According to former lovers and friends, his sexual appetite is immense and his preferences unusual, leaning toward light S and M play, sometimes B and D. They say he has the ability to ejaculate large amounts of sperm at some velocity. While engaged in intercourse with the “cat woman”—a lady dressed in a whole-body kitten costume—apparently he had an orgasm that shot his sperm across the room and left a white stain on the side of his luxurious ¥6 million yen bed.
But Karpelès’s stained furniture would become the least of his worries as Mt. Gox grew. The story of its development into the epicenter of the bitcoin universe, and then a black hole, is worthy of a chapter on its own. There were forces at play that helped turn the company from a mecca into a disaster area—forces that included people we usually think of as the “good guys.” But before discussing this in more detail, we need to take a slight detour—a detour down the Silk Road.
CHAPTER THREE
THE SILK ROAD
The first bitcoin purchase may have been for pizza, but it didn’t take long for people to find out that bitcoin could also be used for guns, drugs, child porn, and other things you might not want people to know you are buying or selling. When you combine bitcoin with the “invisible Internet,” a.k.a. the Darknet, or deep web, and a privacy-protection Tor Browser, as well as an online catalog of illegal goods, you have all the ingredients for an underground marketplace.1
That marketplace was, and still is, called Silk Road.
In the vocabulary of modern-age Internet users, Silk Road is not the ancient trade and intercultural route, six thousand kilometers long, between East and West. No, it was the first online black market and platform for buying and selling illegal goods. It started functioning in February 2011 and was once the largest dark-web marketplace for illegal drugs and other services.2 The only thing you had to do to access it was download Tor—an acronym for The Onion Router—and search places like the Hidden Wiki, a secretive deep-web page that references anonymous “.onion” sites, including Silk Road. These .onion sites are only visible when you use Tor.
The hard-to-find .onion sites are part of the deep web—a corner of the web that isn’t open to search engines like Google and normal users. It is full of sites for people intent on preserving their privacy online.
Naturally, the seedy side of the Internet can be found here, including some elaborate scams and hoax websites masquerading as underground businesses. But there are also beneficial uses for .onion sites. For example, a whistle-blower or political activist in Iran or Egypt, or even China, can use them to upload and share secret data or communicate to the outside world without fear of reprisal.
Oddly enough, Tor was originally developed by the United States Naval Research Laboratory and mostly financed by the US government. It is a superb tool for protecting user privacy. Tor is available free online and acts as a “proxy.” According to the Tor Project website, its software protects users by bouncing their communications around a distributed network of relays run by volunteers all around the world. It can prevent third parties watching the user’s Internet connection from learning what sites they visit; it prevents the sites they visit from learning the user’s physical location; and it lets the user access sites that are blocked in their own country.
The Tor Browser, which is based on Firefox, lets anyone use Tor on Windows, Mac, or Linux operating systems without actually needing to install any software. You can run it off a USB flash drive that comes with a preconfigured web browser to protect your anonymity, and it is self-contained and portable. In short, you can take Tor with you into any net café in the world and surf with impunity. Or you can do it from home. And you might find yourself browsing topics and sites like “Rent-a-Hacker,” “Create encrypted self-destructive notes,” “Drug Market,” “US Fake ID Store,” “Hitman Network,” “Counterfeit USD,” “OnionWallet—Anonymous Bitcoin Wallet and Bitcoin Laundry,” “PedoEmpire,” or “Anonymous, safe, secure, crowd-funded assassinations.”
Incidentally, Mark Karpelès’s company hosted a website called silkroadmarket.org, which explained how to get started with Tor and reach Silk Road. The connection was made under a false name, and the fees paid in bitcoins to Karpelès. He had become a part of Silk Road without really knowing it.
While Silk Road was—and is, in the form of Silk Road 3.0—a marketplace for illicit items, there is a strange honesty to the whole enterprise. Vendors are unlikely to cheat because the site runs on a reputation-based trading system. If you sell a product and don’t deliver, your rating will plummet. Acquire a bad reputation, and your business is not sustainable.
