DEFINITION of Silk Road
A digital platform that was popular for hosting money laundering activities and illegal drug transactions using Bitcoin. Silk Road, coined as the first modern darknet market, was launched in 2011 and eventually shut down by the FBI in 2013. It was founded by Ross William Ulbricht.
BREAKING DOWN Silk Road
The digital era has brought many technology innovations to our home fronts and disrupted life as we know it. We can now conduct transactions online with e-commerce sites, pay for online transactions using virtual currency, get loans online using social lending sites, operate anonymously on the web using data anonymization technology, and even connect with company recruiters using social media sites. The list of digital technology inventions goes on and on and ventures into every sector of the world economy whether it’s the financial sector or the retail sector. An increase in the use of cyber technology like cryptocurrency and e-commerce marketplaces led to an increase in the demand for data privacy. Demand for privacy resulted in an increase in regulation and laws over how data is used, and also an increase in technological tools and platform created to serve users who prefer anonymity. While the initiation of data anonymization tools helps in protecting users’ personally identifiable information (PII), these tools are also used by entities who intend to conduct illegal and criminal activities.
In 2011, the Silk Road was born out of a need to connect illegal drug sellers with interested buyers online while protecting their identities and transactions using anonymization techniques.
Through a combination of data anonymization technology and a feedback trading system, Silk Road created a haven for drug traders. The site was accessible only through a network known as Tor which exists mainly to anonymize user data and activities online. Tor obfuscates users' addresses so they appear hidden to unwanted parties looking to surveil the user’s transactions and activities. For this reason, Silk Road buyers and sellers brazenly conducted illegal drug transactions without fear of their IP addresses being traced back to them. Another reason Silk Road thrived was the buyer feedback implemented on the platform. Buyers normally would provide feedback on sellers after receipt of the goods. The feedback received was then used by the site to weed out fraudulent sellers, while reputable sellers had their products highly sought after. This promoted buyer confidence on the online platform.
All trades on Silk Road were conducting using the increasingly popular digital currency known as Bitcoin. Every Bitcoin transaction is recorded on a public ledger which is easily accessible to legal and regulatory bodies. Due to the transparency evident in Bitcoin transactions, dark wallets were invented with the primary purpose of encrypting and masking all Bitcoin transactions. Silk Road participants who used these bitcoin wallets to fund their transactions enjoyed an added layer of privacy.
The Silk Road came to its demise in 2013 after the FBI, after learning about the existence of the hidden marketplace, colluded with the DEA, IRS, and Customs agents. Although the federal agents admitted that the use of Tor and Bitcoin to obscure addresses were major obstacles that they encountered, they were still able to crackdown on the underground drug market. The FBI shut down the site permanently, seized more than 144,000 Bitcoins (then valued at $122 million), and arrested a number of users of the site including the founder, Ross Ulbricht, who made about $80 million in commissions from transactions carried out within the site. Ulbricht was convicted in 2015 and is currently serving a life sentence without the possibility of parole.