This Trial Against A 30-Year-Old Former Physics Student And Eagle Scout Could Change The Future Of Bitcoin

Ross ulbrichtSpencer Platt/Getty ImagesA protestor stands outside the courthouse holding a poster of Ulbricht’s face juxtaposed on the symbol for Bitcoin, the virtual currency used to pay for items on Silk Road.

The trial of the alleged mastermind behind the world’s biggest online drugs marketplace began last week, and the case could have significant implications for online anonymity and the regulation of digital currency.

Ross Ulbricht, the alleged founder of Silk Road, has been charged with narcotics trafficking, computer hacking, and money laundering.

Ulbricht’s lawyers tried to get out of money laundering charges last year by claiming that Bitcoin, the digital currency used to purchase goods on Silk Road, is not real money. The judge didn’t buy it, however, ruling that “Bitcoins carry value — that is their purpose and function — and act as a medium of exchange.”

This decision to equate bitcoins with real currency could subject the digital cash to a whole host of new laws. The prosecution showed last week that Silk Road vendors could sell their bitcoins directly on the site for real money and this, according to the government, amounts to money laundering in the most basic sense: liquidating proceeds from illicit transactions to mask the source of the funds.

Prosecutors allege that Silk Road generated an estimated $US1.2 billion in revenue between 2011 and 2013, including an estimated $US80 million paid in commissions.

AP310132607448Seth Wenig/APSupporters of Ross William Ulbricht hold signs during the jury selection for his trial outside of federal court in New York, Tuesday, Jan. 13, 2015.

WhileUlbricht’s supportershave challenged the idea that virtual currency — and, by extension, the dark net — can be regulated as such, others argue that the government’s powers do not end at the internet.

“Taking things out of the Bitcoin arena, you’re not allowed to have a flea market where you’re dealing drugs,” corporate attorney
Marcus Asner told Business Insider. “If you buy into the notion that the government gets to regulate narcotics, then the fact that it [regulation] is done online makes no difference.”

Department of Homeland Security agent Jared Der-Yeghiayan
admitted last week in a testimony that at one point he was convinced that Mark Karpeles, the owner and operator of the world’s largest (and now-bankrupt) Bitcoin exchange, Mt. Gox, was running Silk Road to drive up the value of bitcoins, the New York Times reported. Karpeles has denied any involvement.

Bitcoin may have begun as a libertarian project, but it has gained widespread appeal among those who value its relative anonymity and lack of regulation. With more mainstream appeal, however, has come more government oversight: Mt. Gox accounts in the US holding nearly $US10 million worth of bitcoins were seized in 2013, and law enforcement officials now have tools to investigate the criminal organisations that try to use the currency for illegal purposes.

BitcoinsMark Lennihan/APPeople attend the Inside Bitcoins conference and trade show, Monday, April 7, 2014 in New York.

Asner, former chief of the Major Crimes Unit in the US Attorney’s office in Manhattan, believes the Bitcoin industry not only supports reasonable and effective regulation, but that total anonymity was never its strength in the first place.

“If you wanted to transfer money secretly, Bitcoin would be a bad way to do it,” Asner said.

This is because law enforcement officials can easily trace the IP addresses of buyers and sellers by accessing the transaction’s online “blockchain.” Bitcoin is anonymous, but it is not untraceable.

People are still innocent until proven guilty, however, which is why a matching IP address is usually not enough for a conviction. Just as an incriminating phone call can only be traced back to the phone and not the individual who placed the call, an incriminating IP address can only trace back to a computer and not its user at the time the transaction occurred.

This burden of proof is currently on the prosecution at the Silk Road trial, as it always is in criminal cases. While the government has claimed to have traced Dread Pirate Roberts’ — the marketplace’s operator — back to Ulbricht’s IP address, Ulbricht’s defence team has challenged them to prove that Ulbricht was actually running the site from the time it was launched in February 2011 until it was shut down in late 2013.

In opening statements, the defence claimed that Ulbricht had created Silk Road as an “economic experiment,” but later handed it off to someone else once it became too chaotic. This “someone else,” the real Dread Pirate Roberts, is still out there, Ulbricht’s lawyers argue. The defence says its client was just a “fall guy.”

Ulbricht, a 30-year-old Texas native and former Eagle Scout, studied physics as a grad student at Pennsylvania State University. Soon after he graduated, Ulbricht became a passionate Libertarian, writing in his LinkedIn profile that “the most widespread and systemic use of force is amongst institutions and governments.”

In Austin, he was also the CEO of Good Wagon Books, a nonprofit that donated used books to prisons, we have previously reported.

He moved to San Francisco after grad school under the name “Joshua Terrey,” claiming to be a freelance currency trader, and was arrested at Glen Park Branch Library in San Francisco in October 2013.
Prosecutors claim he was caught red-handed, “literally with his fingers at the keyboard, running the Silk Road” when agents surrounded him.

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