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Bitcoin, Freedom and their Role in Black Markets

Note: this article has been updated from the version published on June 3rd.

Though most countries have yet to accept Bitcoin as legal tender, Bitcoin is steadily becoming a mainstream asset.  Aside from speculators and traders, businesses are now beginning to adopt the cryptocurrency as well.  Microsoft, Amazon and a number of other large corporations and small businesses both accept Bitcoin, and some businesses are beginning to pay their employees’ salaries in Bitcoin as well.  Hundreds of Bitcoin ATM’s have appeared around the world, slowly integrating everyday society with the cryptocurrency.

As large investors and businesses begin to utilize Bitcoin, every day people will be more likely to put their faith into the seemingly mysterious digital currency.  It will no longer be limited to the technically literate.  However, as many are introduced to the concept of Bitcoin, it becomes historically important to understand its nascent years, the philosophies which inspired its original backers and the markets at which Bitcoin was first put to practice.  Before it was ever accepted in the mainstream, it was an item for crypto enthusiasts and fringe anarchists.  Before it was generally accepted by mainstream corporations, it was the currency of notorious, digital black markets.

Bitcoin Genesis

The concept of Bitcoin was first introduced to the public sphere when the mysterious Satoshi Nakamoto released the paper, Bitcoin: A Peer-to-Peer Electronic Cash System, in 2008.  On the 9th of January the following year he released Bitcoin version 0.1 as open source software.  The first Bitcoin transaction took place three days later between Satoshi and the late Hal Finney.

The true identity of Satoshi Nakamoto is unknown; he could be an individual or a group of people.  His involvement in the bitcoin project ended in 2010, when he ultimately disappeared from the public sphere, entrusting the development of Bitcoin to the community.  It was at this point, however, that the idea of Bitcoin had taken root.  All that was left was to see what society would do with this creation.

It is impossible to speak for Satoshi Nakamoto or determine his reasoning behind the creation of Bitcoin, so a controversy has developed around what some believe his motivations to be.  The early beginnings of Bitcoin are not unblemished by politics, and many have taken political interpretations from his actions and words.  For example, in a conversation with Hal Finney, Satoshi said the following while referring to Bitcoin:

It’s very attractive to the libertarian viewpoint if we can explain it properly.  I’m better with code than with words though.[1] – Satoshi Nakamoto

Whatever Satoshi Nakamoto’s motives were, Bitcoin itself as a concept is objectively liberating, from both the perspective of an individual and society as a whole.  Obviously, the very concept of Bitcoin was revolutionary in itself.  The concept and implementation of a decentralized currency controlled not by a central authority but by the community was never before achieved in history, and thus the idea was very attractive to those of many different persuasions.  However, besides the theoretical feat, Bitcoin wasn’t very useful in and of itself when it was originally created.  It was still relatively unheard of and accepted absolutely nowhere.  It was nothing but cryptographic signatures assigning themselves to an address, worth nothing at the time.  Being less intuitive than cash and lacking the wide acceptance of credit, there was little reason for regular people to adopt the use of Bitcoin.

This created two distinct demographics of people who were originally interested in the cryptocurrency.  Anyone who grasped onto Bitcoin in its early years were either crypto enthusiasts interested in the technical aspect of Bitcoin, or privacy advocates, crypto anarchists and libertarians who saw potential opportunities emerge with the new cryptocurrency.  The liberating aspect of Bitcoin necessitated the latter to put their trust in Bitcoin as a possible currency, as there was no alternative that could provide fractions of the privacy and pseudonymity offered by Bitcoin.  With this freedom, an entire sub culture sought to free themselves from government regulations and control.  Its use in crime was therefore inevitable.

Silk Road

During late 2010, while Bitcoin was still new and under the mainstream radar, a research scientist named Ross Ulbricht was developing his own project which would eventually bring Bitcoin into international headlines.  Ross, originally a material science and engineering major, began to lose interest in his scientific research as he became enamored with libertarian economic philosophies, likely taking inspiration from the writings of influential libertarian inspirations such as Austrian economist Ludwig Von Mises.  According to Ross Ulbricht’s LinkedIn page, his goals were to “use economic theory as a means to abolish the use of coercion and aggression amongst mankind.”

Attaining freedom was what Ross sought in the creation of The Silk Road, which he finally launched as a hidden service accessible on the darknet in February of 2011.  The Silk Road was basically an Amazon for drugs and illegal substances, where someone could anonymously order narcotics and have them delivered over the mail, all from the comfort of their computer.  It made use of anonymity provided by the TOR network and vendor reputation to provide trust in the anonymous environment.  Silk Road would hold Bitcoins for transactions until each party was satisfied, acting as an intermediary to prevent scamming.

The Silk Road was ultimately Ross’ simulation of an anarchist market.  His philosophy behind The Silk Road closely resembled agorism, an extreme libertarian philosophy which espouses a peaceful counter-economic revolution through civil disobedience by the creation of black markets.  Agorism holds that all market trade should be free, voluntary, consensual, non-violent and free from government regulation.  Promoting in society a system of safe, voluntary and consensual exchanges where individuals could exchange whatever they desired, free from government regulations, seemed to be Ross’ original goal.

