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Thus far in lecture 7,
we've talked about the growth of Bitcoin,

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we've talked about how Bitcoin operates,
who's in charge of it.

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I want to spend the rest of lecture
7 talking about governments,

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governments' interaction with Bitcoin and
government attempts to regulate Bitcoin.

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And we'll start simply with the moment
when governments noticed Bitcoin.

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When Bitcoin became big
enough as a phenomenon,

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the governments started to worry
about the impact it might have, and

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governments started to talk
about how to react to it.

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One reason why governments would
notice a digital currency like Bitcoin

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is that untraceable digital cash,
if it exists, can defeat capital controls.

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Capitol controls are rules or
laws that a country has in place

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that are designed to prevent
the flow of value, of capitol,

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of wealth either in or out of the country
and by putting controls on banks and

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investments and so on a country
can try to prevent these flows.

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Bitcoin is a very easy way under
some circumstances to defeat capital

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controls because someone can simply buy
Bitcoins with capital inside the country,

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ship those Bitcoins outside
the country by electronic means and

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then sell those Bitcoins for
capital or wealth outside the country.

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By doing that, they could move capital or
wealth from inside to outside and

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similarly, you could do the same thing
to move it from outside to inside.

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Because wealth in this electronic form
can move so easily across borders and

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can't really be controlled,

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a government that wants to enforce capital
controls in a world with Bitcoin has to

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try to disconnect the Bitcoin world from
the local fiat currency banking system.

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So that it's not possible for
someone to turn large amounts of

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local currency into Bitcoin or large
amounts of Bitcoin into local currency.

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And so we see countries that
are trying to beef up or

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protect their capital controls do that.

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And a notable example is China.

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China has engaged in
increasingly strong measures

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to try to disconnect Bitcoins from
the Chinese fiat currency banking system.

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Another reason governments might worry
about untraceable digital cash is that it

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makes certain kinds of crimes easier.

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In particular crimes like kidnapping and

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extortion that involve the payment of
a ransom or some kind of a payoff.

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Those crimes become easier when payment
can be done at a distance and anonymously.

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Law enforcement against kidnappers, for
example, often has relied upon exploiting

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the hand-off of money from the victim or
the victim's family to the criminals.

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When that can be done by email, when that
can be done at a distance in an anonymous

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way, it becomes much harder for
law enforcement to follow the money.

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Similarly, tax evasion becomes
easier when it's easier for

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people to move money around, when it's
easier to engage in transactions that

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are not easily tied to a particular
individual or identity.

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And finally the sale of illegal
items becomes potentially

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easier when the transfer of funds
can happen at a distance and

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without needing to go through
a regulated institution.

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A good example of that is Silk Road.

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Silk Road was essentially the eBay for
illegal drugs.

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You can see here a screenshot of
Silk Road's website when it was operating,

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it calls itself an anonymous marketplace.

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You can see over on the left some
sorts of things that are for sale.

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Illegal drugs were the primary things for
sale on Silk Road.

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You can see examples of the sorts
of things that were for sale here.

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Silk Road allowed sellers to
advertise goods for sale.

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They allowed buyers to buy those goods.

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The goods were delivered typically through
the mails, or through shipment services.

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And payment was made in Bitcoins.

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So, Silk Road operated
as a Tor hidden service,

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something that was discussed
in an earlier lecture.

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So by operating as a Tor hidden service,
Silk Road,

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the Silk Road servers could be
hidden from law enforcement.

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So they were difficult for
law enforcement to reach.

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Because Silk Road used Bitcoin for
payment, it was also difficult for

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law enforcement to follow the money and

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figure out who the people
participating in the market were.

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Silk Road was the largest online
market for illegal drugs, as I said,

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it ran as a Tor hidden service and
used payments in Bitcoins.

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The site held the Bitcoins in escrow
while the goods were shipped.

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There was an innovated escrow system
which helped to protect the buyers and

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sellers against cheating by other parties.

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The Bitcoins would be
released once the buyer

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certified that the goods had arrived.

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Silk Road had an eBay-like reputation
system that allowed buyers and sellers to

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get reputations for following through on
their deals and by using that reputation

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system Silk Road was able to give the
participants in the market an incentive to

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play by the rules even though they would
be very, very difficult to find otherwise.

