The dangers of designing markets for illegal goods: Silk Road Founder Ross Ulbricht--'Dread Pirate Roberts'-- Sentenced to Life in Prison

Designing illegal markets (and shutting them down) is the story of the day, with stories about the late Silk Road, and it's successors.

The WSJ has the story on the life sentence of Dread Pirate Roberts:
Silk Road Founder Ross Ulbricht Sentenced to Life in Prison
Ulbricht was convicted of running underground online drug bazaar

"The sentence handed down by U.S. District Judge Katherine Forrest followed an emotional three-hour hearing. Judge Forrest said she spent more than 100 hours grappling with the appropriate sentence, calling the decision “very, very difficult.”

But ultimately, she gave Mr. Ulbricht the harshest sentence allowed under the law, saying Silk Road was “an assault on the public health of our communities” by making it easy for people around the world to buy illegal drugs."
...
"Prosecutors have described Silk Road as a criminal marketplace of unprecedented scope and sophistication. The site, which operated for two years, facilitated millions of dollars in transactions between buyers and sellers, who hawked illegal goods ranging from cocaine to fake driver’s licenses. At the heart of the criminal conspiracy, prosecutors say, was Mr. Ulbricht, who allegedly ran the site using the pseudonym Dread Pirate Roberts.
...
"In many ways, the Silk Road case was the first of its kind. The site operated on a hidden part of the Internet called the Tor network, and its only accepted form of payment was bitcoin, a digital currency whose movements are difficult to trace. The anonymity of the site’s transactions posed new challenges for law enforcement and forced them to depart from investigative techniques that would have been used in a traditional street drug case.

"Mr. Ulbricht is also not the typical drug kingpin. He was an Eagle Scout and grew up with a close-knit family in Austin, Texas, according to his lawyer. Mr. Ulbricht studied physics at the University of Texas in Dallas on a full scholarship and completed a master’s degree in material sciences at Pennsylvania State University."
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For some background, here's a long excerpt from an essay by Henry Farrell on the Silk Road and Dread Pirate Roberts
"The Silk Road might have started as a libertarian experiment, but it was doomed to end as a fiefdom run by pirate kings"
...
"This hidden internet is a product of debates among technology-obsessed libertarians in the 1990s. These radicals hoped to combine cryptography and the internet into a universal solvent that would corrupt the bonds of government tyranny. New currencies, based on recent cryptographic advances, would undermine traditional fiat money, seizing the cash nexus from the grasp of the state. ‘Mix networks’, where everyone’s identity was hidden by multiple layers of encryption, would allow people to talk and engage in economic exchange without the government being able to see.

Plans for cryptographic currencies led to the invention of Bitcoin, while mix networks culminated in Tor. The two technologies manifest different aspects of a common dream – the utopian aspiration to a world where one could talk and do business without worrying about state intervention – and indeed they grew up together. For a long time, the easiest way to spend Bitcoin was at Tor’s archipelago of obfuscated websites.

Like the pirate republics of the 18th century, this virtual underworld mingles liberty and vice. Law enforcement and copyright-protection groups such as the Digital Citizens’ Alliance in Washington, DC, prefer to emphasise the most sordid aspects of Tor’s hidden services – the sellers of drugs, weapons and child pornography. And yet the effort to create a hidden internet was driven by ideology as much as avarice. The network is used by dissidents as well as dope-peddlers. If you live under an authoritarian regime, Tor provides you with a ready-made technology for evading government controls on the internet. Even some of the seedier services trade on a certain idealism. Many libertarians believe that people should be able to buy and sell drugs without government interference, and hoped to build marketplaces to do just that, without violence and gang warfare.
...
"Would-be criminals on the hidden internet repeatedly complain that they have been ripped off. In the description of one commenter on the Hidden Wiki:
I have been scammed more than twice now by assholes who say they’re legit when I say I want to purchase stolen credit cards. I want to do tons of business but I DO NOT want to be scammed. I wish there were people who were honest crooks. If anyone could help me out that would be awesome! I just want to buy one at first so I know the seller is legit and honest.

