In the wake of the Silk Road bust, the US government has transferred a cache of Bitcoins to a government-controlled Bitcoin address. How long until they are stolen by a savvy employee?

Managing Bitcoins isn’t the most difficult task in the world, but it does take some technical capabilities. Unique to Bitcoins is the need to balance the risk that they will be stolen vs. the risk that they will be lost.

Be too jealous of your private keys, perhaps making only one copy on a piece of paper, and you’ve reduced the likelihood of being robbed, yet put yourself in a dubious position to accidentally lose access to your valuable stash.

Be too paranoid about losing your keys, making copies in multiple places on multiple media, sending them to your uncle and little sister, and you’ll rest easy that you’ll always have access to your coins. Unfortunately, somebody else could as well.

When I described this phenomenon to a friend, he seemed to understand this principle very well. Bitcoins are like cash. If you lose a paper wallet of which there was only one copy, then it’s gone forever.

But there is an additional subtle implication to the private key access mechanism that was lost on him. Unlike cash, I can’t just hand over a paper wallet to somebody to transfer the value; at least the recipient shouldn’t accept it without promptly transferring the coins to a new wallet of his choosing. This is because simply showing a paper wallet to somebody endangers the coins it shelters. If you’ve ever funded a paper wallet that has been in a room with a surveillance camera, you may want to relocate those coins.

This problem is universal to all Bitcoin holders, whether they are private individuals or government employees. So now that we have been informed that (allegedly) the US government is in possession of former Silk Road-controlled Bitcoin, many of us are curious about how they plan to protect them.

One of the challenges that is unique to an organization as opposed to an individual, however, is that of trust. Not only must you store your coins with the proper balance of retrievability and security, but you must also trust the employee to whom you have given this responsibility to neither lose nor compromise the private keys in addition to not stealing them.

If those who are in control of the coins are smart, they will employ an m-of-n private key split, choosing a select group of highly trusted technical people. But if they are careless, they might end up in the embarrassing position of having to admit at some point that the coins are gone. This is a particularly intractable problem since the people most qualified to steward a small Bitcoin fortune – those who understand it on a deep level – would also be those most likely to be tempted by its value.

What do you think? Is the Silk Road Bitcoin haul safe in the hands of the US government, or will it slip away into the ether?

 

Edit: The original source for Bitcoins being seized was this BBC article: “The FBI seized the virtual currency by getting hold of encryption keys for the bitcoins, according to Jerry Brito, George Mason University’s technology policy director.

The keys were made available through seized computer equipment, Mr Brito said in a blog post.”

However, the post cited by the BBC, does not in fact claim that the keys were compromised, only that the feds had the authority to seize them.

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Silk Road owner Dread Pirate Roberts nabbed after investigators identify the owner of alias “altoid.” Charges include conspiracy to murder. Mixed reaction from Bitcoiners.

Despite great efforts to remain anonymous, the owner of the controversial Tor-enabled drug marketplace: Silk Road has been identified, according to the FBI.

29-year old Ross Ulbricht, living in San Francisco, is the alleged owner of Silk Road, operating under the pseudonym Dread Pirate Roberts (DPR). Since his apparent arrest, the Silk Road website has been shut down, showing instead a short paragraph to that effect and listing five US government agencies. According to the FBI, the world finally gets a look at the Silk Road books. The result: Over US $1.2B worth of turnover at a profit of almost US $80M.

The lynch-pin of the investigation turns out to be an oversight by Ulbricht, who posted thinly-veiled Silk Road marketing messages on two separate forums, but then later solicited unrelated IT help on another forum whilst listing his real email address as a contact point, using the same username “altoid.” Once Ulbricht appeared on investigators’ radar, it was only a matter of due diligence to make multiple connections between him and Silk Road.

The arrest brings with it both practical and philosophical implications. To his detractors, Dread Pirate Roberts was known as a modern-day cyber hooligan, overseeing his drug empire under the cowardly cloak of anonymity. But he had his fans too. Stating explicitly at one point that he was striving to accomplish two goals: 1) To remove the violence from drug purchases, and 2) To reduce the risk of purchasing drugs of questionable quality, DPR may have in fact made inroads towards his ideals. By anonymizing buyers and sellers, it is conceivable that drug-related violence was reduced among Silk Road users. In addition, by using an Amazon-like vendor rating system, buyers were able to purchase illicit drugs with high confidence that they were of high purity.

DPR was as well known for his roll as the leader of Silk Road as he was for his idealistic prose. In his lengthy posts, he extolled the moral virtues of a free society, often lauding his customers as brothers in arms. He was known as a pacifist and a dreamer.

But the recent FBI warrant paints a far darker picture of Ulbricht, after allegedly accessing a series of private messages in which he solicits the murder of a Silk Road user who was blackmailing DPR. According to the documents retrieved, an assassination was carried out in Canada for US $150,000 equivalent – a premium over the last “hit” that DPR ordered which was for only $80,000. However, this accusation has not been fully corroborated, as there were no reported murders at the time and place mentioned. If these allegations are true, it will assuredly change the opinions of DPR’s followers. In the meantime, we have only the warrant document as evidence and will have to wait to see if the charges are corroborated or refuted.

A commonly debated topic among Bitcoiners is how their favorite crypto-currency is related to Silk Road. How much of the daily Bitcoin transaction volume is drug purchases? Without Silk Road, would the Bitcoin value be much lower? Maybe without the stigma of Silk Road the value would actually be much higher? Bitcoiners posting to the Bitcoin sub-reddit forum differ on their reactions. Some feel that DPR’s arrest is a good thing for Bitcoin, while others believe that he was doing the world a valuable service. Will the shuttering of Silk Road have a positive, negative, or even neutral effect on the price of Bitcoin? At least in the short-term, the price has plummeted over 30% in the last hour (the BitStamp price went from ~$125 to ~$90). Are Silk Road users dumping their Bitcoin as fast as they can? Or is this just speculative selling? Only time will tell just how important, or insignificant, that Silk Road was to the value of Bitcoin.

A great implication to consider: If the US government successfully seized the Silk Road Bitcoin stash, then it may now be one of the largest holders of Bitcoin in the world.