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Friday, October 4, 2013

The ‘Silk Road’ Bust And The Future Of Bitcoin

Ross Ulbricht

We’re learning more today about Ross Ulbricht, the 29-year-old tech entrepreneur authorities say operated “Silk Road,” an e-commerce website described as the Internet’s largest and most sophisticated criminal marketplace.

People on the website allegedly used Bitcoin, a digital currency, to conduct business. It seems Bitcoin’s electronic trail may have helped the FBI take down the website.




Well, we're learning more today about Silk Road. That is the website described as the Internet's largest and most sophisticated criminal marketplace. It was also called the of illegal drugs, and it was shut down by the FBI this week. The founder was charged with narcotics trafficking and money laundering, and the website used bitcoin.

That is an unregulated, digital currency, and it seems bitcoin's electronic trail may have helped lead the feds straight to the founder of that site. So is it time to regulate bitcoin? Joining us for more from New York is Christopher Vecchio, a currency analyst who follows bitcoin with Christopher, welcome.

CHRISTOPHER VECCHIO: Thanks for having me.

HOBSON: Well first of all, let's just talk about the basics here. For people who don't know, explain to us what bitcoin is and how it sort of evolved from its start, which I gather was back in 2008.

VECCHIO: Right, you know, bitcoin really came to the forefront, hitting the headlines in the news around January, 2009, as this crypto-digital currency, a currency that has no backing of any sovereign or central bank and really was viewed as an alternative, a third alternative to the current fiat system, the second alternative being of course precious metals.

And so as these concerns over the European Union's existence and the U.S. dollar around the Fed have gathered up, people have looked to bitcoin as an alternative way to store wealth.

HOBSON: To store wealth, but can they actually buy much with it?

VECCHIO: Well, there are certainly a number of markets out there for bitcoin. I know across New York City, in fact, a number of restaurants and stores have started to accept bitcoin as a form of tender. And so, you know, as long as there's a market that will continue to support bitcoins in the real world, exchanged for real goods not just theoretical dollars online, then there is a place for bitcoin as a medium of exchange certainly.

HOBSON: And how much is bitcoin being used for things that are illegal, like in the case of Silk Road?

VECCHIO: You know, when we talk about overall bitcoin volume, Silk Road trade only accounted for about four percent of it. So, you know, to say that what's going on with Silk Road is going to be the end of bitcoin or the demise of bitcoin, it's probably unlikely because there's a broader application for bitcoin as a medium of exchange out there besides these illegal practices.

HOBSON: Although it did drop 66 percent a couple of years ago on the mere mention of a Silk Road shutdown. So obviously there are some people who think that this is a big part of bitcoin's business.

VECCHIO: Right, and I think the market reaction we've seen recently actually attests to the resiliency and the attention that bitcoin has gotten in the last several months. Before the news was announced this week, bitcoin was trading around 140. It dropped as low as 109.70, and this morning when I checked it was back around 135. So, you know, if only to speak to the fact that Silk Road only plays a minor role, an insignificant role in overall bitcoin volume traded, it shows that the market is rebounding already, and it makes sense considering that we're seeing that these U.S. fiscal fears are coming up, and all of a sudden there's talk about the U.S. dollar losing value and losing some faith behind it, and sure enough bitcoin having undergone its own PR mess this week is pretty much back above water where it had been.

HOBSON: But are there concerns among bitcoin users that this could be the beginning of something that may lead to some real regulation of bitcoin? I want to quote from Senator Charles Schumer, a Democrat. This was - he was talking about this a couple of years ago. He says literally bitcoin allows buyers and users to sell illegal drugs online, including heroin, cocaine and meth, and users do sell by hiding their identities through a program that makes them virtually untraceable.

VECCHIO: I mean, that's certainly one way of painting it. I think we have to turn to what Jennifer Shasky came out, that she's a director of the Treasury Department's Financial Crimes Enforcement Network. In mid-September she said that FinCEN's recent guidance concerning virtual currencies made clear that virtual currency administrators and exchangers that provide services within the U.S. must register with FinCEN as money service businesses.

So what she's saying is that, you know, even though that these services, you know, might have these ulterior applications, the fact of the matter is that they also have very legitimate means and ways of conducting business, and they will be treated like any other service.

So, you know, bitcoin in a sense is then viewed as, you know, a Western Union of sorts, right, where you can transfer money. But again, you know, Senator Schumer, what he's saying seemed a little overreaching, four percent of Silk Road, there's not many other large illegal vendors out there, and this point in time, again it's - it speaks to the resiliency of the market that bitcoin prices are still around 135, only down from 140 before this news evolved.

HOBSON: But as a currency analyst, are you expecting there to be regulation of bitcoin, real regulation from Washington?

VECCHIO: I mean absolutely, and that's going to be the number one reason why I still don't view bitcoin as a legitimate form or store of wealth. It's uninsured, too, right. You know, if you lose your money, or your bank gets robbed, the FDIC comes in and insures your deposit. With bitcoin, if someone hacks your virtual wallet, you're left in the dust, and that, you know, alone is a big concern because from one moment you could have all your money, fine, and then the next it could just be gone with no hope of getting it back.

HOBSON: Christopher Vecchio is a currency analyst for Christopher, thanks so much.

VECCHIO: Thank you for having me, Jeremy.

HOBSON: And the latest news is coming up next, HERE AND NOW. Transcript provided by NPR, Copyright NPR.

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Robin Young and Jeremy Hobson host Here & Now, a live two-hour production of NPR and WBUR Boston.

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