This creates a market niche for intermediaries, who can become entrepreneurs of trust, supporting relationships between buyers and sellers who otherwise would not trust each other. Again, the Sicilian Mafia provides a precedent. Gambetta finds that they began as brokers of trust between buyers and sellers in a rural society without effective laws. The Mafia made money by guaranteeing transactions, threatening cheaters, and sometimes cultivating a general atmosphere of paranoia in order to ensure demand for their services. In other words, it built an informal order of its own, inimical to conventional laws, that gradually began to supplant the traditional state.

When Ulbricht began to grow hallucinogenic mushrooms and sell them on the internet in 2010, he didn’t see himself either as a Mafioso or a state builder. Instead, it appears that he was driven by enthusiasm for the libertarian thinker Murray Rothbard. On his LinkedIn profile, Ulbricht declared his intention to use ‘economic theory as a means to abolish the use of coercion and aggression amongst mankind’, and to build an ‘economic simulation’ that would let people see what it was like to live in a world without the ‘systemic use of force’. At the same time, he didn’t mind turning a profit from his activism – his diary entries show that he was pleased to make money from his first crop of mushrooms, and disappointed that he cashed out his first profits before the price of Bitcoin peaked.
...
"Seller pseudonyms provided a rough equivalent to a commercial brand. As the Stanford economist David Kreps has noted, a secured brand name with a reputation for honest dealing is an asset, and the desire to preserve its value can provide the incentive for future honesty. Not that the value is dependent on the actual owner of the name: a trademark can be sold or passed from one individual to another without losing its power. Ulbricht’s own pseudonym suggests that he had given this some thought: the original Dread Pirate Roberts appears in William Goldman’s comic fantasy novel The Princess Bride (1973), where it is a composite identity, passed from pirate captain to pirate captain as a kind of guarantee of fearsomeness.
...
"Yet market competition was no guarantee of honesty. Sometimes traders wanted to build up a reputation for honest dealing so that they could take the money and run. Several scammers gamed the system by establishing themselves as apparently reliable drug dealers, making a large number of near-simultaneous sales, demanding that customers finalise the payment before they got the goods and then disappearing with the money. Since the scammers used pseudonyms and Tor just like everyone else, outraged customers could do little except issue grandiose threats in the discussion forum.

They were vulnerable to more profound betrayals, too. Customers had to give mailing addresses to dealers if they wanted their drugs delivered. Under Silk Road’s rules, dealers were supposed to delete this information as soon as the transaction was finished. However, it was impossible for Ulbricht to enforce this rule unless (as happened once) a dealer admitted that he had kept the names and addresses. It’s likely that Silk Road dealers systematically broke these rules. At least one former Silk Road dealer, Michael Duch, who testified at Ulbricht’s trial, kept the names and addresses of all his clients in a handy spreadsheet.
"This created an obvious vulnerability – indeed, an existential threat to Ulbricht’s business. If any reasonably successful dealer leaked the contact details for users en masse, customers would flee and the site would collapse. And so, when a Silk Road user with the pseudonym FriendlyChemist threatened to do just that, Ulbricht did not invoke Silk Road’s internal rules or rely on impersonal market forces. Instead, he tried to use the final argument of kings: physical violence. He paid $150,000 to someone whom he believed to be a senior member of the Hells Angels to arrange for the murder of his blackmailer, later paying another $500,000 to have associates of FriendlyChemist murdered too.

It is unclear if anyone was, in fact, killed by anyone else. Indeed, it seems most likely that the whole affair was a scam in which FriendlyChemist and his purported assassin were associates (or possibly the same person). Still, it marked the final stage in an extraordinary transformation. Ulbricht began as an idealist, setting out to build a market free from what he described as the ‘thieving murderous mits’ of the state. He ended up paying muscle to protect the bureaucratic system that he had created."
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The Guardian writes about the dark markets that have sprung up to replace Silk Road: Dread Pirate Roberts may have been sentenced to life, but experts and customers say the tide has turned and internet markets for illicit products are here to stay

"James – not his real name – is the editor of DeepDotWeb, a news site which focuses on darknet marketplaces and maintains an up-to-date list of which markets are on or offline. He said the current market was “WAY bigger” than it was in the days of Silk Road.

James said it could safely be assumed that the daily turnover of the biggest markets – Agora is the largest, followed in no particular order by Nucleus, Middle Earth, Abrax, and Alphabay – is in the order of more than a million dollars a day. He estimated the market cap to be in the “hundreds of millions” of dollars.

