Bitcoin Prices Plunge on Bust of Online ‘Black Market’

The price of Bitcoins listed on the Bitstamp Ltd. exchange plunged as much as 33 percent after charges were unsealed for the operator of an online marketplace for drugs and other illicit goods.

Ross William Ulbricht, who runs the “Silk Road Hidden Website” was charged in federal court in New York today for running a “sprawling black-market bazaar” where anonymous users conducted transactions with Bitcoins.

Bitcoins exist as software that’s designed to be untraceable, making it an attractive tender for those seeking to trade anonymously via the Web. The price for one unit dropped today to about $85 from $127. That’s probably due to speculation that demand for the digital money will shrink after the U.S. government said it seized the Silk Road website, according to Jered Kenna, Chief Executive Officer of virtual-currency exchange Tradehill Inc.

The Rise of Bitcoin

“The question here is: What is it going to do to the Bitcoin ecosystem?” Kenna said in an interview. “Are we going to find out that 90 percent of Bitcoins were used on Silk Road, or that 1 percent of Bitcoins were used there? The Silk Road just threw a lot of uncertainty into it.”

U.S. prosecutors said today that Ulbricht, known on Silk Road as “Dread Pirate Roberts,” ran the site as “the most sophisticated and extensive criminal marketplace on the Internet” from January 2011 to September 2013. The site generated sales of about $1.2 billion and about $80 million in commissions for Silk Road, they said.

Virtual Money

Since being introduced four years ago by a programmer or group of programmers going under the name of Satoshi Nakamoto, Bitcoin has become popular way to pay for goods and services on the Internet, with 11.8 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks the digital currency’s activity.

While Bitcoins are designed to be untraceable, that’s not always guaranteed since most transactions leave a record of the exchange. Although the currency can be used for illicit goods, it’s also becoming a popular way to buy and sell legitimate products and services, from cupcakes to Web hosting.

Bitstamp and several other online exchanges have emerged where Bitcoin holders are able to trade the digital currency for dollars, euros and other legal tender. With the growing use of Bitcoins, driven in part by speculative demand, the currency is up about tenfold over the last year, according to Bitcoincharts.

Benjamin Lawsky, superintendent of New York’s Department of Financial Services, said that any regulation of the nascent Bitcoin industry has to include transparency on who does the trading of the virtual currency. He said in an interview with Bloomberg editors and reporters that his primary concern involved adding anti-money-laundering safeguards.

Illegal Transactions

Ulbricht, 29, was charged with narcotics trafficking conspiracy, computer hacking conspiracy and money laundering conspiracy. He tried to have one user killed for attempting to extort money from the site, prosecutors said in a criminal complaint unsealed today in Manhattan federal court.

“The site has sought to make conducting illegal transactions on the Internet as easy and frictionless as shopping online at mainstream e-commerce websites,” the government said in a civil forfeiture complaint unsealed today.

Ulbricht was arrested yesterday and appeared in federal court in San Francisco today, according to Julie Bolcer, a spokeswoman for Manhattan U.S. Attorney Preet Bharara.

The criminal case is U.S. v. Ulbricht, 13-mg-023287; the civil forfeiture case is U.S. v. Ulbricht, 13-cv-06919, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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