The website Gawker first reported on the existence of Silk Road in a June 2011 article. “‘Our community is amazing,’ Silk Road’s anonymous administrator, known on forums as ‘Silk Road,’ told us in an email. ‘They are generally bright, honest and fair people, very understanding, and willing to cooperate with each other.’”3
They say there’s no honor among thieves, but with Silk Road vendors there is a healthy respect for reputation that borders on it.
Of course, some things, like fake passports, are probably hard to rate, since if you fail when using one, you may not have access to a computer to write a review for a few years.
Vendors feel comfortable selling illegal goods on Silk Road because the police can’t easily track them. Silk Road does not accept credit cards, PayPal, or any other form of payment that can be traced or blocked. The only currency good there is bitcoin. The trouble is, bitcoin is not as anonymous as Silk Road users would like to believe, since transactions are recorded in a public log—the blockchain. The identities of all users on the blockchain remain anonymous, but the flow of bitcoins can be tracked, giving investigators a way in.
Silk Road really arrived on the scene around New Year’s Day 2011. An unknown individual who used the pseudonym “altoid” started to advertise the hidden Tor service on Internet forums such as bitcointalk.org. He painted a portrait of a black-market eBay where you could find almost anything you wanted.
About two months later, a message on BitcoinTalk announced that Silk Road had been operational for a few weeks with several buyers and sellers. By April, Silk Road hit a thousand users, and by summer the site went mainstream after Gawker published its article on June 1. In that piece, investigative reporter Adrian Chen explained how Silk Road allowed people to buy and sell illegal goods safely, using bitcoins for transactions.
A few days after the article came out, Democratic Senators Charles E. Schumer and Joe Manchin sent a letter to the Drug Enforcement Agency in which they expressed serious concern and asked the authorities to take immediate action to shut down the site. According to his partisans and family, that’s around the time that Ross Ulbricht, a physics graduate from the University of Texas at Dallas, relinquished control of the site to his successors. Ulbricht was twenty-seven at the time.
On June 18, the official Silk Road forum appeared on Tor, and Ulbricht allegedly posted his first comment there under the username “Silk Road.” Then in October the BitcoinTalk user altoid posted a job ad for an IT professional in the bitcoin community. It was a job for Silk Road, and people interested were asked to write to [email protected].
Ulbricht was far from being the Professor Moriarty of the dark web. On February 5, 2012, the user Silk Road announced that his new name would be “Dread Pirate Roberts.” This alias was taken from the popular book and film The Princess Bride, written by William Goldman.
According to the criminal indictment filed against Ulbricht, Silk Road wrote:
I need an identity separate from the site and the enterprise of which I am now only a part. I need a name.
Drum roll please . . . My new name is: Dread Pirate Roberts.”4
Thus Dread Pirate Roberts was born—and the police began looking for him immediately. They didn’t, however, shut down the site just then. Maybe they couldn’t.
Silk Road at the time was a modestly successful venture. By March 2013, the site listed ten
thousand items for sale, seven thousand of which were drugs, including cannabis, MDMA, and heroin. The FBI closed Silk Road down in October that year. The agency asserts that by the time it was closed down, Silk Road boasted an estimated nine hundred thousand users and had generated more than $1 billion in sales.
The FBI may have shut it down, but they couldn’t destroy the marketplace. Today, it still operates in a revised version called Silk Road 3.0, with complementary websites telling you how to access the new and allegedly even more secure outfit. The FBI doesn’t like to talk about it. It makes closing down Silk Road look like fighting the Hydra and losing.
And how was Ross Ulbricht arrested?
It took years of work. Homeland Security Special Agent Jared Der-Yeghiayan first began investigating Silk Road while he was working at Chicago’s O’Hare International Airport in 2012. He noticed that several seized drug shipments could be matched up with photos, descriptions, and “shipped from” locations as advertised on Silk Road. This is how the investigation began.
