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Bitcoin Crackdown Could Lead to Bitcoin Resurgence

Bitcoin just lost one of its largest users in a federal raid on a notorious online black market, but the fledgling digital currency's future still appears to be bright.

FBI shuts down Silk Road
FBI shuts down Silk Road

U.S. agents shut down the notorious Silk Road site, where hackers and drug dealers sold their illegal wares using Bitcoins, and arrested founder Ross William Ulbricht this week on charges of money laundering, conspiracy to commit drug trafficking and other crimes.

Though it’s long been associated with the nefarious transactions on Silk Road, the vast majority of Bitcoin usage actually has nothing to do with criminal activity. And companies active in the fast-growing, legitimate side of the market welcomed the crackdown.

An attempt at legitimacy

“Silk Road is a nuisance and distraction as it made Bitcoin an easy target for its detractors,” says David Barrett, CEO of Expensify, an online expense reporting service that accepts Bitcoins.

Expensify users don’t necessarily want to be anonymous -- a key feature of using Bitcoins -- though they sometimes prefer to use the virtual currency to pay for overseas expenses instead of trading in the currencies of small countries, Barrett says.

BitPay, which provides Bitcoin payment processing services, says it has signed up 10,000 businesses including blogging service WordPress and web address registrar Namecheap. So far this year, BitPay has handled $34 million worth of legitimate Bitcoin dealings.

"Now that Silk Road is done, there's room for positive accomplishments in the Bitcoin space and for other companies to get noticed,” says BitPay CEO Tony Gallippi.

Bitcoins, which exist only as bits of computer code, were the brainchild of an anonymous computer programmer known as “Satoshi Nakamoto.” New Bitcoins are created when computer users crack complex mathematical equations. Just under 12 million Bitcoins with a total value of about $1.5 billion are currently in circulation.

Only a small fraction of Bitcoin transactions went through the Silk Road site, which launched in 2011. While observing the Bitcoin economy between June 29 and July 29 this year, only 6% of transactions involved Silk Road, according to Sarah Meiklejohn, a graduate student at University of California, San Diego, who led a study of the marketplace. (Although Bitcoin users can remain anonymous, all transactions are publicly recorded.)

The sometimes volatile price for a Bitcoin initially took a dive on the Silk Road news. After the announcement of Ulbricht's arrest on Wednesday, the value of a Bitcoin traded on the Mt. Gox exchange in Tokyo dropped by more than 20% to as low as $110 from $140, before closing at $124. But a day later, the price had bounced back to $130.

Those fluctuations are minor compared to the bounces in April, when fears of a European economic and currency collapse sent the Bitcoin market into a frenzy. The value of a Bitcoin skyrocketed to $266 then plunged to $40 in a matter of days.

The much reduced volatility this time around reassured Expensify’s Barrett. “I think this is a vote that BitCoin's primary value is in legitimate commerce,” he says.

Still, criminals who used Bitcoins on the Silk Road site and sullied the digital currency’s reputation aren’t likely to disappear. The illicit online marketplace ran much like eBay with user ratings and the site taking a commission out of every sale. Listings ranged from marijuana and LSD to fake drivers licenses and hacked Netflix accounts. Prosecutors noted listings such as "High Quality #4 Heroin All Rock" and "UNCUT Crystal Cocaine” in their criminal complaint.

Improved image

Concerns about criminal activity have somewhat hampered efforts to create legitimate services for the virtual currency. In August, New York regulators subpoenaed 22 companies active in the Bitcoin economy, including well-known venture-capital firms like Google Ventures and Andreessen Horowitz, seeking to uncover possible illegality.

“If virtual currencies remain a virtual Wild West for narco-traffickers and other criminals, that would not only threaten our country’s national security, but also the very existence of the virtual currency industry as a legitimate business enterprise," Benjamin Lawsky, superintendent of the New York’s Department of Financial Services, said at the time.

Many Bitcoin proponents welcome greater regulation, which will improve the currency's image and foster consumer trust. "The only way that money is valuable to people is if it trustworthy," says Micky Malka, founder of Ribbit Capital, which has invested in Bitcoin startups.

Without Silk Road, crooks may try to find substitute illicit online marketplaces, notes Nicolas Christin, an assistant research professor at Carnegie Mellon University who has studied use of Bitcoin on the site.

Bitcoin’s legitimacy could improve in the short term at least “provided there isn't another illicit online marketplace that becomes as successful as Silk Road,” Christin says. “What really would improve Bitcoin's reputation is if mainstream shops started using it. Some such uses have started to happen but still remains very much on the fringe.”

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