Dread Pirate Roberts", or DPR, after "The Princess Bride" character. DPR wrote a libertarian manifesto, stating that he wanted a marketplace free from government tyranny. In early October 2013, after a three-year chase, the Federal Bureau of Investigation arrested DPR from the science-fiction section of a public library in San Francisco.
DPR's real-world persona is Ross William Ulbricht, 29, a physics student who dropped out from the postgraduate programme at Pennsylvania State University. The operation fell apart because a courier packet containing fake identity documents with DPR's picture fell into the wrong hands. After that, legwork connected the threads between Mr Ulbricht and DPR.
By then, DPR had allegedly cleared over $80 million in commissions. The site is said to have processed well over $1 billion in drug-related transactions alone. Apart from drug trafficking, money laundering, etc, DPR is believed to have arranged murders.
The problem with running such a marketplace is, of course, the need to provide anonymity. How does one transact without leaving an electronic or paper trail? Silk Road solved these problems very elegantly.
Anybody could open a user account, with an electronic wallet containing cash. Every transaction would lead to cash placed in escrow by Silk Road with the payment delivered upon proof of receipt of contracted goods or services. The site charged a commission. This is all close to the eBay model and Silk Road also used buyer-seller feedback the same way.
One key difference was that Silk Road user accounts were anonymous and the currency used was the bitcoin. The bitcoin is a virtual currency. It is not backed by government or bullion or any given company. It can be exchanged for fiat currencies and has seen speculative surges in price. Daily bitcoin trading volume is reckoned to run at about $10 million USD equivalent.
The currency was designed circa 2008. A hacker with the handle "Satoshi Nakamoto" wrote a seminal paper outlining how it could work. Every bitcoin issued has a unique encrypted ID, which means the currency cannot easily be forged or "double-spent".
Every transaction and every issued bitcoin is tracked through a public ledger called the Blockchain, using a decentralised peer-to-peer (P2P) system. The currency can be earned or "mined", as hackers call it, by lending computer time to the P2P network. The money supply is controlled. There will never be more than 21 million bitcoins issued. DPR worked out how to make multiple dummy transactions that allowed transfer of ownership on the Blockchain, while making origin untraceable.
Bitcoins are used in many legitimate transactions. They are popular on gamer forums and porn sites, and are also used to buy less exotic electronic goods and services. Other virtual currencies such as the Facebook Credit and Linden dollars are also used for similar transactions. But those are issued by firms that could be forced to divulge user details by governments.
The masking techniques utilised by Silk Road are becoming increasingly popular among computer savvy people, who wish to avoid surveillance. Silk Road has been shut down. However, given the National Security Agency-triggered paranoia of the zeitgeist and, shall we say, a certain lack of faith in fiat currencies, it's likely that clones of Silk Road will pop up sooner or later.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
