It鈥檚 early summer 2011, and Nicolas Christin is hanging out by the coffee machine in CyLab, Carnegie Mellon鈥檚 cybersecurity research and education center. It鈥檚 between classes, and he鈥檚 chatting with research scientist James Newsome, who happens to ask Christin: 鈥淗ey, did you see what happened to Mt.Gox?鈥�
鈥淢ount what?鈥� Christin replies.
explains that Mt.Gox is an online exchange based in Japan that trades a digital currency called Bitcoin. Apparently, someone hacked into the exchange and made off with more than $8 million worth of Bitcoins. 鈥淵ou might want to look into this,鈥� he suggests to , knowing that the senior systems scientist鈥檚 research focuses on computer security and online crime.
Christin is intrigued by the security breach and also by the fact that it involves a digital currency; in the early/mid 2000s, he had spent time following the development of digital currencies, but most of them eventually dissolved. But he hadn鈥檛 come across Bitcoin. Coffee in hand, he returns to his office to dig up some info online. He discovers there鈥檚 not much on the topic鈥攐nly a few press mentions and a few gambling Web sites that accept the currency. The overall picture he starts to form looks like something that could be lifted straight from the pages of a cyberpunk novel.
He learns that Bitcoin, the world鈥檚 first 鈥渃ryptocurrency,鈥� is a cryptographically encoded, open-source, peer-to-peer鈥揹istributed, semi-anonymous, unforgeable, and completely unregulated global digital currency, championed by 鈥渁narcho-libertarians鈥� and created by an unidentified shadowy figure who goes by the Japanese pseudonym .
If that鈥檚 not futuristic enough, he learns that the bulk of Bitcoins are being used as currency on a hidden Web site similar to eBay. But rather than books or electronics, most visitors to what鈥檚 called the 鈥淪ilk Road鈥� anonymous marketplace on the Deep Web are in search of one thing: illegal drugs.
Right.
At first read, this all sounds fantastical, even mindboggling to anyone who isn鈥檛 tech-savvy. It doesn鈥檛 help that, at the time, the only 鈥渙fficial鈥� literature on Bitcoin is a 鈥渨hite paper鈥� released by Nakamoto, its mysterious founder. Although computer scientists may be able to follow the paper鈥檚 diagrams and jargon, it鈥檚 not exactly a clear 鈥渉ow-to guide鈥� for the masses.
As for Silk Road, Christin can鈥檛 find any data, despite New York Senator Charles Schumer calling it 鈥渢he most brazen attempt to peddle drugs online that we have ever seen鈥� at a recent press conference. Schumer called on federal authorities to shut down the site in response to a few somewhat 鈥渟ensationalist鈥� articles that had recently been published online.
Christin decides to put some hard numbers to all of the speculative chaos swirling on the Web and get a sense of the scale of the Silk Road operation鈥攊s this just some guys selling pot to their friends, or is it bigger? Once he gets some kind of idea, he鈥檒l be able to get a better sense of the Bitcoin economy itself. Plus, what he finds may contribute to a large research project he鈥檚 doing on the online sale of pharmaceutical drugs through unlicensed pharmacies. So, as a side project, he sets up a six-month Web crawl of the site, scraping data page by page on a daily basis while making sure to fly under the radar of the sites鈥� operators. What he ends up finding is pretty alarming.
Initially, he鈥檚 surprised by how seemingly 鈥渘ormal鈥� the site runs, considering that it sells almost any drug imaginable: from marijuana to heroin to hallucinogens to pharmaceuticals. An even bigger shock is the scale; it鈥檚 definitely not a neighborhood dealer. He estimates that Silk Road generates $1.2 million monthly and that it鈥檚 growing, with almost 600 sellers present during the last day of the crawl, with the largest contingent (43%) apparently shipping from the United States. The sellers ship drugs worldwide through the mail and accept Bitcoin as the only method of payment.
