'Dread Pirate Roberts', Drug Prohibition and the Dark Web

By now it is well known that the proprietor of the 'Silk Road' internet marketplace for drugs and other illicit products has been busted by the FBI. Of course, the idea that the State should prohibit drug use by adults is highly questionable. If one studies the history of legislation in this regard, it soon becomes clear that while these prohibitions have been variously dressed up in Puritan morality or appeals to the need to preserve the 'Volksgesundheit' (the peoples' health), these laws really were largely protectionist measures.

For instance, it is no coincidence that marihuana use became illegal around the time chemical concerns such as Du Pont de Nemours introduced artificial fibers. Making the plant that produces marihuana illegal at the same time removed the biggest competition to artificial fibers – hemp.

Similarly, drug prohibition leaves the field of supplying the population with various uppers and downers in the hands of the pharmaceutical industry, which is producing dangerous psychoactive medication by the wagon loads these days. What the long term consequences of feeding the population with various benzodiazepines and other types of psychoactive drugs that influence the serotonin, norepinephrine or dopamine balance in the brain (such as the infamous and widely prescribed antidepressant Prozac) are is not really known, but we do know that a great many mass murderers that have gone 'postal' in modern times have been taking such psychotropic drugs.


Today here is a vast variety of anti-depressants, stimulants, 'mood stabilizers', anxiolytics and anti-psychotic drugs on the market that produce billions in profits for the pharmaceutical industry. We would wager that if the prohibition of currently criminalized drugs (most of which are produced by nature) were rescinded, this business would suffer a steep decline.

The senseless 'war on drugs' has not achieved a single one of its purported objectives. Drug use has not decreased because of it. However, it has had a huge cost both in terms of money and lives. So why is it continuing in spite of the crushing weight of evidence proving that it does more harm than good? That's simple: if you want to know why, follow the money.

A huge amount of money is made because certain drugs are illegal. If prohibition were rescinded, a major source of revenue for criminal cartels would dry up, and a great many minions of the State would see their jobs becoming redundant. Moreover, a major source of their funding would disappear as well, which is currently available to them via 'civil forfeiture'. As we pointed out previously, this pays inter alia for the militarization of the police, which these days can deploy a great many lethal toys as a result of this source of income. In the same article we argued that the changing social mood could actually lead to an end of prohibition in spite of all the vested interests arrayed in favor of maintaining it.

The 'Dread Pirate' apparently believed in non-coerced free markets, which he cited as a major reason to open his online drug bazaar. What is perhaps not widely known is that he was actually not busted because of any weaknesses in the TOR-based 'dark web'. He simply made a number of stupid mistakes that allowed the authorities to track him down by employing standard investigative procedures. The following cartoon probably illustrates it well:



securityHow to bust dark web users

(Image source unknown, via askqtp.com)



For readers interested in the technical aspects of the bust, this article at 'The Verge' has more detail on the topic. As the Verge maintains, the 'Dread Pirate' may have been busted, but the 'Dark Web' lives on. Note here that the TOR network is not merely something that is exclusively used by criminals. For many a regime critic and political dissident living in an authoritarian regime the anonymity of the 'Dark Web' is a literally a life saver. Naturally, governments everywhere dislike it, regardless of whether they are democratic or authoritarian: they dislike it simply because it is not under their control. However, there seems nothing they can do about it short of shutting down the internet altogether.


The Bitcoin Connection

In order to make anonymous payments on 'Silk Road' possible, the site used Bitcoin. In fact, when it became widely known that the drug marketplace accepted Bitcoin in payment, the price of the currency began its fantastic climb. This is no surprise, as these news were the first hard evidence that Bitcoin was actually used as a medium of exchange.

Bitcoin detractors everywhere no doubt rejoiced when Solk Road was busted: finally, a major prop helping the currency retain its value had been removed. Bitcoin duly suffered a 'mini crash' when the news hit, but it seems now that the currency's detractors have overestimated Silk Road's importance and underestimated the degree to which Bitcoin has become accepted as a store of value (it is not yet a widely used medium of exchange, but it would probably be correct to refer to it as a secondary medium of exchange by now).

After the initial crash, the currency quickly recovered, as dip buyers stepped in. Note also that Bitcoin has increased by nearly 100% in value since the low it made in July this year.




Bitcoin: after initially crashing on the news of the Silk Road bust, the currency has recovered almost the entire loss – click to enlarge.



Bitcoin, one yearBitcoin over the past year: since the early July low, the currency has risen by almost 100% – click to enlarge.



We would note here that we still regard Bitcoin mainly as a trading sardine. However, it is possible to integrate its existence into monetary theory: one only needs to keep in mind that its exchange value is highly dependent on the fact that it is convertible into standard money issued by governments. Monetary theorists are debating whether the currency can really be regarded as 'money'. After all, it is not a commodity with a preexisting use value, such as is the case with gold and silver.

However, it can at the same time not be denied that it has arisen in the market. No government committee decided one day 'let there be Bitcoin'. Instead a couple of computer nerds created the currency for the sheer fun of it. In the meantime, it has evidently become a serious contender in the world of currencies. Its rising exchange value suggests that it is widely regarded as a better money than the monies issued by States.

It is easy to see why this is so: although Bitcoin is not a commodity money and has no preexisting use value, it must be 'mined' at great cost and effort. Moreover, its supply is strictly limited: there will never be more than 21 million Bitcoins in existence.

