We have blogged earlier this year (14/06/2013) about the arrests of those involved in Liberty Reserve, the Costa Rican based virtual currency and online payment network, by the US authorities.
The FBI have now recently arrested (2-3/10/2013) Ross William Ulbricht, AKA 'Dread Pirate Rebel', of the online market place known as 'Silk Road'. It is alleged that this organisation was part of the 'dark web', and facilitated drugs trafficking and money laundering using the virtual currency BITCOIN to achieve this.
It has also highlighted the vulnerability of peer to peer virtual currencies such as BITCOIN to abuse by criminals.
'Silk Road' used a service known as 'TOR', originally invented by US Naval Research Laboratory, which is part of the deep web used to hide data and protect the identity of users. It is used for legitimate purposes by journalists involved in sensitive investigations for example, and cannot be accessed by the usual search engines.
According to the FBI, 'Silk Road' had nearly a million users and was trading some $1.22 million per month. In their thirty-three page affidavit they state that 'Silk Road', which has been in operation since 2011, facilitated $1.2 billion worth of sales, of which Ulbricht kept $80 million in commission. They continue to state that of the 1 million registered users 146,946 accounts were used to purchase goods in nearly 1 million separate transactions. One third of users were from the US; the remaining users largely from the UK and Australia.
Liberty Reserve was also used, quite legitimately, by some individuals as an alternative to systems such as PayPal. They would be charged a 1% fee for each transaction and a 75% privacy fee.
Cash would be paid to Liberty Reserve, using legitimate facilities e.g. credit card or postal order, converted into the virtual currency and transferred to another account holder who can withdraw the funds.
Bitcoin has tremendously vocal and powerful backers, mainly in the US Silicon Valley, who have invested huge amounts in this virtual currency. After news broke that 'Silk Road' used Bitcoin, the value of its shares initially fell but the company fought back with an aggressive public relations drive and share prices recovered quickly.
The US authorities have ensured that the virtual currencies abide by strict AML compliance and have the usual reporting obligations of currency movements over the value of $10,000 and a duty to register as a money exchange business with the US Treasury Service. BITCOIN had previously lobbied, rather optimistically, to self-regulate.
The IRS strongly suspected that FATCA offences were being committed with US Nationals using virtual currencies to facilitate tax evasion, and European regulators are of the belief that many in cash strapped countries such as Spain or Greece are using these virtual currencies to protect their money.
BITCOIN relies on BITCOIN exchanges to covert the virtual currency into other currencies.
An interesting aspect of the 'Silk Road' prosecution was raised by Jacob Gershman in his blog (Wall Street Journal 03/10/2013) about the seizure, restraint and confiscation of the virtual currency involved.
The complexity of the situation required a novel approach by the authorities. After all, how does one restrain assets that only exist in the virtual world and not the real one? Gershman states that each BITCOIN has a private key i.e. a secret sequence of numbers attributed to each coin. The keys are stored offline in specially encrypted wallet files and in order to access the wallet you will need the password. In short, in order to seize/restrain or confiscate the BITCOIN, the authorities will need the password.
What if they are unable to break the password? That would require the assistance of the owner of the password. This is causing legal problems in the US, less so here. The Courts have recently imprisoned an individual who refused to give up the password to his computer.
Therefore, in order to seize the $3.6 million digital currency held by 'Silk Road' the Federal Judge had to make a specific order in these terms:
"Authorities to seize any and all BITCOIN contained in wallet files residing on 'Silk Road' servers by transferring the full account balance in each 'Silk Road' wallet to a public BITCOIN address controlled by United States Authorities."
The FBI are still in the process of attempting to recover Ulbricht's commission, referred to earlier in this piece. This also begs the question, what are the authorities going to do with these seized assets (BITCOINS) in the event that they successfully prosecute Ulbricht? Auction them? Continue to track them to ensure that they are not going to be used for illegal purposes?
The UK's NCA recently arrested four men in Manchester and Devon on drugs supply offences as a direct result of the 'Silk Road' arrests. The NCA press release emphasised that 'Silk Road' was used by child pornographers, suppliers of drugs and firearms, money launderers, and people traffickers.
So how exactly did the US authorities manage to pull down 'Silk Road'? It has been strongly suggested in IT circles that the US authorities, possibly the CIA and/or the NSA, hacked the server of 'Silk Road', probably using TOR and some international assistance to do so. The server could have been physically located in Iceland/Romania or Latvia. In any event we are unlikely ever to be told the full story. This will lead to interesting disclosure and PII arguments in court.
However, despite the bullish press release by the NCA, it is likely that any number of copycat 'Silk Road' sites will continue to appear and will grow increasingly more sophisticated. This is going to be a continuing expensive investigative exercise for the authorities, absorbing a great deal of their time and resources.
If you are the subject of a cybercrime investigation, contact our leading and top ranked defence specialists either by using our online enquiry facility or telephone us on 020 7387 2032.
