What are Bitcoins?
Bitcoins are a digital currency that function like Internet cash. They allow for rapid, anonymous peer-to-peer transactions at low or no cost, without the need for a bank or middleman.
Like cash, Bitcoin transactions are not reversible. They are traded worldwide and can be purchased through online exchanges.
Sources: Bitcoin Foundation, Bitstamp
In a case believed to be the first of its kind, federal authorities have seized a Charleston man’s virtual currency due to an alleged drug law violation with possible links to a shadowy online black market.
The U.S. Drug Enforcement Administration recently posted a forfeiture notice indicating that agents had seized 11.02 Bitcoins worth $814 from 31-year-old Eric Daniel Hughes for allegedly violating the federal Controlled Substances Act. No other details were provided.
The seizure appears to mark the first time the federal government has gone after Bitcoins. That’s prompted a flurry of speculation that the DEA had infiltrated the infamous Silk Road website, an off-the-grid marketplace where drugs are traded and Bitcoins are the only accepted currency.
“This is the first time something like this has happened with Bitcoin,” Adam B. Levine, editor and chief of the website Let’s Talk Bitcoin!, which tracks developments with the currency and first reported on the seizure. “And the interesting subtext is: We don’t have any idea just how involved the DEA is with Bitcoins.”
Bitcoins are basically an Internet equivalent of cash, a so-called “crypto-currency” that can be sent directly to other users with no involvement from banks or middle men.
Introduced in 2009, Bitcoins have been a hot investment item of late and are the currency of choice for online drug dealers and other black market traders.
“Bitcoins themselves do not provide anonymity guarantees, but their design makes it possible for transactions to be much harder to trace than traditional payment systems like credit cards or ACH (Automated Clearing House electronic credit) transfers,” Nicolas Christin, associate director of the Information Networking Institute at Carnegie Mellon University, said.
The DEA stated it seized the coins from Hughes, also known as “Casey Jones,” in April, but the agency hasn’t charged him with a crime.
Attempts to reach Hughes were unsuccessful last week, and it is unclear if he has an attorney. No one answered the door when a reporter visited his St. Philip Street apartment last week.
DEA officials would not discuss his case except to say it concerns an ongoing investigation being run by the DEA’s Los Angeles field office. Two agency spokeswomen said they knew of no other forfeiture cases nationally involving Bitcoins.
Charleston police also moved against Hughes last month, charging him with distributing marijuana and prescription pills after a June 5 raid on his apartment, according to county court records and a police incident report. The charges stem from 10 bags of the narcotic Suboxone found in Hughes’ bedroom during the search and two undercover drug buys that occurred in April, according to arrest affidavits. He is accused of selling .77 grams of the muscle relaxant Clozepam and 10.7 grams of marijuana to informants working with police, the affidavits said.
The search of his apartment also uncovered digital scales, a small amount of marijuana, various white powders and pills, computer equipment, a loaded pistol and other items, a police report noted.
Charleston police would not discuss the case, referring all questions to the DEA.
Marketplace for drugs
The case has drawn a great deal of attention online due to its potential linkage to Silk Road, an underground marketplace that exists in the Deep Web, a sub-layer of the Internet outside the reach of standard search engines. Silk Road, accessible only through the anonymity cloaking Tor Network, is named after an ancient and enduring trade route that connected Asia to Europe.
Silk Road offers a cornucopia of drugs for sale through anonymous peer-to-peer transactions conducted with Bitcoins.
A couple of years back, U.S. Sen. Charles Schumer, D-N.Y., pushed to have Silk Road shut down, calling the site “a certifiable one-stop shop for illegal drugs.” That didn’t happen. Instead, the site has blossomed into a booming enterprise.
Christin, of Carnegie Mellon, spent six months studying Silk Road before authoring a 2012 paper on the subject. He determined that more that $1.2 million in business was conducted on the site monthly, mostly catering to drugs and involving “a relatively international community.”
“People don’t go there to hang out and have a good time,” Levine, of Let’s Talk Bitcoin!, said. “They go there because there are specific things you can do there.”
Christin said it is difficult to say what implications Hughes’ case might have for Silk Road until more is known about what the DEA did and how they did it.
Discussion of “Casey Jones” started popping up on a Silk Road chat forum after news of the seizure broke. Commenters described Casey Jones as an active vendor on the site who bought and sold drugs such as Suboxone and Adderall.
Let’s Talk Bitcoin! bloggers traced the activity for the Bitcoin account number listed in the DEA notice and found a transaction for 11.02 Bitcoins on April 12, the date the DEA stated the funds were seized.
Just how the DEA managed to confiscate digital Bitcoins has been the source of much puzzlement and debate.
Levine said law enforcement might have gotten hold of a computer that contained an unencrypted key to the electronic “wallet” where Hughes’ coins were held. More likely, he said, is that the DEA set up an online sting operation involving a transaction on Silk Road.
The DEA forfeiture notice states that the individuals named in the document are not necessarily criminal defendants or the targets of an investigation. The notice also states that those whose goods were taken can challenge the seizure in federal court. There was no record found Friday indicating that Hughes had filed such a challenge.
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