“It’s becoming bigger all the time,” James told the Guardian. “Currently there are over 40 markets, forums, private vendor shops and a higher number of product listings than ever. I can personally testify that we, as a site who is reporting the darknet, see more and more traffic from people searching for specific markets – 1000% more than we saw last year.”

He said that since Ulbricht’s arrest people had “lost the sense of being invincible”, but also that they learned from Ulbricht’s mistakes and were now more careful, and more aware both of the dangers of law enforcement and of scams.

On Reddit, the subreddit for darknet markets has almost 60,000 subscribers. Among users asked by the Guardian what they thought the future holds, opinion was split. Many were worried by the instability of the new markets, suggesting that once vendors had enough repeat custom they would move to a direct-deal model rather than advertising on marketplaces that were vulnerable to exit scams. Vendors were the biggest losers in the Evolution exit scam.

But others thought the new order was here to stay.

“As long as our customers understand that purchasing their drugs through a DNM [Dark Net Market] is WAY safer than doing it in person, this will continue forever,” said one user, who gave his name as John. “People aren’t afraid of being robbed, beaten or killed because they went to their corner drug dealer when they can go to a DNM instead.”"

Somali Pirates

U.S. Forces Free Ship From Somali Pirates

"American officials said the rescue appeared to be the first time the American military had boarded a ship commandeered by Somali pirates, who have been hijacking vessel after vessel off Somalia’s coast and wreaking havoc on some of the busiest shipping lanes in the world.
"The Americans, however, are active in the area. Last year, Navy Seal snipers killed three pirates who were holding an American cargo ship captain in a lifeboat, after he had offered himself as a hostage in exchange for the safety of his crew.
"Despite the intense international naval presence in the region, the pirates are on track to have another banner year, with more than 30 ships hijacked so far in 2010, which has earned them tens of millions of dollars in ransoms. "

However, piracy seems to be becoming fully entrenched in the fabric of Somali political culture: In Somali Civil War, Both Sides Embrace Pirates

"For years, Somalia’s heavily armed pirate gangs seemed content to rob and hijack on the high seas and not get sucked into the messy civil war on land. Now, that may be changing, and the pirates are taking sides — both sides.

"While local government officials in Hobyo have deputized pirate gangs to ring off coastal villages and block out the Shabab, down the beach in Xarardheere, another pirate lair, elders said that other pirates recently agreed to split their ransoms with the Shabab and Hizbul Islam, another Islamist insurgent group.
"The militant Islamists had originally vowed to shut down piracy in Xarardheere, claiming it was unholy, but apparently the money was too good. This seems to be beginning of the West’s worst Somali nightmare, with two of the country’s biggest growth industries — piracy and Islamist radicalism — joining hands."

"Safety and anonymity" in the design of the Silk Road drug market

Even illegal markets depend for their success on appropriate design. (And law enforcement may depend on disrupting it...) Bloomberg quotes some testimony from the trial of the alleged (and now convicted) “Dread Pirate Roberts” said to have run the black market site.

Silk Road Heroin Dealer Tells ‘Dread Pirate’ Jury of His Success

"(Bloomberg) -- A New York man who faces drug charges that could put him in prison for as long as 40 years told jurors in the trial of the alleged mastermind of the Silk Road online marketplace that the “safety and anonymity” of the website helped turn him from an addict into a successful heroin dealer."

The evidence was apparently overwhelming, and the conviction came quickly, see this account in The Economist: http://www.economist.com/blogs/democracyinamerica/2015/02/silk-road-trial

"TIME is up for the Dread Pirate Roberts. Ross Ulbricht, the 30-year-old Texan physics graduate accused of setting up the first major drugs marketplace on the web, the Silk Road, has been found guilty of all seven drugs-trafficking charges in a Manhattan court room today. And so comes to a close one of the first great criminal cases in this new era of internet-enabled crime."

Reputation among thieves: ransomware and kidnapping

Like everyone else, I occasionally get notifications of data breaches from organizations with which I have digital relations.  Often the breach involved a third party.  Sometimes the breach involves the theft of data accompanied by a demand of ransom--i.e. the victim is invited to pay the cybercriminal, who then promises to destroy the data instead of selling it on the dark web or otherwise using it.