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So Silk Road was innovative among
criminal markets in finding ways

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of enforcing the rules of
the criminal market at a distance.

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Something that criminal markets
in the past had difficulty doing.

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Silk Road was run by a person who
called himself Dread Pirate Roberts.

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And some of you may
recognize that reference.

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Obviously a pseudonym.

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It operated from February
2011 until October 2013.

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Silk Road was shut down after
the arrest of this guy, Ross Ulbricht,

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who was the alleged operator of Silk Road.

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He was arrested in October 2013,
and he's currently awaiting trial.

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The government says that he was
the operator of Silk Road and

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that he tried to cover his tracks by
operating using various anonymous accounts

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by using Tor, anonymous remailers and
those sorts of things but

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they said that they were
able to connect the dots and

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connect him to Silk Road activity,
to connect him to the servers, and

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to connect him to the Bitcoins that
belonged to the operator of Silk Road.

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They charged him with various crimes
relating to operating Silk Road.

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They also charged him with
attempted murder for hire.

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If the allegations are true, he more than
once tried to pay to have people killed.

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Fortunately he was bad at it,
and nobody actually got killed.

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But nonetheless,
these are some pretty serious charges.

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The government,

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in the course of taking down Silk Road
seized about 174,000 Bitcoins.

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That's quite a bit of value.

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They then auctioned
those off to the public.

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As with the proceeds of
any crime under US law,

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they could be seized by the government and
the government did seize them.

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So, Mr. Albrecht is awaiting trial.

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We'll eventually, perhaps find out
the full evidence against him.

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Now there's several
lessons from Silk Road and

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from the encounter between law
enforcement on the one hand,

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and Dread Pirate Roberts, perhaps Mr.
Albrecht, on the other hand.

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First of all, one lesson is that it's
actually pretty hard to keep the real

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world and the virtual world separate.

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The operator of Silk Road
believed that he could

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live his real life living in society and
at the same time have a secret identity in

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which he operated a fairly good sized
business and technology infrastructure.

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That apparently is harder
than you would think.

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It's difficult to keep these
separate worlds completely apart.

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And not accidentally create
some linkage between them.

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It's hard to stay anonymous for
a long time.

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It's hard to be very active and engage in
a course of coordinated conduct in which

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you're working with other people
over time while remaining anonymous.

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The reason being that although you
can operate multiple identities,

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if there's ever a connection
between two of those identities,

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if you ever slip up and use the name of
one, while wearing the mask of another.

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Or if you ever slip up and

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create a link between them,
that link can never be destroyed.

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And over time, the different anonymous or

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identities are masks that someone is
trying to use, tend to get connected.

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And there's a lesson there as well.

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The third lesson here is that the Feds,
the law enforcement can follow the money.

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Because even before there was
an arrest in the Silk Road case,

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the government knew that certain
Bitcoin addresses were operated

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by the operator of Silk Road, and
they were watching those addresses.

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The result is that the operator of
Silk Road, while wealthy in according to

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the block chain, was not actually able
to benefit from that wealth because any

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attempt to transfer those assets over
into the dollar world would have

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resulted in a traceable event and probably
would have resulted in rapid arrest.

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And so although Mr. Ulbricht was
allegedly the owner of 174,000 Bitcoins,

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the fact is,
he was not living like a king.

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He was living in a one bedroom
apartment in San Francisco,

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apparently unable to get to the wealth
that he allegedly controlled.

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The lessons here are that if you
intend to operate an underground

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criminal enterprise, and
I hope you as our students are not.

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But, if you are then, it's a lot
harder to do than you might think.

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That the technologies like Bitcoin and
Tor are not panaceas for

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people who want to do these things and
that law enforcement

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actually has some pretty significant
tools that they can still use.

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And so although there might have been some
panic in the world of law enforcement over

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the rise of Bitcoin.

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Law enforcement is more and

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more realizing that they can still
follow the money up to a point and

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that they still do have a substantial
ability to investigate crimes and

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to make life difficult for people who want
to engage in coordinated criminal action.