In August 2012, just a couple of days after Christin places his report in an obscure online repository while awaiting peer-reviewed publication, he finds himself unexpectedly fielding calls from U.S. News & World Report, Forbes, Wired, The Economist, and other news media around the world. Christin is the first researcher to come up with real measurements on Silk Road, considered one of the largest anonymous marketplaces.
Online 鈥渄rugs-in-the-mail鈥� Web sites aren鈥檛 new; other sites like Farmer鈥檚 Market have been shut down. Silk Road鈥檚 success to date hinges on being able to stay anonymous, thanks in part to something called the Tor network, a sophisticated worldwide network of servers that hides IP addresses through a combination of encryption and relay circuits. For example, if you were to access a Web site using Tor, neither the site鈥檚 operators nor your Internet service provider would be able to see your IP address. Instead, they would just see encrypted Tor information. In this way, Tor helps buyers and sellers on Silk Road stay anonymous, as well as hide the site itself, making it ideal, Christin notes, for black-market enterprises. The Tor network, coupled with a hard-to-trace currency, keeps Silk Road users anonymous. No wonder journalists鈥攃lamoring to know more about the little-known rogue currency Bitcoin and its black-market connection鈥攇ravitate to Christin鈥檚 study.
Today, a quick Google search of 鈥淏itcoin鈥� turns up more than 249 million results, including countless articles that mention Christin鈥檚 findings. This past spring, he traveled to Brazil to present his findings at the I, a selective gathering of leading researchers, developers, users, and commercial ventures.
While Silk Road has grown in volume, so too have hundreds of legal online companies that accept Bitcoin as payment, even some brick-and-mortar businesses. Payment-processing services, like BitPay, are pulling in millions of dollars in monthly transactions. Dozens of exchanges offer conversion to 18 global currencies. Hedge funds are being set up, new companies are being created, big venture capitalists are starting to invest, and some early-comers have already made huge profits.
Despite its volatile track record of rising and plummeting prices, making it unreliable as an everyday currency, the Bitcoin economy overall has been on an upward trajectory. It鈥檚 now worth more than $1 billion and fluctuating around $100 per Bitcoin (though still with plenty of 鈥渨ild swings鈥�); when the first Bitcoins hit the market in 2009, they were worth less than a penny each. Bitcoin has undeniably become the most successful digital currency to date, says Christin.
So how exactly does it work?
For starters, Bitcoin isn鈥檛 a 鈥渃oin鈥� at all. It鈥檚 a digital form of currency. In simplest language, each 鈥渃oin鈥� is just a bunch of digital 鈥渂its鈥�: a series of coded numbers and letters that give it a unique identity. As far as digital currency goes, that鈥檚 pretty elementary stuff. What sets it apart is that鈥攗nlike the dollar bills in your wallet or the account balance on your bank statement鈥擝itcoin isn鈥檛 regulated or backed by any company, bank, or government. And unlike the U.S. Mint and the Federal Reserve, no single authority mints Bitcoins or decides how much is released into the digital ether. Rather, it鈥檚 self-regulated by an encrypted algorithm.
The whole system, says Christin, works like a game, dependent upon the resources of 鈥渕iners鈥� who work to solve a fixed supply of cryptographically locked 鈥渂locks.鈥� The fixed supply of 21 million Bitcoins is meant to control for inflation, making the system similar to a digital form of gold. So far, about half of the quota has been reached.
To Christin, a computer scientist who helped to kickstart a CyLab graduate program in Japan, Bitcoin is ingenious. However, what鈥檚 fueling its innovation isn鈥檛 novel or new technologies, but rather the way in which Bitcoin creators have pieced together preexisting technologies to ultimately create a currency without any centralized intermediary. Kind of like building with Lego blocks, he suggests.