This bears some resemblance to the kidnapping business, and its high-seas version, piracy.

Here's part of an email I recently received informing me of such a breach, and subsequent payment of ransom.

"I’m writing to inform you that Blackbaud, the company that hosts [xxx’s] relationship management system, suffered a security incident in May. Blackbaud is the world’s largest provider of fundraising technology for non-profits and educational institutions, and many organizations have been impacted by this incident.

...

"We were also informed by Blackbaud that in order to protect data and mitigate potential identity theft, it met the cybercriminal’s ransomware demand. Blackbaud has advised us that it received assurances from the cybercriminal and third-party experts that the data was destroyed. Blackbaud has been monitoring the web in an effort to verify the data accessed by the cybercriminal has not been misused. "

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Why should "assurances from the cybercriminal" be reassuring? (and for how long?).  And what are the roles played by "third-party experts"?

My guess is that, as in the kidnapping biz, intermediaries have emerged to conduct the negotiations, get some sort of assurances, and make it possible for criminal organizations to maintain reputations for honor among thieves.

It is of course possible to regard ransom paying as a repugnant transaction that facilitates ransomware, kidnapping, etc.  In fact the U.S. for some time made it a crime to pay ransom to kidnappers, but relaxed that view over time, as kidnapping became a bigger international business, and there was often a considerable desire (sometimes covered by insurance) to pay ransom when it seemed the best way to recover the kidnapped person alive.

Here are some related posts which touch on that story:

Monday, June 24, 2019  Kidnapping insurance

Tuesday, September 13, 2016 Ransom as a (not so) repugnant transaction

Saturday, June 27, 2015 Ransom as a repugnant transaction--the U.S. relaxes its position

Monday, August 9, 2010 Brokers for pirate ransom

Saturday, December 5, 2009 Market for kidnapping

Friday, February 13, 2009 Pirate ransom: counterparty risk in the endgame

Sunday, November 30, 2008 Pirate ransom: counterparty risk

Piracy

The LA Times reports: Somalia's pirate problem grows more rampant

"Entire villages along the coast now engage in piracy. Unemployed youths provide the muscle. Idle fishermen offer boats and knowledge of the coastline. Foreign businessmen provide the money for guns, radios and satellite phones. Islamic hard-liners are lured by the chance to attack Western interests offshore.
The result is a criminal free-for-all. Pirate attacks off the coast of Somalia have tripled over the last three years, with nearly three a week in 2008, maritime officials say. Currently there are about a dozen hijacked ships, with more than 300 crew members, being held hostage. Ransom payments are often as high as $2 million."

Exchanges for single earrings, odd shoes

Here's a NY Times story about what to do if you've lost one of a pair of earrings (and don't want to become a pirate...)

The Five Stages of Earring Loss--What to do when one earlobe goes bare. By Nancy Wartik

"In 2012, Ms. Kennedy created a Facebook page called My Lost Earring, inspired by the loss of one of her glass seagull earrings. They were a gift from her husband, but one of them vanished on a long-ago bike ride, a loss she still mourns.
...
"I put a photo on the My Lost Earring page, which Ms. Kennedy estimates has made at least 200 pairings. Matches can take weeks, months, sometimes years, she cautioned, encouraging me not to abandon hope."
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That reminded me of the National Odd Shoe Exchange

"NATIONAL ODD SHOE EXCHANGE was founded in St. Louis, Missouri in 1943. The late Ruth Rubin-Feldman created the organization as a support for polio survivors. Herself a survivor of polio, Ms. Feldman had feet of significantly different sizes. When wartime rationing made buying two sizes even more difficult, she conceived the idea of a service whereby people with similar problems could register their names and sizes. The registry served as a clearing-house that put people with similar interests and tastes, but opposite foot sizes, in touch with one another. Together the new friends could buy footwear and share the cost. No shoes were wasted and they saved money!

"With many veterans coming home from the war as amputees, the service grew and broadened its scope. First Lady Elenor Roosevelt gave NATIONAL ODD SHOE EXCHANGE nationwide recognition for providing such a valuable service."