This fact alone makes it interesting to many people as a potential store of value, especially if its acceptance as a medium of exchange continues to increase. Naturally its cash-like anonymity remains a big draw as well.  Consider in this context the example of the 'Saddam dinar' in Iraq: after the invasion of Iraq, the currency began to rise strongly. This was so because it continued to be accepted as a medium of exchange, and people knew at the same time that henceforth, printing of the currency would stop. The central bank of Iraq had been forced to cease to add to the supply of Saddam dinars.

Having said all that, until Bitcoin is more widely accepted in exchange (so far its use as a medium of exchange remains rather limited), the main prop keeping its value up is the fact that it can be converted into other currencies. If Bitcoin owners were not certain that they can indeed exchange their Bitcoins for dollars, euro, etc. at anytime at a Bitcoin exchange, its value would immediately come into question. In the end, it is just a collection of bits and bytes – the fact that it is not a commodity money remains its most severe flaw. It is therefore probably best regarded as an extension, or adjunct to existing paper monies.



bitcoin logo

Bitcoin: nothing but bits and bytes – and yet, a currency that has arisen in the market




Charts by MtGox Bitcoin exchange



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10 Responses to “Bitcoin and the Silk Road Bust”

  • MoonShadow:

    “the fact that it is not a commodity money remains its most severe flaw. It is therefore probably best regarded as an extension, or adjunct to existing paper monies.”

    Peter, you’ve overlooked a very important feature to Bitcoin that contributes significantly to it’s ‘moneyness’; and that would be the rather unique attribute of the Bitcoin network that bitcoins alone can be transfered securely anywhere in the world in minutes. While I would agree that it’s not a commodity in any traditional sense, our modern & highly connected planet has certainly begun to place real value upon useful data sets that form large network effects. A subjective value to be sure, but one that is independent of the cost of replicating the code itself. The services that the Bitcoin network provide include, but are not limited to, long distance transfer (WesternUnion), secure storage of wealth (banks, gold depositories), rapid finalization of transactions (cash in person), low trust transactions online (credit cards, Paypal) and even a small class of transactions that cannot be securely implimented by credit cards or cash at all (see https://en.bitcoin.it/wiki/Contracts). Bitcoins would be useless without the Bitcoin network, but one can only interact with the bitcoin network using bitcoins. It is currently true that the net effect of the bitcoin economy is as a secondary medium of exchange, that is no longer true in all cases and I expect that it will become less true as Bitcoin gains marketshare and mindshare. The potential market for bitcoins among the System D crowd worldwide alone is in the hundreds of billions of US dollars per year.

  • uslackr:

    While the drug war does bring in money to the government, I would guess it’s a net loss with the costs of prison & manpower. However legalizing drugs would open new revenue opportunities through taxes with less overhead to collection.
    On the other hand, reducing the number of police would reduce the inherent power the government has so don’t expect a change

    • worldend666:

      You are missing the point. It doesn’t have to be a net gain for government. Only the lobbies have to benefit at the expense of tax payers.

  • Jay:

    “…In the end, it is just a collection of bits and bytes – the fact that it is not a commodity money remains its most severe flaw…”

    You mean like every other digital currency, like dollars, euros, etc.

  • Sunonmyface:

    Adding to Solon’s post….

    Another major hit to society is the rapid evolution of the Drug King. In order to stay on top of his empire, the Drug King must be ruthless and very smart or else he dies or goes to prison. As others see the Drug King make mistakes, the replacement Drug King learns and evolves. We are developing Drug Kings that will have the intellectual capacity, connections and money to become significant puppet masters of the elected politicians. Imagine a country effectively run by Drug Kings………..

  • worldend666:

    >>Naturally, governments everywhere dislike it, regardless of whether they are democratic or authoritarian: they dislike it simply because it is not under their control.

    That’s highly debatable. I read somewhere that 40% of all Tor nodes are owned by the NSA, and given that anyone can set up a Tor node this is quite possibly so. VPN is probably a more anonymous way to surf.

    • mic:

      That comic is from xkcd.

      This comic is what we call “rubber hose cryptanalysis” the weakest link in the system is nearly always the human. As we learn you have to have proper OPSEC for example don’t use your real name.

      “40% of all Tor nodes are owned by the NSA”
      Wouldn’t be surprised.

      “VPN is probably a more anonymous way to surf.”
      I would think Tor is better in general. Although some VPN are Tor-like or even use Tor.

      TOR is a great thing for the world of internet freedom. TOR is not a perfect system. There are some vulnerabilities; in theory if your advisory runs 51% of the TOR nodes your message passes through you are done. It is estimated that 60% of TOR users are using outdated crypto that is within the reach of nation states.

  • No6:

    Can anybody say ‘the land of the free’ with a straight face anymore?

  • Solon:

    The Drug-Profit cycle is even more twisted than people realize. There are more than just cartels involved in production and distribution… history has proven that members of the elite and the CIA have been extensively involved also.

    Criminalization of drugs is even more sinister than protectionism for competing industries and profits for the producers and first-line distributors…

    These distributors infiltrate a neighbourhood and recruit and conscript its residents and its gangs. The resulting addiction and drug wars (between the gangs and the police and between the gangs themselves), drives up the demand and price for illegal arms, and destroys the neighbourhoods and its real estate value.

    The recruits and conscripts once caught are sentenced under heavy0handed legislation, enabling prisons-for-profit to make even more profit.

    Meanwhile drug money uses the strangest anti-money laundering laws of all time to buy up the distressed properties in the drug-torn neighbourhood. Once the police have cleaned the inner city neighbourhood up, the area becomes gentrified and the laundered drug money makes even more money.

    The government and Wall Street enable this entire process. To learn more, please read Catherine Austin Fitts the former Dillon Read banker who was railroaded out of her position as Asst Sec of HUD when she discovered this process.


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