Since the beginning of their virtual existence, decentralized virtual currencies – especially Bitcoin – have been receiving considerable attention. While some welcome them as the future of payment systems or as an investment opportunity, criminal and terrorist groups see cryptocurrencies as yet another incentive to commit crime. The advantage of virtual currencies as a tool for money laundering is clear – they are anonymous. Moreover, international transactions in cryptocurrencies are fast, their sources are easy to hide, and proceeds of crime in the virtual form are easily concealed.
On 3rd January 2009, an anonymous computer programmer using an alias Satoshi Nakamoto made history by releasing, on a server called Sourceforge, the very first Genesis Block containing the first 50 Bitcoins. In 2011, Ross William Ulbricht launched Silk Road, one of the first darknet market websites. In two years of its existence, total sales on Silk Road reached $ 1 billion, i.e. 9.5 million Bitcoins at the time [1]. In an interview for the Guardian, FBI special agent Christopher Tarbell described Silk Road as the „currently the most sophisticated and extensive online criminal marketplace“[2]. To put it simply, Silk Road functioned as an eBay for drugs and other illicit merchandise. An investigation which took more than two years yielded information which led to an arrest of Ross William Ulbricht on October 2nd 2013 in a San Francisco library. The arrest meant the end of Silk Road, too. In 2015, Ulbricht was found guilty of perpetrating drug trafficking and conspiracy to legitimize proceeds of crime and subsequently sentenced for life.
Silk Road was particularly attractive to criminals for its anonymity provided through open source software securing anonymous browsing of users on the Internet by hiding their real IP address (TOR)[3] in combination with Bitcoins as means of payments for goods and services. Bitcoin, which helped buyers and sellers to conceal their identity, soon became an exclusive currency for the Silk Road transactions. Dispatchers and recipients of Bitcoin peer-to-peer (P2P) transactions are identified only by an anonymized Bitcoin wallet. In addition, users can obtain an unlimited number of Bitcoin wallets and thus use unique addresses for each individual transaction. For more anonymity, users can exploit variety of services for further anonymization, including a built-in software solution allowing users to “mix” their Bitcoins with other users directly into Silk Road transactions.
Essentially, Silk Road operated as an internal Bitcoin bank; anyone who intended to make transactions on the web had to keep an account there. Each Silk Road user had at least one Silk Road account associated with their Bitcoin wallet stored in a digital wallet kept on servers administered by the Silk Road admins. The first step to making a purchase was to get hold of Bitcoins, which the user usually achieved by exchanging fiat currency for Bitcoins in a “Bitcoin exchange”. Next, the user transferred the Bitcoins to a Bitcoin wallet associated with their Silk Road account digital wallet and Silk Road subsequently moved the user’s Bitcoins to the escrow account kept by the Sild Road where they were kept until the transaction was complete. The payment – the buyer’s Bitcoins – was then transferred by Silk Road to the seller’s Bitcoin wallet. All transactions were further anonymised through the mixing services of the “mixer” or “tumbler”: the user sends money to such service which “launders” the money and sends the corresponding amount to a selected wallet, often with an optional delay to further obstruct the detection of such transaction. The laundering itself can take place by merging deposits into one address and their subsequent redistribution to customers.
However, the end of Silk Road did not mean that operators of illegal Darknet marketplaces were defeated. Although Ross William Ulbricht was arrested and incarcerated, the tools and sophisticated methods that created the spiderweb for his criminal activity have remained active. One can say that one corner store closed does not mean a crime-free neighbourhood – just the opposite, several new shops will soon open across the street.
[1] STROUKAL, Dominik a Jan SKALICKÝ. Bitcoin a jiné kryptopeníze budoucnosti: historie, ekonomie a technologie kryptoměn, stručná příručka pro úplné začátečníky/ Bitcoin and other cryptocurrencies from the future: history, economics and technology of cryptocurrencies, a brief guide for complete beginners. 2nd (extended) edition. Prague: Grada Publishing, 2018. Finance for everyone, p. 51, ISBN 978-80-271-0742-1.
[2] GIBBS, S. Silk Road underground market closed – but others will replace it. In: The Guardian [online]. 2013, [cit. 2017-10-29]. Available: https://www.theguardian.com/technology/2013/oct/03/silk-road-underground-market-closed-bitcoin
[3] Tor stands for “The Onion Router”, which refers to multiple layers of encryption used to protect user´s privacy.
Filip Novák specializes in capital markets, fintech, compliance and money laundering prevention. In the area of capital markets, it focuses on the legal and regulatory aspects of the provision of financial services and collective investment, the supply of securities and admission to trading on public markets. In the area of fintech, compliance and money laundering prevention, it focuses primarily on crowdfunding, wealthtech, financial institution compliance and AML threats associated with cryptoactive activities and the use of new technologies. He currently works at the CNB as an expert in the field of financial market regulation and international cooperation. Prior to joining the CNB, he held the position of Head of Compliance and Legal Department of a Licensed Securities Dealer and previously at the law firm HAVEL & PARTNERS.