Piracy and armed merchantmen

Why is this headline such an outlier? Cruise ship opens fire to beat back Somali pirates

One reason is that ship owners are concerned about the longer term effects of escalating the level of violence in their encounters with pirates. But, it turns out, there are some market design reasons too (emphasis added):

"There have been calls for commercial ships to be allowed to carry weapons to deter increasingly bold pirate gangs, who are armed with automatic rifles and often rocket-propelled grenades.
But ships with arms onboard are not allowed to dock at non-military ports.
To bypass this rule, some operators are hiring private security teams who board as the ship enters a risky stretch of water and leave once the danger has passed.
Andrew Mwangura, head of the East African Seafarers' Assistance Programme in the Kenyan port of Mombasa, criticised the Melody for carrying guns.
"There are a number of other methods which can be used to deter the pirates, having weapons on board is dangerous because it raises the stakes for the pirates," he said.
"There is a far higher risk that a crew member of a merchant vessel, or a passenger, could die if the pirates feel they must fight harder to win the ship." The International Maritime Bureau said piracy incidents nearly doubled in the first quarter of 2009, almost all of them off Somalia. There were 18 attacks off the Somali coast in March alone.
Pirates have made millions of dollars from seizing ships and taking crews hostage. A Greek ship was released on Saturday after a £1.3 million ransom was paid.
But just hours earlier a German grain carrier was grabbed in the Gulf of Aden. "

Mail order opiods, paid for by bitcoin, ordered over the dark net

The NY Times has the story:
Opioid Dealers Embrace the Dark Web to Send Deadly Drugs by Mail

"In a growing number of arrests and overdoses, law enforcement officials say, the drugs are being bought online. Internet sales have allowed powerful synthetic opioids such as fentanyl — the fastest-growing cause of overdoses nationwide — to reach living rooms in nearly every region of the country, as they arrive in small packages in the mail.

The authorities have been frustrated in their efforts to crack down on the trade because these sites generally exist on the so-called dark web, where buyers can visit anonymously using special browsers and make purchases with virtual currencies like Bitcoin.

The problem of dark web sales appeared to have been stamped out in 2013, when the authorities took down the most famous online marketplace for drugs, known as Silk Road. But since then, countless successors have popped up, making the drugs readily available to tens of thousands of customers who would not otherwise have had access to them."
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For an earlier post on the Silk Road marketplace and its demise, see

Monday, June 1, 2015

The dangers of designing markets for illegal goods: Silk Road Founder Ross Ulbricht--'Dread Pirate Roberts'-- Sentenced to Life in Prison

Pirate ransom: counterparty risk

Arranging to deliver the ransom for the Ukranian ship captured by Somali pirates, and to receive the ship and hostage crew in return is a delicate matter without a legal framework to reduce the counterparty risk (sort of like a drug buy): Mediator Says Ransom Deal Has Been Reached for Pirated Ukrainian Freighter

"Andrew Mwangura, who as head of a Kenyan maritime association has helped mediate the situation, said Sunday that the Somali pirates who captured the freighter more than two months ago and the ship’s owners had agreed on a ransom. He would not reveal the figure, but he said that the only thing left was to figure out how to get the money to the pirates and hand over the ship.
Still, that is no simple feat, given the band of jumpy pirates on board and the half-dozen American and European naval vessels circling the freighter."

The related story in the Telegraph notes that
"The US military has overflown the hijacked vessel several times to take pictures of the crew lined up on the bridge and verify that all were in good health. "

Pirate ransom: counterparty risk in the endgame

The NY Times reports that Hijacked Arms Ship Limps Into Port (this is the Ukranian ship full of Russian tanks and other heavy weapons that I blogged about earlier).

An earlier report, Somali Pirates Said to Be Leaving Ship , sheds some light on the negotiations:
"Somali pirates freed a Ukrainian ship carrying tanks and other heavy weapons Thursday after receiving a $3.2 million ransom. The U.S. Navy watched the pirates go but didn't act because the pirates still hold almost 150 people from other crews hostage." ...
"U.S. seamen were inspecting the pirates' departing boats to make sure they weren't taking weapons from the Faina's cargo, Mikhail Voitenko, a spokesman for the ship's owners, said Thursday.
But the Navy was not taking action against the pirates because it did not want members of other crews still in captivity to be harmed, said Cmdr. Jane Campbell, a spokeswoman for the 5th Fleet in Bahrain.
''Even when you release Faina, there are still 147 mariners held hostage by armed pirates,'' Campbell told The Associated Press. ''We're concerned for their well-being.''"

