U.S. Senators. Charles Schumer , D-N.Y., and Joe Manchin, D-W.Va., are urging the U.S. Department of Justice Department to shut down an underground online drug-trade site called Silk Road, but in a June 6 open letter to the department the senators barely touched on the digital currency–Bitcoins–that fuels the site’s commerce.
The department historically has suspended individual online online-currency accounts, such as it did with e-gold, when it discovers criminal use. The senators in the letter’ only mention Bitcoins in passing, focusing more on Silk Road, and they do not specifically push for shutting down the currency itself.
“The only method of payment for these illegal purchases is an untraceable peer-to-peer currency known as Bitcoins,” the senators’ letter reads. “After purchasing Bitcoins through an exchange, a user can create an account on Silk Road and start purchasing illegal drugs from individuals around the world and have them delivered to their homes within days.”
Those wishing to buy drugs–from marijuana to heroin–from sellers on Silk Road connect to the site through the network TOR, which covers up a user’s online footprint, and make purchases with Bitcoins.
But Bitcoin transactions are not as anonymous as cash, and law-enforcement agencies potentially could track Silk Road customers because all Bitcoin transactions are recorded in a public log, Bitcoin developer Jeff Garzik said in an email to PaymentsSource.
Satoshi Nakamato developed the supposedly untraceable “cryptocurrency” was developed in 2009, but only in recent months has it begun to gain popularity among nonhackers, who originally used it for digital barters among themselves.
Nakamato reportedly was a Japanese computer-science student when he developed Bitcoin, but some question his actual identity and nationality, believing the name is a pseudonym. Bitcoin has no central issuing authority and is said to appeal to those who wishwanting to buy goods online without having marketers and others tracking their purchases.
Gwenn Bézard, a research director with Aite Group LLC in Boston, said in a phone interview he cannot imagine Bitcoins or any other digital currency will gain much ground as an online-payment option, suggesting consumers are not worried enough about privacy to take the extra step of going to an exchange site to buy Bitcoins.
“Do people really care?” he said. “If consumers in a massive way were putting privacy at the very top of their concerns, they would not be on Facebook.”
Schumer and Manchin could not be reached for comment on whether they would push to shut down Bitcoin or further regulate it. Bitcoin exchanges are working with multiple countries to comply with regulations and already have implemented anti-money-laundering safeguards, Garzik said.
“We hope the U.S. government can separate the bad guys–Silk Road–from a currency where the majority of the community is working to make Bitcoins acceptable for mainstream use,” he said in an email. “If Bitcoins are to be successful, we want law-abiding, tax-paying businesses and citizens to feel safe and comfortable using Bitcoins.”
Online chatter has some technology and economist bloggers calling the currency a scam in that early adopters stand to make the most money, as Bitcoins skyrocket in value. They remained virtually worthless until earlier this year when more — –mostly legitimate — –online businesses began to accept them, according to BitcoinCharts.com, a site that tracks the Bitcoin market.
As of June 14, one Bitcoin was worth $19.04. That price more than doubled from around the $8.67 value on June 1, when Gawker.com published an article about the currency and Silk Road. Within days of the article publishing, the value of one Bitcoin value had jumped to around approximately $14 and peaked at around about $30 on June 9.
The currency is volatile, and critics say that eventually the bottom will fall out.
“The economic assumptions underpinning the Bitcoin ecosystem are laughable, and ignore hundreds of years of accumulated understanding of how currencies work with each other,” self-described Internet economist Adam Cohen wrote in an online forum. “So, do I think Bitcoin is a good idea? The cryptography system seems to have technical merit, although I'm I’m not a cryptologist. If it were thoughtfully integrated into a legitimate banking product, it might be a good idea. But this is not a good idea; this is a scam.”
On June 8, Garzik responded online to Cohen’s comments by saying, “… as a startup currency, like any startup business, standard disclaimer applies: it is a highly risky experiment, but I would push back towards any claims of ‘scam.’”
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