Silk Road is an online market. As part of the Deep Web, it is operated as a Tor hidden service, such that online users are able to browse it anonymously and securely without potential traffic monitoring. The website launched in February 2011; development had begun six months prior. Although Silk Road is an underground website, sometimes called the "Amazon.com of illegal drugs" or the "eBay for drugs," the site also sells apparel, art, biotic materials, books, collectibles, computer equipment, digital goods, along with dozens of other categories of merchandise.
Initially, buyers could register for free, but there were a limited number of new seller accounts available; new sellers had to purchase an account via an auction. Later, a fixed fee for each new seller account was chosen to mitigate the possibility of malicious individuals distributing tainted goods.
On 2 October 2013, the FBI shut down Silk Road. They arrested Ross William Ulbricht on charges of alleged murder-for-hire and narcotics trafficking violation and identified him as the founder and chief operator "Dread Pirate Roberts". On 6 November 2013 Forbes and Vice reported that Silk Road 2.0 was online and being run by former administrators of Silk Road and that a different user was now using the name, Dread Pirate Roberts.
Characterized as humanitarian, idealist, and criminal, alleged mastermind and founder Ulbricht pled not guilty to charges of drug trafficking, computer hacking, money laundering, and running a continuing conspiracy in a Manhattan court on 7 February 2014.
In June 2011, Gawker published an article about the site, which led to "Internet buzz" and an increase in website traffic. Once the site was known publicly, U.S. Senator Charles Schumer asked federal law enforcement authorities such as the DEA and Department of Justice to shut down the website.
In February 2013, an Australian cocaine and MDMA dealer became the first person to be convicted of crimes directly related to Silk Road, after authorities intercepted drugs he was importing through the mail, searched his premises, and discovered his Silk Road alias in an image file on his personal computer. Australian police and the DEA have targeted Silk Road users and made arrests, albeit with limited success at reaching convictions. In December 2013 a New Zealand man was sentenced to two years and four months' jail after being convicted of importing 15 grams of methamphethamine he had bought on Silk Road.
On 27 June 2014, the U.S. Marshals Service will sell 29,657 bitcoins in 10 blocks, estimated to be worth $18 million at current rates, and only about a quarter of the seized bitcoins, in an online auction. Another 144,342 bitcoins, roughly $87 million, found on Ulbricht's computer, will be kept.Tim Draper bought the bitcoins with an estimated worth of $17 million at the auction, to lend them to a bitcoin start-up called Vaurum, which is working in developing economies of emerging markets.
Seizure and arrest
Image placed on original Silk Road after seizure of property by FBI
Impact of the seizure on the USD/Bitcoin exchange rate
On 2 October 2013, Ross William Ulbricht, alleged by the FBI to be the owner of Silk Road and the person behind the pseudonym "Dread Pirate Roberts," was arrested in San Francisco on suspicion of drug trafficking, soliciting murder, facilitating computer hacking, and money laundering. Christopher Tarbell, the FBI agent leading the investigation, was also responsible for the 2011 arrest of the LulzSec hactivist Hector Xavier Monsegur (Sabu). On 4 October, Ulbricht appeared in federal court in San Francisco and denied all charges, whereupon the hearing was rescheduled for 9 October.
In anticipation of transfer to New York, Ulbricht became represented by New York lawyer Joshua Dratel, a former lawyer for Guantanamo detainees.
The FBI seized over 26,000 BTC from accounts on Silk Road, which were worth approximately $3.6 million at the time. An FBI spokesperson said in an interview that they would hold the bitcoins until the judicial process finished and after that, they would liquidate them. On 25 October, the FBI reported that they had seized 144,000 BTC worth $28 million that they believed belonged to Ulbricht.
Silk Road 2.0
On 6 November 2013 admins from the shuttered Silk Road, led by a new pseudonymous Dread Pirate Roberts, relaunched the site. Dubbed "Silk Road 2.0" it recreated the original site's setup and promised improved security. The new DPR took the precaution of distributing encrypted copies of the site's source code to allow the site to be quickly recreated in the event of another shutdown.
On 20 December 2013 it was announced three alleged Silk Road admins had been arrested; two of these suspects, Andrew Michael Jones and Gary Davis, were named as the admins "Inigo" and "Libertas" who had continued their work on Silk Road 2.0. Around this time the new Dread Pirate Roberts abruptly gave up control of the site and froze its activity, including its escrow system. A new temporary administrator under the screenname "Defcon" took over and promised to bring the site back to working order.
On 13 February 2014, Defcon announced that Silk Road 2.0's escrow accounts had been compromised through a vulnerability in Bitcoin's protocol called "transaction malleability". While the site remained online, all the bitcoins in its escrow accounts, valued at $2.7 million, were reported stolen. In April, Vice magazine reported that the vulnerability was actually in the site's "Refresh Deposits" function, and that the Silk Road administrators had used their commissions on sales since 15 February to refund users who lost money, with 50 percent of the hack victims being completely repaid as of 8 April.
