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Can We Ever Trust Black Market Websites Again?

After Silk Road was shut down by the FBI earlier this year, arguably the most popular site of its kind, lots of new black market sites popped up in the aftermath, trying to claim the now empty throne and to fill the void in the market left by SR. Users rushed to claim that this new way of buying illegal products online was here to stay, no matter what the authorities tried to do about it, as there’s a lot of money to be made. As the mythical Hydra, cut one head and three more grow in its place.

And they were right. SR’s shutdown brought a whole new set of players, some of them technically better than its predecessor, and business was as good as ever (probably the closure of the popular website and its appearance on the media brought in a lot of awareness to the existence of these black market sites).

But when you thought that customers were safe from vendors because of the review and escrow system, and vendors were safe from the authorities because of all the technical efforts made by the market site owners (and lack of mistakes, unlike the Silk Road owner) to ensure everyone’s anonymity, making the whole thing a great place to engage in illegal activities, turns out there’s a new problem in town: market sites scamming vendors and customers alike.

Atlantis was the first to go, taking everyone’s money. Then Project Black Flag also shut down, also taking everyone’s money with it. In case you don’t know how these markets work, let me explain a bit so you know what I mean when I say “taking everyone’s money”. These sites all transact with bitcoins, since you don’t need credit cards or bank accounts to make payments and thus, you can shop at these illegal marketplaces without having your real identity tied to it (assuming you did things right to protect yourself). So you have your private wallet with all your bitcoins. You’re the only one with the key / password so nobody can access it. For now you’re in the clear. But in order to buy things from these sites, you need to first send money into the site (into a personal private wallet you have on the site, but that the site owners can also access), so that the site can automatically deduct from it the amount you spend on the site. At the same time, vendors have their own private wallet on the site where they receive the bitcoins paid by customers. Both parties can theoretically withdraw any bitcoins they want from their account at any time back to their private wallets (where they’re safe).

Lots of customers (most, really) don’t just send the exact amount they need to buy what they want and withdraw back what’s leftover. They have some extra money for the next time they want to buy. And lots of vendors leave a bunch of bitcoins there, only withdrawing when they feel like it. Some vendors lost tens of thousands of dollars when Silk Road went bust a few months ago, because they hadn’t withdrawn their bitcoins. So when I mean “taking everyone’s money”, I mean taking the money of customers and vendors that still had money in their wallets in the website (where the site owners can access it and send it to other wallets not accessible to their rightful owners). Basically, it’s like you sharing a bank account with Amazon, where you both can operate it, but the money is yours. And at some point, they wire all your money to one of Amazon’s accounts. The safest thing to do in this scenario, is to never have any more money than absolutely necessary in that website wallet.

Sadly, the latest market to join this trend is Sheep Marketplace. Ironically, a lot of people thought this market was a scam or an FBI honeypot from the start because of its name, while others thought that was too obvious a clue. As far as I know, it was the most popular market right now, and given current Bitcoin exchange rates, the admins stole over $40 million worth of it from customers and vendors. Clearly, there’s a lot of money in the space. Remember that Silk Road processed over $1 billion in sales over two years, and its profits were (at the current exchange rate) over $100 million.

A comment on HackerNews made me realize something. How can you trust black market site admins with your money? The author makes some good points:

  1. The admins have made a big effort to hide their real identities from the FBI and other law enforcement agencies. You’re clearly not going to find out who they are.
  2. You can’t even report them to the police because using these sites is illegal in the first place.
  3. Bitcoin doesn’t provide any safety measures to recover your money in case of fraud, unlike credit cards.

Basically, you’re left to trust the admin’s good will and honesty as the absolutely only thing to do. Based on what I read, Ross Ulbricht, Silk Road’s founder, seemed liked a true libertarian and a fighter for the cause. If he didn’t bail out (even just properly closing down the site without taking everyone’s money) after making tens of millions of dollars, he was probably sticking around for the long haul. And it seemed like a good idea when, after years of running a highly profitable and known illegal site, he seemed to be invisible to the authorities. But we all know how that turned out.

So I’m guessing people with the skills to run and grow these sites have come to realize one thing: they can create a great site and provide a good service, gain the trust of our users, and when the time (and the bounty) is right, they shut it down, steal everyone’s money and move to a private island to sip piña coladas. The alternative, most probably, is to end up being too profitable and well known for their own good, and being caught by the cops (nobody’s perfect and everyone makes mistakes). Definitely makes more sense to make a lot of money in a few months and disappear. Most law enforcement agencies probably won’t spend a lot of resources tracking down someone who closed shop and stole money from drug vendors and buyers.