To some, an unregulated currency free from the grip of financial institutions is a beautiful thing. It鈥檚 popular with individuals of particular schools of thought and 鈥渇ringe鈥� philosophies, such as those searching for an alternative to gold. There is an even more real and tangible appeal to those living in unstable economies, those who are otherwise subjected to unreliable government-backed currencies, says Christin鈥檚 colleague , associate professor of business administration at Harvard Business School. The 2008 hyperinflationary disaster in Zimbabwe and the recent banking crisis in Cyprus are prime examples.
Other advantages of Bitcoin come in the form of transactions themselves, which carry much lower fees than banks or credit companies. This may be particularly attractive to international merchants looking to avoid typical transaction costs. Simultaneously, as Christin has shown, Bitcoin鈥檚 unregulated protocol makes it ideal for those on the 鈥渄ark corner of the Web,鈥� like Silk Road and other risky ventures that seek anonymity.
Bitcoin itself isn鈥檛 technically anonymous, points out Christin. Every Bitcoin transaction is recorded in a public ledger on the network with the identifying information of your Bitcoin 鈥渨allet,鈥� which is one of the ways that make the coin unlikely to be falsely duplicated. However, because personal information is being withheld, Bitcoins can come pretty close to a digital form of cash. Anyone looking to buy or sell on the Silk Road can easily input a false identity on the Bitcoin. Then to further ensure anonymity, Silk Road uses 鈥渢umbler鈥� mechanisms to essentially launder Bitcoins, rolling them through a series of intermediaries and making a money trail all but impossible to trace.
This criminal element, coupled with Bitcoin鈥檚 virtual explosion in the past year, has started turning the heads of government agencies like (the Financial Crimes Enforcement Network). They鈥檝e realized that Bitcoin is no longer 鈥渇unny money,鈥� says Christin, and so they are trying to determine what laws apply. But legally, it鈥檚 blurry. Although laws exist against minting alternative currency in most countries, the currency laws of the U.S. Constitution weren鈥檛 exactly prepared for handling digital 鈥渂its鈥� that people have determined are worth something. 鈥淭here is a lag between policy-makers 鈥� between what they know, the amount of knowledge that they have, and what is already going on,鈥� says Christin.
FinCEN has suggested guidelines for Bitcoin exchanges to comply with laws regulating conventional financial institutions, but the interplay between Bitcoin and government policy is still in its early stages.
At the end of the day, the Bitcoin eco-system is still the 鈥淲ild West,鈥� says Christin. Even the exchanges themselves, often subject to technological setbacks and cyber-attacks, contribute to the instability, which ultimately led him to publish a study on the topic in April 2013 in the Proceedings of the 17th International Conference on Financial Cryptography and Data Security. It received international attention among top computer-security researchers, as well as the media.
When it comes to Bitcoin, and in the broader field of cybercrime, Christin has distinguished himself as a researcher at the forefront of the field, notes colleague and collaborator , professor of security engineering at the University of Cambridge Computer Laboratory.
As for the future of Bitcoin, Christin likens the nascent currency to a 鈥渓ab experiment鈥� that could take a number of different directions: in one extreme scenario, government regulation could clamp down on exchanges and suffocate the currency; in another, major online retailers like Amazon could pick it up and propel Bitcoin into the mainstream, where it could grow to supplant other forms of currency.
Despite Bitcoin鈥檚 highly unpredictable future, Christin says it has demonstrated that a decentralized digital currency is possible and can actually be used, evolving, in the case of Bitcoin, from its subversive beginnings on the Silk Road. Clearly, it鈥檚 no longer the stuff of fiction or even academic experiments, as was the case with many digital currency predecessors.
Perhaps the real value of Bitcoin, he suggests, lies in the doors it has opened to societal discussions about our financial systems and the very nature of money itself, prompting us to ask a fundamental and inherently complex question that is almost philosophical: 鈥淲hat is money?鈥�?
Danielle Commisso (DC鈥�06) is a Pittsburgh-based freelance writer and a regular contributor to this magazine.
Related Links:
听
