If you want to buy a book online, at this point pretty much everyone goes to Amazon.com. Right? If you want to buy shoes? Zappos. Domain name? Godaddy. An 18 year old Brazilian girl’s virginity? eBay. A one way flight to Brazil? Kayak. But where do you go if you want to anonymously buy illegal drugs like heroin, cocaine, meth, molly, LSD etc… all from the privacy and comfort of a web browser? Well, up until 3:15pm on Wednesday October 2nd, for all these illicit purchases and more you could have gone to a website called SilkRoad.
What happened Wednesday at 3:15pm? After months of painstaking investigation, the FBI swooped in and arrested the long sought-after mastermind of this highly illegal anonymous drug marketplace. Who was this mastermind? Was it a secretive Russian hacker living in Moscow? A Chinese internet tycoon operating from a private yacht in international waters? Actually, it was a 29 year old American named Ross Ulbricht who operated most of his empire out of a San Francisco coffee shop. When he was arrested, he was actually using the free wifi at a public library.
This story is long, but completely insane, totally worth reading all the way through. In case you need some teasers, this story involves billions of dollars worth of drug transactions, an enormous illegal fortune made entirely out of Bitcoins, fake passports and even a couple of hitmen.
SilkRoad was founded in 2011 as an underground marketplace where internet users could buy, sell and trade illegal drugs anonymously. The reason it worked was because SilkRoad required every potential buyer and seller to use a routing service called Tor. When someone uses Tor, their IP address (geographic location) is encrypted several times over then routed all over the world to dozens of locations. Using Tor, someone could be sitting in Los Angeles but would be tracked as a zipping line that appears then disappears from one location to the next instantaneously. Tor was originally invented by the U.S. NAVY to help mask top secret messages. It has lots of legitimate uses like maintaining a journalist’s anonymous sources or keeping a business meeting extra private. Unfortunately, Tor is also perfectly suited for keeping illegal transactions totally untraceable and anonymous. That’s where SilkRoad came in and thrived.
When it was up and running, there wasn’t much of a difference between SilkRoad and eBay or craigslist. It was a website where buyers and sellers met to exchange money for goods and services. The main difference, aside from the fact that most of the products being listed were illegal, was that on SilkRoad you couldn’t simply charge a credit card or use your paypal account to complete the transaction. Instead, users traded Bitcoins. What’s a Bitcoin? That question alone probably deserves its own dedicated article on CNW, but for now all you need to understand is that Bitcoin is a completely anonymous virtual currency. The most recent value of a single Bitcoin was right around $130. So that means if you wanted to buy $250 worth of cocaine on SilkRoad, at today’s price you would need to own at least two Bitcoins.
“I love my fed-ex guy cause he’s a drug dealer and he doesn’t even know it…and he’s always on time.” – Mitch Hedberg.
Actually, SilkRoad preferred the US Postal Service over Fed-Ex, but the late great comedian Mitch Hedberg was clearly way ahead of his time with that classic line. So you’ve just spent two Bitcoins to buy $250 worth of cocaine. How were these drugs delivered? Simple. The seller would vacuum seal the package then ship it through the USPS, likely with a false return address. Ironically, the Federal government was a drug dealer and they didn’t even know it… for a while. SilkRoad would make money by taking a 10% commission on every transaction. It has been estimated that prior to being shutdown, SilkRoad was responsible for more than half of the daily trading volume of Bitcoins around the world.
It turns out, the FBI had been trying for over a year to unmask the mastermind of SilkRoad who they only knew by the internet handle “Dread Pirate Roberts“. The FBI spent thousands of hours scouring the internet trying to find traces of his potential real identity. Unfortunately for “Dread Pirate Roberts”, this internet mastermind made a few very crucial errors. First off, he accidentally used his real name and personal gmail address on at least two occasions when posting in online forums to ask questions about working with Tor and to advertise SilkRoad. The FBI was then able to subpoena some very valuable information from Google and another technology firm that ran what is called “VPN” software which was supposed to help keep Ulbricht anonymous. Through these subpoenas, the FBI was able to piece together that the vast majority of SilkRoad’s operations were being run out of a coffee shop on a quiet San Francisco street. Agents then began to track Ulbricht back and forth to the coffee shop.
Here’s where the story gets completely insane: According to the indictment documents filed today in New York, the FBI was able to determine that over the last two years, SilkRoad processed $1.2 billion dollars worth of transactions. In other words, 9.5 million Bitcoins have flowed back and forth between SilkRoad buyers and sellers. What does that mean for Ross Ulbricht personally? Over that same time period, the FBI determined that Ulbricht collected some 600,000 Bitcoins in the form of his commission. How much are 600,000 Bitcoins worth? At today’s closing price, $78 million. At yesterday’s closing price? $90 million (the price of Bitcoins dropped sharply in the wake of Ulbricht’s arrest). When Bitcoins hit an all time peak value in April 2013 of $266 per coin, his virtual collection was worth $160 million. To give you some idea of how insane the market for Bitcoins has been recently, in the fall of 2011 when SilkRoad was founded, a single Bitcoin was worth just $2.