Der-Yeghiayan put together a team at the Department of Homeland Security (DHS) and set up an undercover Silk Road account under the username “dripsofacid.” His team then transferred roughly $7,000 to Mt. Gox in exchange for 27.27 BTC on April 5, 2013, and began to buy things.
Over the course of the investigation, the special agent logged thousands of hours on the Internet, and his team made nearly fifty undercover purchases. Surprisingly, most of the dealers were “honest”—the drugs shipped were tested and found to be pretty much as advertised in roughly nine out of ten cases.
Der-Yeghiayan worked himself further into the network under the name “Cirrus,” becoming responsible for assisting clients and moderating inappropriate comments on the site’s forums. He was paid the equivalent of a $1,000 a week in bitcoin, proving that crime may not pay but customer support jobs almost always do.
Homeland Security Investigations, the IRS, the DEA, and the FBI joined forces to home in on whoever was masterminding this covert marketplace. Their mission was named “Operation: Marco Polo” after the famous explorer of the ancient Silk Road.
To arrest their prime suspect, Ross Ulbricht, the idea was to get him somewhere out in the open and initiate an online chat with Dread Pirate Roberts, then grab his computer in a nonencrypted state to verify that it contained the same exchange. If Ulbricht managed to close down his laptop before it was taken from him, it might be impossible to prove that he and Dread Pirate Roberts were one and the same person.
In the afternoon of October 1, 2013, Ross Ulbricht, wearing a T-shirt and a jacket, was sitting in the science fiction section of the Glen Park Library in San Francisco, taking advantage of the public Internet. Der-Yeghiayan was sitting opposite the library, in Café Bello. At 3:08 p.m., when Dread Pirate Roberts connected on the Silk Road chat site, Der-Yeghiayan asked him to verify a message on another forum. “OK, which post?” was the reply. At that moment, the special agent gave the green light for an arrest. In the library, a woman wearing a yellow raincoat suddenly yelled, “I’m tired of you!” and while Ulbricht was looking at her, his laptop was snatched out of his hands. The woman in the raincoat was an undercover FBI agent who had told the librarians about the planned operation. There were half a dozen agents already in the library. They forced the man onto the floor and put him in handcuffs. Ulbricht submitted without resistance and without emotion. He was arrested on a number of charges, including narcotics trafficking and computer hacking.
Predictably, the FBI took most of the public credit. One of the reasons why many special agents in other federal law enforcement agencies are not fond of “the bureau” is that many investigations play out this way—other agencies do the bulk of the work, and the FBI gets the kudos. The laziness of the press also aggravates this problem, as they automatically tend to credit the FBI rather than lesser-known agencies.
The trial was held more than a year later but lasted only three short weeks. Ulbricht’s defense attorneys tried to argue that he was the fall guy—not the real Dread Pirate Roberts—based on the fact that US law enforcement had focused on other suspects for two years. His attorneys also argued that while Ulbricht had created Silk Road, he had long since handed it over to another party who was actually running it.
Among the other suspects, apparently, was Mark Karpelès. Yes, the hapless MagicalTux.
Ulbricht initially pleaded not guilty to seven charges, including narcotics trafficking, criminal enterprise, computer hacking, and money laundering, according to media reports.
Before he was sentenced, the parents of a number of Silk Road users who had died from overdoses of substances allegedly purchased on Silk Road told the court that their children would never have died if the site hadn’t existed.
Summing up, the judge told him, “The stated purpose [of Silk Road] was to be beyond the law. In the world you created over time, democracy didn’t exist. You were captain of the ship, the Dread Pirate Roberts. You made your own laws.”
In a New York courtroom on May 29, 2015, Ulbricht was sentenced to life in prison without parole.
The accused was polite and well educated, and even his closest friends were astonished to learn of his activities in what seemed like a parallel world. How could this guy who got along with everyone (albeit a little clumsily with women) end up becoming his country’s public enemy number one in such a short period of time?
