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Bitcoin at the centre of international drug trade

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Bitcoin at the centre of international drug trade

Opponents of Bitcoin and other crypto-currencies were vindicated last week after the FBI seized Silk Road, an online black market on the Deep Web used to buy and sell illegal drugs. Silk Road operated as a hidden service, priding itself as the anonymous marketplace allowing users to browse and purchase items without fear of traffic monitoring.

The value of Bitcoin, the online crypto-currency that enables creation and exchange through open source protocol independent of any central authority, suddenly dropped last week after Silk Road mastermind Ross Ulbricht was arrested. It later came to light the crypto-currency was at the centre of the black market’s activity, with the FBI seizing 26,000 Bitcoins that belonged to Silk Road customers. However, the Bureau has so far been unsuccessful in securing the 600,000 Bitcoins (valued at around $80 million) Ulbricht is believed to be holding.

The decentralized nature of Bitcoins has raised questions about how to regulate virtual currency. As the Silk Road situation clearly demonstrates, confiscating virtual funds, which don’t rely on any centralized authority for processing or handling, poses a significant challenge. Bitcoins and other virtual currencies use methods of cryptography similar to those used to protect e-mails. In order to transfer Bitcoins, users need to know the password protecting the “wallet,” which is the name of the digital file containing the encrypted information.

Although the FBI has been unable to locate Ulbricht’s secret stash, the funds are unlikely to be moved now that the Silk Road mastermind is in custody. According to Jon Matonis, executive director of the Bitcoin Foundation, authorities won’t be able to seize Ulbricht’s Bitcoins without access to the servers and/or passwords that protected the digital currency.

The Silk Road drug bust has raised several questions about the sustainability and usefulness of Bitcoins in mainstream commercial activity. The crypto-currency and others like it have been at the centre of attention for all the wrong reasons, as regulators struggle to account for the grey areas surrounding its use. United States anti-laundering agencies have already gone after virtual currency providers, having seized Costa Rica-based Liberty Reserve in May of this year on charges of cyber fraud. Liberty Reserve is believed to be at the centre of a large scale money laundering operation valued at more than $6 billion.

In light of these challenges, Thailand recently became the first nation to outright ban the use of virtual currency. However, this sentiment wasn’t shared by Germany, which became the first nation to recognize BItcoin as a legitimate currency. The move to recognize Bitcoin as private money helped strengthen the virtual currency’s legitimacy, making it subject to the rules of the financial system.

The digital currency debate will continue to divide regulators, consumers and online businesses. On the one hand, the advent of the information age and growth of online shopping have created demand for a common, delocalized, virtual currency that enables creation and exchange in a private, secure manner. On the other hand, the bulk of this activity has been used to evade authorities by users involved in illegal activity. Ulbricht’s stash of 600,000 Bitcoins is believed to represent 5 percent of Bitcoin’s total circulation. For this reason, the value of Bitcoins is susceptible to large price swings. Until we see more evidence of Bitcoin being used for legitimate activity, the value of the virtual currency could change suddenly. The value of Bitcoin is based on supply and demand, and is determined by online currency conversion websites.

Silk Road users are believed to have exchanged more than 9.5 million Bitcoins since the site launched in May 2011. The value of the crypto-currency fell 15 percent after news of Ulbricht’s arrest surfaced last week.

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