The ability to mail order a wide variety of drugs over the internet caused the Silk Road to become rapidly popular and notorious, while incentivizing thousands of new individuals to buy Bitcoin, a purchase they otherwise would not have made.  Ross operated the site for nearly two years under the pseudonym of Dread Pirate Roberts, or DPR, until law enforcement finally seized The Silk Road in October 2013 and took Ross into federal custody.  In this time, the Silk Road had seen 1,229,465 transactions completed with total revenue nearing 9,519,664 bitcoins, likely accounting for well over 10% of total Bitcoin transactions.[2]  Even after the fall of The Silk Road, it is estimated that other darknet black markets ‘processed more Bitcoin than Bitpay’ daily, illustrating the significance of black markets within Bitcoin’s economy.  It is certain that the darknet black market drug trade greatly influenced the growth of Bitcoin.

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In the time that Ross controlled The Silk Road operation, he was allegedly involved in a plethora of crimes.  He was charged with laundering, hacking, drug-trafficking, and even allegedly ordering the murders of 6 people, though there is no proof any murder was ever carried out.  In May 2015, Ross was sentenced to life in prison without parole.  The severity of the sentence was likely to set precedence for others joining the rapidly evolving darknet market scene.  Despite the austerity of the allegations, many individuals, especially those within libertarian circles, consider Ross to be a libertarian martyr of sorts.[3]  Some also point to this case for the implications it might have in the future of regulations regarding the internet, particularly concerns regarding the liability of web hosts.

What is unmistakable, however, is that through the creation of The Silk Road, Ross brought enormous attention to Bitcoin from the mainstream and inspired an underground black market culture which thrives to this day.  Even though The Silk Road has been shut down for years, exchanging illegal goods is still possible on hundreds of other markets created in the past few years.  Except for perhaps guns and hitmen, which are much harder to procure on the darknet than popular culture might proclaim, other contraband such as drugs and malware are easily and safely obtainable on a variety of different darknet markets.

Despite the darknet market economy being riddled with damaging events such as exit scams, where an entire market disappears with the Bitcoins of both vendors and clients, darknet black market operations continue to be successful and, for the most part, undeterred by law enforcement.  Even after events such as Operation Onymous, where law enforcement across several nations successfully seized hundreds of darknet sites, more darknet market administrators gladly fill the gaps left behind by their predecessors.  Black markets using Bitcoin don’t only facilitate drugs and narcotics trafficking.  Cybercrime is a business which costs the global economy 575 billion yearly.  Bitcoin has become the preferred currency of hackers and cybercriminals, and darknet black markets have become a favored place for hackers to sell credit cards and other stolen data.

The fact that Bitcoin is used extensively in the criminal underground for all sorts of criminal activity makes it especially interesting to see how global governments will react to the cryptocurrency.  Governments will certainly try to take control of the situation with greater regulations, demonstrated in the case of an owner of an exchange site in Estonia, who had his site shut down and faces fines and potential jail time for failing to release information about his clients.  However, governments also seem keen to accept the cryptocurrency and integrate it with everyday life, such as the Swiss city of Zug, which is planning on accepting Bitcoin for city services.

Bitcoin is valuable for the new opportunities it provides.  The fact that it is useful for crime doesn’t make it solely useful for crime.  Just as cash is useful for criminals (some even wish to abolish cash for this reason), it is exceptionally useful for legal and mundane transactions as well.  The same reasoning applies to Bitcoin, a highly versatile technology which empowers individuals and businesses with never before heard of flexibility and control over their own digital assets.  It is for these reasons that banks are beginning to leverage blockchain concepts within their technology as well.  If criminals and anarchist types were perhaps an overwhelming demographic to originally adopt Bitcoin, they did so out of necessity, through the fact that the new creation of Bitcoin was the only decentralized and highly anonymous alternative to other forms of online payment.  Bitcoin as an asset was largely proven viable to the public through its successful adoption in highly anonymous and secure digital black markets.

Like Ross Ulbricht said, “I learned from Silk Road that when you give people freedom, you don’t know what they’ll do with it.”  Society witnessed how the freedom of Bitcoin was used in the criminal underground.  Now all that’s left to see is how upcoming entrepreneurs will use this freedom to mark the future with Bitcoin.

[1] http://www.mail-archive.com/cryptography@metzdowd.com/msg10001.html

[2] https://www.cs.columbia.edu/~smb/UlbrichtCriminalComplaint.pdf. Note: assuming that each Silk Road purchase involved two transactions (one for the transfer to the escrow service and one for a transfer from the escrow service), then the Silk Road was responsible for at least 9% of the 213 million Bitcoin transacted while the Silk Road was operational. Given that many of these transactions involved later peeling activity to hide them, the total blockchain activity attributable to the Silk Road is likely far higher.

[3] Ross’ family has raised 450,000$ for Ulbricht’s defense fund, arguing that The Silk Road wasn’t as sinister as presented by the mainstream media.  Many believe Ross to be a victim to an unbridled federal government, with thousands showing their support for the FreeRoss movement.

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