Although the bulk of the evidence suggests that Ulbricht was indeed the creator of Silk Road and Dread Pirate Roberts, his supporters contend he is innocent. Some in the bitcoin community believe that even if he were Dread Pirate Roberts, he had committed no real crime. One such defender is Roger Ver, pioneering investor in bitcoin, who says he donated around $165,000 to Ulbricht’s legal defense. Ver is an ex-convict himself, as well as a former US citizen. He is also known as the Bitcoin Jesus because of his staunch advocacy for the virtual currency and his zeal for spreading the “good news” about it.
“My point of view is that none of this would ever have happened if it wasn’t for the government’s insane war on drugs. If governments respected each individual’s self-identity, and allowed them to actually control their own bodies, drugs like these would be sold by CVS, Walgreens, or Amazon.com,” said Ver during interviews we conducted with him. “There would never have been a need for Silk Road, or any of the problems related to it.”
Ver believes that Ulbricht was simply helping people get what they want out of life. In our interviews with him, he emphasized that Ulbricht wasn’t an active participant in criminal activity. “He wasn’t using any violence on anybody. The indictment doesn’t say Ross smuggled drugs; what he did [was provide] a platform that allowed other people to buy and sell them. By the same logic, should we charge cell-phone companies because a lot of drug deals have been done by people talking on cell phones? What about the Internet as a whole? Or e-mail providers? All these services enable people to buy and sell and smuggle narcotics.”
While the Silk Road investigation was going on, another kind of criminal activity using bitcoins began to proliferate in cyberspace. The popularity of bitcoin with criminals has an obvious cause: it’s held in a digital wallet that isn’t registered with any government or financial authority, and it can easily be swapped for other currencies through exchanges such as bitFlyer, OKCoin, Bitfinex, BTCChina, Bitstamp, or any of a dozen more now operating in many countries. Ransoms thus become virtually untraceable, and because bitcoin transactions are made to be irreversible, the money can’t ever be retrieved.
About the time that Silk Road was being closed down, hackers around the world managed to enter and take over a vast number of computers—sometimes taking down public websites—and hold them for virtual ransom. Their victims were random computer users, financial firms, and even police departments. Usually the only way to regain control of the computer was to pay the criminals a ransom in bitcoins, sometimes as much as $20,000. For firms or individuals with valuable files saved on their computers, sometimes
with no backups, the threat of losing access to data was obviously very serious.
One recent case involved a criminal or group of criminals who went by the name DD4BC. The raider threatened to shake down the websites of several financial companies with overwhelming message traffic unless a bitcoin payment was made.
The most successful of the “ransomware” operations was CryptoLocker, which flourished from late summer of 2013 until early summer 2014. International law enforcement identified the mastermind behind it as a thirty-year-old Russian named Evgeniy Bogachev. In a June 2014 report, the Department of Justice cited security research suggesting that as many as 234,000 computers had been compromised by the malware. Bogachev and a group of cyberpirates believed to be based in Russia and Ukraine were supposedly running the CryptoLocker scam and reportedly made about $16.5 million in bitcoins in a little more than a month in 2015.
Roger Ver was the victim of one of these new cyberpirates while he was attending the Singapore Coin Congress in May 2014. Somebody hacked into all his old e-mail addresses, a forgotten Facebook account, and Skype, and they asked him to pay a ransom of $20,000 in bitcoins, threatening to “ruin him” and harass his family in the United States by sending a SWAT team to his mother’s house—possible because the hacker had Ver’s family’s address.
This malevolent practice is known as “swatting” in the cybersphere. Hackers and gamers anonymously report false shootings, hostage situations, and other crimes so that SWAT teams and/or other paramilitary police units will raid the homes of the victims—often with no warning and breaking down their door in the process.
“All I want is some bitcoin and I will leave you alone,” said Ver’s hacker, who was using the Skype account “nitrous” and the screen name “Savaged” when he wrote to Ver. The man bragged that his take from Ver included his social security number and other private data. He promised to erase the stolen information and stop infiltrating Ver’s cyberlife only if Ver paid up.
Pay the Devil in Bitcoin: The Creation of a Cryptocurrency and How Half a Billion Dollars of It Vanished from Japan (Kindle Single) Page 4