Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

Silk Road Shutdown Benefits International Crime Syndicates, Bitcoin Unharmed

Posted by Tom Foremski - October 2, 2013

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Last year a 21 year old man is shot and killed in a drug-related case near my home in San Francisco.

The FBI's shutdown of web site Silk Road is a hollow victory in the hugely expensive war on drugs, which has consistently failed to stop the drug trade, or stop criminals from amassing huge amounts of wealth and ordering more than 60,000 murders in Mexico alone.

Silk Road had some positive aspects. The FBI admitted that Silk Road vendors provided high quality drugs. And the prices were far below the street, reducing the money fueling the trade.

Based on advanced Internet technologies, it was able to create a protected market that kept money out of the hands of violent street gangs and international criminal syndicates. It also protected buyers (lots of US citizens) from the poisons that adulterate street drugs.

If it had grown large enough, Silk Road, or a collection of similar online services, would have begun to seriously challenge the revenues of local and international mobsters on a scale that the war on drugs has consistently failed to do.

It's much better to have drug distributors such as Silk Road and competitors fight over Google keywords in online auctions than murder and behead each other in the tens of thousands. 

The beneficiaries of this FBI takedown are the international criminal syndicates, hit men, and the corrupt networks that enable the drug trade to cross borders in staggering quantities.

The FBI has unwittingly done them all a big favor and kept the Internet from disrupting a truly evil international industry.

But this story is not done yet. It's just the beginning. The next generation of Silk Roads is on the way and they'll be smarter, stealthier, and even more efficient at disrupting the drugs business.

[The Walter Whites of the future can remain mild-mannered, middle class artisans rather than having to learn the murderous ways of the drug world. Lost mail, Internet outages, and changes in Google's algorithm will be the most dramatic events in a future sequel to "Breaking Bad."]

Bitcoin's future…

Bitcoin is a key technology in this tale of potential business disruption. Its ability to enable a large market with relatively friction-less payments has attracted the attention of a legion of entrepreneurs with ideas for other applications. Bitcoin has benefited greatly from its nefarious affiliations.

Businessweek's Joshua Brustein reports that the Silk Road bust is good thing for the virtual currency. He quotes several entrepreneurs saying it removes a negative perception.

However, Bitcoin's future has nothing to do with drugs. It's as if the future of cash was in doubt because its anonymity allowed people to buy drugs, and worse. Bitcoin's value dipped after the bust but it recovered quickly showing that most Bitcoin backers knew that the drug connection is a red herring and were happy to buy them at a discount from dumb sellers.

The burgeoning interest in the currency is due to its unique properties, especially its property of scarcity.

Abundance destroys monetary value but scarcity attracts it and retains it.

That's why De Beers warehouses huge quantities of diamonds so that they remain scarce and maintain their market value despite the fact that diamonds really aren't all that scarce, thanks to new sources and new mining techniques.

There isn't a warehouse full of Bitcoins being kept out of the market to maintain a high value because it would be impossible. But De Beers could decimate the value of all diamonds at any time, by having a 50%-off warehouse sale.

A government couldn't use Bitcoins for quantitative easing, for example. "Printing money" is impossible with Bitcoins.

In the digital world of the Internet everything is easy to copy. But not Bitcoins.

It's these qualities that make it interesting.... and valuable.

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