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FBI closes down Silk Road, Bitcoin price crashes

In hindsight, it was inevitable. The online marketplace which was famous for sales of drugs, guns and money laundering, Silk Road, has been busted by US federal agents and the founder taken into custody. As a result, the US government has taken possession of millions of dollars-worth of the digital currency Bitcoin, causing its value to crash.

The Silk Road was an eBay-like retail store hosted on the TOR network. TOR, which stands for The Onion Ring, is a method of connecting to the internet via a series of proxy servers which mask the originating IP address. Created by the US Navy as a way of securely communicating with military personnel over the public internet infrastructure, TOR was released as free software over a decade ago and has become an important tool for protecting the identity of whistleblowers and activists in oppressive regimes, as well as a way of ordinary citizens avoiding large scale government surveillance projects like PRISM.

Although most traffic on TOR is just passing through on its way to regular internet sites, there are websites hosted within TOR’s ‘Deep Web’ which are only accessible via browsers using its protocol. It was here that the Silk Road was established in 2011, trading in illegal items with apparent impunity until it was closed down last night. Last month, the FBI also closed down a child pornography website operating out of Ireland by launching a malware attack which compromised its anonymity.

It’s not yet known whether or not the same attack was used to reveal the identity and location of Ross William Ulbricht, a San Francisco resident who went by the online handle “Dread Pirate Roberts” and was taken into custody last night. According to federal prosecuters, more than 100 000 people have bought illegal wares from the Silk Road website, in transactions worth over $1.2bn (R12bn), which netted the site $80m in fees.

While it was the anonymity of the TOR network that allowed the Silk Road to exist online without leaving the usual traces ownership, it was the emergence of Bitcoins as a viable currency that facilitated trades on the site. Bitcoins are a form of digital cash which exist primarily as encryption keys, which can be traded with a level of anonymity since every transaction can be conducted using a new, unique identifier. Bitcoin’s value has fluctuated wildly over recent years, but before the news of Silk Road’s closure was trading at around $145 per Bitcoin.

Following the news its value dropped to $118 (R1182). Mt Gox, the world’s largest Bitcoin exchange, is currently trading at $129 (R1291) to the Bitcoin, suggesting a further recovery could take place today despite the fact that the FBI has seized more than $3m (R30m) of Bitcoins and effectively taken them out of circulation (although limited supply should push up the value, shouldn’t it?).

Some experts are optimistic about the currency’s future and believe that by losing the association with illegal activities. Writing on Forbes, John Jeffrey Mardlin says that some people may try to get rid of Bitcoins today to avoid being traced back to purchases from Silk Road, but:

“That might lead to more curiosity, which inevitably leads to more adoption.”

He also raises the point that with prices low, it may be a good time to buy. Some development specialists have speculated in the past that Bitcoins could be widely used in Africa eventually, as an alternative to heavily controlled currencies with often fluctuating values themselves.

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