This is the same U.S. Navy one of whose first missions was to fight the Barbary Pirates , an earlier African/Islamic manifestation of piracy. (Do you say a Navy won its wings? spurs? water wings?). So it is very plausible that the pirates worry that, when they release their last hostages, they will face military retaliation against their bases in Somalia.

This will make the endgame tricky.

Brokers for pirate ransom

Suppose your ship were hijacked by Somali pirates, and you wanted to ransom it and the crew. How would you go about it?  You would need a middleman, someone who could get the money to the right pirates, and maybe who played a repeated game with them, to help ensure that the release would go as planned. As it happens, you might become the client of a certain kind of British law firm, whose market is now threatened by the imposition of sanctions against those who deal with certain named Somali pirates. The problem is, it may be impossible to pay a ransom without doing business with the embargoed individuals. The Financial Times reports: Somali crackdown threatens City role on ransoms

"International plans for a legal crackdown on the funding of piracy could scupper a burgeoning City industry.
"The United Nations plans for sanctions on two suspected pirates would hit the often lucrative work of the law firms, insurers and private security companies in London that quietly arrange ransoms to free kidnapped ships and crews."
...
"The government has decided to block the UN plans amid worries they could force shipowners and their advisers to stop paying ransoms or else risk prosecution.


"London’s piracy negotiation business brings together an unusual cast of characters, from hard-bitten security operatives to dapper lawyers making telephone calls to hijacked ships from offices close to the banks of the Thames.


"NYA International, a kidnap response specialist based off Bishopsgate and now part of Aon, the US insurance broker, has advised on more than 20 piracy incidents during the past 18 months or so.


"The leading ship hijack case law firm in terms of numbers of clients is said to be Holman Fenwick Willan, which has offices north-west of the Tower of London.


"James Gosling, partner at HFW, said: “Nobody wants to pay ransoms. But when it’s the only option, what the hell else do you do?” "
...
"The concern about sanctions is that, while they do not explicitly outlaw the payment of ransoms, they make it impossible in practice because of the uncertainty about where money given to pirates will end up.

“The problem is the due diligence,” Mr Roberts said. “How can you possibly know if the money is going to that [sanctioned] person or not?”

"Maritime lawyers in London say they were encouraged by a High Court ruling this year that paying ransoms wasn’t contrary to British public policy, although they admit the argument over the subject is increasingly becoming political rather than legal.

"That is why the capital’s community of piracy-related businesses is appealing to the government to hold firm in stopping the UN proposal and the sanctions it would introduce.

"As one London-based insurer, who asked not to be named, put it: “We would be very concerned if shipowners were denied a means to free pirated ships.

“There are no navies prepared to go all guns blazing to rescue people – and it wouldn’t work, either.” "

Conference housing pirates--the (criminal) market for hotel rooms

Here's a scam I hadn't encountered before.

I will be speaking at a transplant conference in February, and last week my phone rang and someone asked me if I had already made my hotel reservations, and offered to make them for me. I declined, and emailed the conference organizer asking if this was how housing was being arranged. In reply I got the following (slightly redacted) email, addressed to all the speakers....

"Dear ... Faculty,

I have received word from two speakers who advised me that they were contacted by a company called Expo Housing. (They can go by other names too) xxx told me she was contacted by a xxx who left an 866 call back number.

This company ...has NOT been contracted to organize, sell or arrange housing for anyone attending or speaking at the [conference] taking place in February 2016 ....

Please DO NOT BOOK housing with anyone. As a speaker you will receive a travel and housing survey from me or another member of the  staff located in the ... National Office. Please contact me immediately if you are contacted by anyone trying to book your housing. 

Our housing website is under construction at this time but again, as a speaker your housing will be arranged by  staff.

Housing pirates or hijackers are illegal entities who "sell" hotel rooms. These rooms can exist or not exist. Often times your money is lost. Typically these people target large meetings like the American Transplant Congress, but no meeting is safe. Any rooms booked through a pirate are not guaranteed by the group nor will they be included in the [conference] block of rooms. "