The Silk Road Marketplace: Crypto’s Darkest Days

    Technological advancement has always been a means to facilitate services and other day-to-day errands. The ever-growing technological innovation in various sectors has proved to be beneficial. However, the digitization of data has urged new technologies to emerge that prioritize data privacy. Although data anonymization helped protect users’ personal information, it opened the door for criminals who wished to conduct illicit and illegal activities. This is exactly what happened in 2011 when crypto was a means to operate the infamous Silk Road marketplace. 

    The crypto world has had its fair share of scams, frauds, and many illegal activities surrounding these digital currencies. However, the darkest story of them all relates to dealing narcotics on an online marketplace. Yes, you heard it right, Bitcoin spent its first years being dealt for illegal drugs.  Let’s have a deep dive into the shadiest, twisted, and illicit uses of crypto!

    What Is the Silk Road?

    No, we’re not talking about the road that connected the West with the East in the second-century BCE. The Silk Road marketplace is a much more modern take on trade, and certainly a very dark one. 

    The Silk Road marketplace was an online black market that was infamous for hosting various illicit activities, such as money laundering and drug dealing. The marketplace is considered to be the first dark web market that was launched back in 2011 by then-27-year-old Ross Ulbricht. 

    Ulbricht, under the pseudonym “Dead Pirate Roberts”, was operating the Silk Road marketplace to enable anonymous online commerce while protecting users’ identities. The website facilitated users to buy and sell illegal drugs and other unlawful goods and services anonymously and away from the reach of law enforcement. 

    Silk Road Marketplace

    What’s that have to do with crypto? Well, all transactions conducted on the illegal platform were made using Bitcoin. The market has generated millions of dollars in illegal profits in the form of cryptocurrency. 

    The dark marketplace however didn’t stay active for long. In 2013, the FBI shut down the Silk Road permanently, arrested Ross Ulbricht, and seized over 144,000 Bitcoins (then valued at $34 million). However, an unexpected cyber attack stole millions of Bitcoins associated with the marketplace, which took law enforcement years to find. 

    The Role of Crypto 

    To ensure user anonymity, the Silk Road marketplace was based on two technologies: The Online Router (TOR) network and cryptocurrencies. 

    Tor hides users’ IP addresses in a way that is not detectable by unwanted parties, in the Silk Road case, law enforcement. This dark web browser is a special network of computers that are distributed around the world. The Tor network makes it impossible to physically locate the computers hosting elicit websites on the internet. This is why users on the marketplace were trading illegal drugs with ease of mind. Their IP addresses cannot be traced back to them.

    As an added layer of security, Ulbricht required that all transactions on Silk Road be paid in Bitcoin. This is because, at that time, the legality of Bitcoin was still a grey area, and regulations surrounding digital currency weren’t enforced. This seemed attractive to criminals who wanted to deal drugs without central authorities like banks detecting them. 

    The payment system on the Silk Road consisted of an internal Bitcoin “bank”. Every user had to hold an account in order to conduct transactions. Each Silk Road user had to have a Bitcoin address associated with their Silk Road account. So, in order to purchase from the Silk Road, users had to obtain Bitcoins from an exchange platform, and then send them to the address associated with their account. After sending the funds, users can then browse freely on the marketplace and make purchases. 

    When a user wanted to make a purchase, the funds are first transferred to an escrow account before reaching the vendor’s account. The site then explained that users “sent all payments through a complex, semi-random series of dummy transactions…making it nearly impossible to link your payment with any coins leaving the site”.

    The Use Dark Wallets 

    However, Bitcoin transactions are recorded on a distributed blockchain, and one of the most evident features of this decentralized ledger is its transparency. Crypto wallets can be traced back to their user, and so, Silk Road traders used dark wallets to mask their identities. 

    Dark wallets were first conducted as a way to improve the anonymity of Bitcoin transactions. Dark wallets are a more encrypted version of crypto wallets that offered users anonymity by implementing stealth addresses and coin mixing. Stealth addresses redirected transactions to other encrypted addresses. While coin mixing joined illicit transactions with other legitimate ones to further distort address tracing. 

    However, it seems that the dark wallets website is no longer detected by search engines or by the dark web. 

    The Fall of the Silk Road 

    The drugs shipped by mail to temporary P.O. boxes revealed themselves after some time. Which allowed law enforcement to investigate the dark marketplace. However, both the Tor browser and the use of Bitcoin created an obstacle. 

    However, the FBI got lucky by encountering a Reddit post that warned about the IP address of the Silk Road being online. After quite some time, Ulbricht was arrested after being caught logged into the site from a public library. 

    Law enforcement recovered a crypto wallet from Ulbricht’s hardware that contained approximately 144,336 Bitcoins. Authorities charged Ulbricht with money laundering, computer hacking crimes, and narcotics trafficking. 

    Ulbricht turned down a plea deal that offered a minimum of a 10-year sentence. Unfortunately for him, authorities prosecuted him with five sentences, including two life sentences without parole, as well as a fine of $183 million. 

    The Missing Bitcoins Case 

    After the shutdown of the Silk Road, a man by the name of Hames Zhong stole thousands of Bitcoins from the marketplace. Zhong took advantage of a flaw in the system when he withdrew over 50,000 Bitcoins into his account in 2012. Nearly a decade later, in 2021, the Department of Justice announced that it seized around 50,676 Bitcoins from Zhong. 

    According to a press release from the Department of Justice, Zhong registered nine fake accounts on the Silk Road back in 2012. He would then deposit 200 to 2000 Bitcoins into the account and send several withdrawal requests. This tricked the site into returning several times what he had initially deposited. Zhong conducted this trick around 140 times which got him around 50,000 Bitcoins. 

    Zhong then benefited in 2017 from Bitcoins hard fork when it split to Bitcoin Cash. Back then, everyone who owned Bitcoin got an equivalent amount of Bitcoin Cash. Zhong then traded his 50,000 Bitcoin Cash for 3,500 regular Bitcoins. 

    After a decade of investigations, authorities retrieved the stolen Bitcoins from a single-board computer hidden in a popcorn tin in an underground safe. This marked the second-largest financial seizure ever, amounting to $3.36 billion at that time. 

    The irony lies in the fact that authorities prosecuted Zhong for committing fraud crimes against another criminal and he faced a maximum of 20 years in prison. 

    Silk Road Crypto for Sale? 

    After the conviction of Ross Ulbricht in 2013, U.S. authorities conducted a series of auctions to sell the seized Bitcoins. In a 2014 auction, the U.S. Marshals sold almost 30,000 to Tim Draper. 

    The U.S. Marshals held another auction in 2015 where they offered 21 blocks of 2,000 Bitcoins and 1 block of 2,341 Bitcoins. Another 9,861 BTC were sent to the Coinbase exchange. Recently also, the U.S. authorities have begun liquidating the 50,000 BTC seized from Zhong. 

    The Silk Road incident has ironically put crypto on the government’s radar. After the dark web market scandal and the $3.6 billion stolen in a Bitfinex hack, authorities have prioritized crypto-related crimes. Regulating the crypto world has been a difficult task for law enforcement, especially since it’s based on new decentralized technology. However, the rising number of frauds and scams might speed up crypto’s regulation process.


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