Electronic currency is not a new concept, but its definition is beginning to change. The predecessors of electronic payment systems like credit cards and debit cards emerged in the first half of the 21st century, and since then, various attempts to create electronic currency have sporadically popped up.
Most of these currencies have attempted to solve a fundamental problem with internet transactions: the centralization problem. Most e-commerce currently uses credit card transactions. A purchaser, with a credit card account, and a vendor, also with an account, can transfer money electronically by using the card issuer, like Visa or Mastercard, as an intermediary.
The problem with this system is that it’s both expensive and inflexible. Transaction fees on credit cards are high, and credit card companies charge even bigger fees on what they see as “cash advances,” the movement of money, as opposed to the purchase of goods. While registering as a vendor is not that hard, it’s also not practical for most individuals to receive money from others in this way, unless they’re running a formal business. Another potential weakness is that credit card companies don’t like signing up anonymous customers, especially vendors. If you want to keep what you’re selling off the radar, Visa is not going to be a huge help.
The Internet black market was crying out for a currency that addressed these concerns. The problem was that designing a peer-to-peer currency is actually quite difficult. Cash works well for person-to-person transactions because it’s hard to counterfeit and easy to exchange. Of course, physical cash doesn’t work on the internet. For a long time, centralized transactions through a processor like Paypal or a credit card company were the only options.
In 2008, however, a mathematician known by the pseudonym of Satoshi Nakamoto published a paper called Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin, according to Nakamoto, could be traded without a centralized registry, and it could do so anonymously. People could trade using the currency both online and offline, and while transactions could be traced to specific accounts, those accounts were not linked to any specific person and could be made disposable.
For a while, nothing came of it; it was simply a curiosity project. By 2011, however, Bitcoin and its derivatives (known as altcoins) had revolutionized the internet’s black market. Easily traded over Tor, Bitcoin transactions were anonymous and secure.
When the Silk Road opened in February of 2011, it took full advantage of Bitcoin and the precedent set by Tor. Named after the trade routes of antiquity, Silk Road was an online bazaar whose participants straddled, and in many cases crossed, the line into criminality. Customers mostly traded in drugs; by some estimates, such as those of the Guardian newspaper, as much as 70 per cent of the traffic on Silk Road was in illegal drugs and drug products.
The Silk Road served as a combination marketplace and escrow service. Users could advertise items and place them up for sale; others could send their Bitcoin to the Silk Road in escrow in exchange for those goods. Observers, including law enforcement, could watch the transactions themselves taking place, and the Silk Road even had a feedback system similar to e-commerce giant Amazon.com. Yet there was little that authorities could do against the protection of Tor and Bitcoin.
Within a year, the Silk Road was huge and its operators riding high, with an average of 2000 transactions per day, worth hundreds of thousands of dollars.
While it may not have been the first and it was certainly not the last, it is perhaps the most notorious black market e-commerce site, a prime target of law enforcement across the globe—at least, until its collapse in October of 2013.
That month, the FBI raided the Silk Road’s servers and arrested its alleged owner and operator. The details of that raid, however, only seemed to strengthen the Silk Road’s proponents. Only a month later, a new online marketplace launched, attempting to reclaim the mantle: Silk Road 2.0. The FBI was back on the move, as well. On Dec. 20, 2013, two of the new site’s staff were arrested, and the digital cold war continued.