As of March 2013[update], the site had 10,000 products for sale by vendors, 70% were drugs that are considered contraband in most jurisdictions. 340 varieties of drugs were being sold, including heroin,LSD, and cannabis. The site's terms of service prohibit the sale of "anything who's [sic] purpose is to harm or defraud." This includes child pornography, stolen credit cards, assassinations, and weapons of mass destruction. There were also legal goods and services for sale, such as apparel, art, books, cigarettes, erotica, jewelry, and writing services. A sister site, called "The Armory", sold weapons (primarily guns) during 2012, but was shut down due to a lack of demand.
Buyers can leave reviews of seller's products on the site and in an associated forum where crowdsourcing provides information about the best sellers and worst scammers.
Based on data from 3 February 2012 to 24 July 2012, an estimated $15 million in transactions were made annually on Silk Road. Twelve months later, Nicolas Christin, the study's author, said in an interview that a major increase in volume to "somewhere between $30 million and $45 million" would not surprise him. Buyers and sellers conducted all transactions with bitcoins (BTC), a cryptocurrency that provides a certain degree of anonymity. Silk Road held buyers' bitcoins in escrow until the order had been received and a hedging mechanism allowed sellers to opt for the value of bitcoins held in escrow to be fixed to their value in US$ at the time of the sale to mitigate against Bitcoin's volatility. Any changes in the price of bitcoins during transit were covered by Dread Pirate Roberts.
The criminal complaint published when Ulbricht was arrested included information the FBI gained from a system image of the Silk Road server collected on 23 July 2013. It noted that, "From February 6, 2011 to July 23, 2013 there were approximately 1,229,465 transactions completed on the site. The total revenue generated from these sales was 9,519,664 Bitcoins, and the total commissions collected by Silk Road from the sales amounted to 614,305 Bitcoins. These figures are equivalent to roughly $1.2 billion in revenue and $79.8 million in commissions, at current Bitcoin exchange rates...", according to the September 2013 complaint, and involved 146,946 buyers and 3,877 vendors. According to information users provided upon registering, 30 percent were from the United States, 27 percent chose to be "undeclared," and beyond that, in descending order of prevalence: the United Kingdom, Australia, Germany, Canada, Sweden, France, Russia, Italy, and the Netherlands. During the 60-day period from 24 May to 23 July, there were 1,217,218 messages sent over Silk Road's private messaging system.
Due to its criminal activities, Silk Road is held as instrumental in the demonization of technology and, more specifically, Tor. While allegations against Silk Road are indeed serious, commentators assert that not all activities in the encrypted browser be deemed as suspicious; rather, that Tor’s encryption and anonymization techniques be viewed under its original conception, i.e., as a tool for uncensored speech to Internet users.
The Farmer's Market was a Tor site similar to Silk Road, but which did not use bitcoins. It has been considered a 'proto-Silk Road' but the use of payment services such as Paypal and Western Union allowed law enforcement to trace payments and it was subsequently shut down by the FBI in 2012. Other sites already existed when Silk Road was shut down and The Guardian predicted that these would take over the market that Silk Road previously dominated. Sites named Atlantis, closing in September 2013, and Project Black Flag, closing in October 2013, each took their users' bitcoins. In October 2013 the site named Black Market Reloaded closed down temporarily after the site's source code was leaked.
^Dread Pirate Roberts (2011-06-26). "New seller accounts". Silk Road forums. Retrieved 2013-08-05. "[...] we shut down new seller accounts briefly, but have now opened them up again. This time, we are limiting the supply of new seller accounts and auctioning them off to the highest bidders. Our hope is that by doing this, only the most professional and committed sellers will have access to seller accounts. For the time being, we will be releasing one new seller account every 48 hours, though this is subject to change. If you want to become a seller on Silk Road, click "become a seller" at the bottom of the homepage, read the seller contract and the Seller's Guide, click "I agree" at the bottom, and then you'll be taken to the bidding page. Here, you should enter the maximum bid you are willing to make for your account upgrade. The system will automatically outbid the next highest bidder up to this amount. [...]"
^Dread Pirate Roberts (2011-07-01). "New seller accounts". Silk Road forums. Retrieved 2013-08-05. "[...] We received a threat from a very disturbed individual who said they would pose as a legitimate vendor, but send carcinogenic and poisonous substances instead of real products and because seller registration is open, they would just create a new account as soon as they got bad feedback. This was shocking and horrifying to us and we immediately closed new seller registration. Of course we need new sellers, though, so we figured that charging for new seller accounts would deter this kind of behavior. [...]"
^ abJoseph Cox (2014-04-22). "How Silk Road Bounced Back from Its Multimillion-Dollar Hack". Vice magazine. "Defcon told me that staff concluded there was a vulnerability in the “Refresh Deposits” function of the site. Using this, the hacker was able to spam the link and exponentially credit their account with more and more bitcoins, taking them out of the section of Silk Road that stored the currency while it was being traded... According to Silk Road staff members, 50 percent of the hack victims had been completely repaid as of April 8, and users themselves have been continually reporting payments since the breach, posting on the site forum when they receive their payment. Since February 15, the administration of the site has not made any commissions on sales. Instead, every time a purchase is made, a five percent slice of the cost goes directly into the account of a randomly determined hack victim."