SILK ROAD
In September 2013, the US Department of Justice unsealed a criminal complaint charging the alleged owner and operator of Silk Road, a hidden website designed to enable its users to buy and sell illegal drugs, weapons, stolen identity information and other unlawful goods and services anonymously and beyond the reach of law enforcement, with narcotics trafficking, computer hacking, and money laundering conspiracies. The Justice Department also seized the website and approximately 173 991 bitcoins, worth more than USD 33.6 million at the time of the seizure, from seized computer hardware. The individual was arrested in San Francisco in October and indicted in February 2014; the investigation is ongoing.
Launched in January 2011, Silk Road operated as a global black-market cyber bazaar that brokered anonymous criminal transactions and was used by several thousand drug dealers and other unlawful vendors to distribute unlawful goods and services to over a hundred thousand buyers, a third of whom are believed to have been in the United States.
It allegedly generated total sales revenue of approximately USD 1.2 billion (more than 9.5 million bitcoins) and approximately USD 80 million (more than 600 000 bitcoins) in commissions for Silk Road. Hundreds of millions of dollars were laundered from these illegal transactions (based on bitcoin value as of dates of seizure). Commissions ranged from 8 to 15 percent of total sales price.
Silk Road achieved anonymity by operating on the hidden Tor network and accepting only bitcoins for payment. Using bitcoins as the exclusive currency on Silk Road allowed purchasers and sellers to further conceal their identity, since senders and recipients of peer-to-peer (P2P) bitcoin transactions are identified only by the anonymous bitcoin address/account.
Moreover, users can obtain an unlimited number of bitcoin addresses and use a different one for each transaction, further obscuring the trail of illicit proceeds. Users can also employ additional “anonymisers,” beyond the tumbler service built into Silk Road transactions (see discussion below).
Silk Road’s payment system functioned as an internal Bitcoin bank, where every Silk Road user had to hold an account in order to conduct transactions on the site. Every Silk Road user had at least one Silk Road Bitcoin address (and potentially thousands) associated with the user’s Silk Road account, stored on wallets maintained on servers controlled by Silk Road.
To make a purchase, a user obtained bitcoins (typically through a Bitcoin exchanger) and sent them to a Bitcoin address associated with his or her Silk Road account to fund the account. When a purchase was made, Silk Road transferred the user’s bitcoins to an escrow account it maintained, pending completion of the transaction, and then transferred the user’s / buyer’s bitcoins from the escrow account to the vendor’s Silk Road Bitcoin address.
As a further step, Silk Road employed a “tumbler” for every purchase, which, as the site explained, “sen[t] all payments through a complex, semi-random series of dummy transactions ... --making it nearly impossible to link your payment with any [bit]coins leaving the site