Thus far in Lecture 7, we've talked about the growth of Bitcoin. We've talked about how Bitcoin operates, who's in charge of it. I wanna spend the rest of Lecture 7 talking about governments. Government's interaction with Bitcoin and government attempts to regulate Bitcoin. And we'll start simply with the moment when governments noticed Bitcoin, when Bitcoin became big enough as a phenomenon that governments started to worry about the impact it might have, and governments started to talk about how to react to it. One reason why governments would notice a digital currency like Bitcoin, is that untraceable digital cash, if it exists, can defeat capital controls. Capital controls are rules or laws that a country has in place that are designed to prevent the flow of value. Of capital of wealth either in or out of the country and by putting controls on banks and investments and so on a country can try to prevent these flows. Bitcoin is a very easy way, under some circumstances, to defeat capital controls, because someone can simply buy Bitcoins with capital inside the country, ship those Bitcoins outside the country by electronic means and then sell those Bitcoins for capital or wealth outside the country. By doing that, they could move capital or wealth from inside to outside, and similarly you could do the same thing to move it from outside to inside. Because wealth in this electronic form can move so easily across borders and can't really be controlled, a government that wants to enforce capital controls in a world with Bitcoin has to try to disconnect. The Bitcoin world from the local Fiat currency banking system, so that it's not possible for someone to turn large amounts of local currency into Bitcoin, or large amounts of Bitcoin into local currency. And so we see countries that are trying to beef up or protect their capital controls do that. And a notable example is China. China has engaged in increasingly strong measures to try to disconnect Bitcoins from the Chinese fiat currency banking system. Another reason governments might worry about untraceable digital cash is that it makes certain kinds of crimes easier. In particular crimes like kidnapping and extortion that involve the payment of a ransom of some kind of a payoff. Those crimes become easier when payment can be done at a distance and anonymously. Law enforcement against kidnappers for example, often has relied upon exploiting the hand off of money from the victim or the victim's family to the criminals. When that can be done by email, when that can be done at a distance in an anonymous way, it becomes much harder for law enforcement to follow the money. Similarly the tax evasion becomes easier when it's easier for people to move money around. When it's easier to engage in transactions that are not easily tied to a particular individual or identity. And finally, the sale of illegal items becomes potentially easier when the transfer of funds can happen at a distance without needing to go through a regulated institution. A good example of that is Silk Road. Silk Road was essentially the eBay for illegal drugs. You could see here a screenshot of Silk Road's website when it was operating, it calls itself an anonymous marketplace, and you can see over on the left some sorts of things that are for sale. Illegal drugs were the primary thing for sale on Silk Road, you can see examples of the sorts of things that were for sale here. Silk Road allowed sellers to advertise goods for sale. They allowed buyers to buy those goods. The goods were delivered typically through the mails or through shipment services, and payment was made in Bitcoins. So Silk Road operated as a Tor hidden service something that was discussed in an earlier lecture. So by operating as a Tor hidden service, silk road, the silk road servers could be hidden from law enforcement so they are difficult for law enforcement to reach. Because Silk Road used Bitcoin for payment, it was also difficult for law enforcement to follow the money and figure out who the people participating in the market were. Silk Road was the largest online market for illegal drugs. As I said it ran as a Tor hidden service and used payments in Bitcoins. The site held the Bitcoins in escrow while the goods were shipped. There was an innovative escrow system which helped to protect the buyers and sellers against cheating. By other parties. The Bitcoins would be released once the buyer certified that the goods had arrived. Silk Road had an Ebay like reputation system that allowed buyers and sellers to get reputations for following through on their deals and by using that reputation system Silk Road was able to give the participants in the market an incentive to play by the rules even though they would be very, very difficult to find otherwise. So Silk Road was innovative among criminal markets in finding ways of enforcing the rules of the criminal market at a distance. Something that criminal markets have in the past had difficulty doing. Silk Road was run by a person who called himself Dread Pirate Roberts, and some of you may recognize that reference. Obviously a pseudonym. It operated from February 2011 until October 2013. Silk Road was shut down after the arrest of this guy, Ross Ulbricht, who was the alleged operator of Silk Road. He was arrested in October 2013 and he's currently awaiting trial. The government says that he was the operator of Silk Road and that he tried to cover his tracks by operating using various anonymous accounts, by using Tor, anonymous remailers and those sorts of things. But they said that they were able to connect the dots and connect him to Silk Road activity, to connect him to the servers, and to connect him to the Bitcoins that belonged to the operator of Silk Road. They charged him with various crimes relating to operating Silk Road. They also charged him with attempted murder for hire. If the allegations are true, he more than once tried to pay to have people killed. Fortunately he was bad at it and nobody actually got killed. But nonetheless, these are some pretty serious charges. The government in the course of taking down Silk Road seized about 174,000 Bitcoins. That's quite a bit of value. They then auctioned those off to the public. As with the proceeds in any crime under U.S. law they could be seized by the government, and the government did seize them. So Mr. Ulbricht is awaiting trial. We will eventually, perhaps, find out. The full evidence against him. Now there are several lesson from Silk Road and from the encounter between law enforcement on the one hand and Dread Pirate Roberts perhaps mister Ulbricht on the other hand. First of all one lesson is that it's actually pretty hard to keep the real world and the virtual world separate. The operator of Silk Road believed that he could live his real life, living in society, and at the same time have a secret identity in which he operated a fairly good-sized business and technology infrastructure. That apparently is harder than you would think. It's difficult to keep these separate worlds completely apart. And not accidentally create some linkage between them. It's hard to stay anonymous for a long time. It's hard to be very active and engage in a course of coordinated conduct in which you're working with other people over time, while remaining anonymous. The reason being that although you can operate multiple identities, if there's ever a connection between two of those identities, if you ever slip up, and use the name of one while earing the mask of another. Or if you ever slip up and create a link between them, that link can never be destroyed. And over time the different anonymous or identities are masked that someone is trying to use tend to get connected. And there's a lesson there as well. The third lesson here is that the feds, the law enforcement can follow the money. Because even before there was an arrest in the Silk Road case, the government knew that certain Bitcoin addresses were operated by the operator of Silk Road. And they were watching those addresses. The result is that the operator of Silk Road, while wealthy according to the block chain, was not actually able to benefit from that wealth because any attempt to transfer those assets over into the dollar world would have resulted in a traceable event and probably would have resulted in rapid arrest. And so although Mr. Ulbricht was allegedly the owner of 174,000 big coins, the fact is he was not living like a king, he was living in a one bedroom apartment in San Francisco. Apparently unable to get to the wealth that he allegedly controlled. The lessons here are that if you intend to operate an underground criminal enterprise then I hope you Are our students are not but if you are, then it's a lot harder to do than you might think. That the technologies like Bitcoin and TOR are not for people who want to do these things and law enforcement actually has some pretty significant tools that they can still use. And so there might have been some panic in the world of law enforcement over the rise of Bitcoin, law enforcement is more and more realizing that they can still follow the money up to a point and that they still do have a substantial ability to investigate crimes and to make life difficult for people who want to engage in coordinated criminal action.