Marco Santori is a FinTech lawyer based in New York City where he leads the blockchain tech team at Cooley LLP.
In this latest edition of CoinDesk’s “Bitcoin Milestones” series, Santori discusses the downfall of the notorious bitcoin-powered dark market Silk Road in fall 2013, and the lasting impact this had on the technology’s perception and his practice.
I still kick myself for failing to buy a single item on Silk Road.
Yes, I’m a lawyer, and, yes, I’m a square. Yes, most of its wares exceeded my risk tolerance. Still, the Silk Road era was a rarified moment in history, and I was too busy warning people about money transmission to even buy a pair of alpaca socks.
In fairness to myself, it was still the early days – the summer of 2013. A bitcoin could be had for about a hundred US dollars. Things were simpler then. Ethereum didn’t exist. Nobody was talking about the legality of token sales.
I had just returned from a trip to Washington, DC, where, together with other members of the Bitcoin Foundation, we had the first multilateral meetings with the federal government on cryptocurrency.
It had been quite a party. FinCEN, IRS, FBI, DEA, SEC, CFPB, CFTC… just about any agency with a potential interest in magical internet money was there to hear us explain it to them. None were believers. In fact, the vibe in the room was clear: bitcoin is for criminals, and these apologists think they’re going to change our minds.
This ‘bitcoin is for criminals’ narrative may not have started with the Silk Road, but it was certainly buoyed by it.
The marketplace was accessible only via the so-called ‘dark web’, an anonymous network that required specialized software to use. Once accessed, you could buy anything. Drugs, porn, fake driver’s licenses… so long as you paid in bitcoin.
It was the first, and, at the time, the only one of its kind. As the Silk Road grew in popularity, so did recognition that bitcoin could be used for illicit activity, and so did the government’s interest in it.
So, the government shut Silk Road down.
The hammer
It happened in October of 2013, just a couple of months after our grand defense of bitcoin to the very federal agencies that gave the order.
I can’t say just where I heard the news first, but the reports hit almost at once: posts on social media, emails from clients, calls for comment from the press, communications from the Bitcoin Foundation’s PR team.
In many of their voices, I heard an unmistakable tinge of panic – the kind of panic usually endemic to tense depositions or bet-the-company litigations – but the only bitcoiner arrested was Ross Ulbricht, the dark market’s alleged (and convicted) operator.
The rest of the bitcoin citizenry was panicked because they were stakeholders in all of it.
Bitcoin was the lifeblood of the Silk Road.
The shock
At the Bitcoin Foundation, we scrambled to develop messaging. At my law practice, we worked to gauge client exposure and risk. Was crypto prohibition on the horizon? Would bitcoin be deemed contraband?
Would the government classify our clients – bitcoin businesses – as entities of primary money laundering concern? If so, an entire industry would be blacklisted from the global financial system…
Once news broke, the media speculated widely that bitcoin transaction volumes would drop to near zero, and that bitcoin prices would do the same. After all, bitcoin was for criminals, the narrative went, and now that the greatest criminal use for bitcoins was gone, what was bitcoin good for?
At the time, we could only speculate. A systemic limitation of a permissionless, pseudonymous network is a lack of data on the intent of its users. We could only guess how much of bitcoin was tied to Silk Road.
Many of us, even if privately, guessed that it was a lot.
We were wrong. When we finally looked back on the numbers, volume didn’t drop. It soared. Price did fall, but almost immediately recovered and blew past its pre-Silk Road heights. It was astounding.
Damage control
One of our public messaging points at the Bitcoin Foundation was the story that bitcoin was a currency with a heart of gold, now freed from unjust association with dark markets.
Its value and its volume were now demonstrably independent from its greatest suspected criminal use, we said. From the beginning, the ‘bitcoin is for criminals’ narrative had to be fiction.
And we were right. Still, this wasn’t the whole story. The whole story was a great deal more complex because, almost immediately, dozens of Silk Road copycats begun to spring up.
Within a year, there were plenty of dark markets using bitcoin. Some were even using new, more privacy-focused digital currencies that were opaque to forensics and post-hoc analysis.
Yet, we also started to see transaction volumes in developing countries start to climb significantly for the first time. People were using bitcoin to improve their lives. Word was getting out that there was an alternative to runaway inflation and fiscal mismanagement inherent in some government money.
It just so happened to get out to criminals quicker than it did to most everyone else.
Lasting impact
Still, Silk Road showed us that bitcoin could be used for criminal transactions just as well as legitimate transactions.
Its shuttering showed us the criminal uses of bitcoin were probably much more limited than anyone – even most bitcoiners – suspected. Silk Road changed the way we thought about money. It changed the way we thought about anonymity. It was a rarified moment in history, the effects of which transformed an industry.
It changed so much about my government outreach work and my practice of law. But at the time, I couldn’t even work up the courage to log on and buy some alpaca socks.
I still kick myself.
For more of Santori’s writing, read his seminal series on Bitcoin Law, Parts 1, 2 and 3, which provide a basic primer on the state of US law as it relates to cryptocurrencies.
Silk road image via Shutterstock