Criminals face two very serious problems when they want to engage in risky transactions with each other. First, they cannot usually trust each other very much; criminals obviously tend to be untrustworthy people. Second, they cannot rely on the usual legal institutions that people rely on for commercial transactions with individuals or companies they don’t know personally. If I pay for something expensive by mail order, and don’t receive it, I can use the courts or the clout of my credit card company to try to get my money back. Criminals don’t have these options — if a deal goes bad, they can’t take the person who cheated them to court. As the sociologist Diego Gambetta says, in “Codes of the Underworld,” his wonderful book on how criminals communicate:
Criminals are constantly afraid of being duped, while at the same time they are busy duping others. They worry not only about the real identity, trustworthiness, or loyalty of their partners but also about whether their partners are truthful when claiming to have interests and constraints aligned with theirs.
Over the last number of years, criminals have begun to use online forums as a way of getting around this problem. Research by Sadia Afroz and her colleagues (pdf) suggests that these forums build communities, which give criminals a greater incentive not to cheat each other, since, if they do cheat, they will not only lose the opportunity to trade profitably in the future with the person they cheated, but also with the other members of the forum. Even better though was Silk Road, the notorious online drugs marketplace, which had a killer feature — escrow. The people behind Silk Road offered an escrow service, so that buyers didn’t have to trust sellers — they could put the money in escrow until they got their goods. Furthermore, all transactions took place using Bitcoin, to provide a high level of pseudonymity and make it difficult to trace transactions, As described by Nicolas Cristin at Carnegie Mellon (pdf):
Once Bob has Bitcoins, and decides to purchase the item from Sarah, instead of paying Sarah directly, Bob places the corresponding amount in escrow with Silk Road. … The escrow mechanism allows the market operator to accurately compute their commission fees, and to resolve disputes between sellers and buyers. Silk Road mandates all sellers and buyers use the escrow system. Failure to do so is punishable by expulsion from the marketplace.
This has enormous advantages for trade between criminals. Potentially, it allows criminal transactions to take place at much higher volume between large numbers of individuals who do not know each other at all. Criminals do not have to trust each other; they just have to trust the escrow service. As long as the operators of Silk Road (who control the escrow) believe that the market will exist into the indefinite future, they can probably be trusted not to cheat, since a collapse in trust would destroy their business model.
Andy Greenberg at Forbes has a new article suggesting that the days of Silk Road’s escrow system are over. A vulnerability in the Bitcoin protocol has allowed hackers to break into the escrow system, and make off with $2.6 million worth of bitcoins. Following this, the operators of the marketplace have closed down the escrow system. A site administrator has announced that Silk Road will never have a centralized escrow system again, and will instead rely on buyers and sellers policing themselves, pending the introduction of an experimental system, which might allow for third-party escrow, but which no one seems sure how to design, let alone build.
Without escrow, it’s hard to see how a market, such as Silk Road, could work at any scale greater than that of a tight-knit community of people who know each other and can police each other. A random and ever changing assortment of buyers and sellers, such as the Silk Road, is likely to devolve into chaos and accusations of cheating and theft. Indeed, according to Greenberg, Silk Road’s customers are suspicious of the motives of the Silk Road’s new administrators, and some speculate that these administrators have just run off with the money (as the administrators of a couple of Silk Road copycat sites have done). The former owner of Silk Road, the pseudonymous Dread Pirate Roberts, had an interest in keeping the site going, since he had already invested time and effort into it (as well as having a loudly proclaimed libertarian philosophy, which perhaps slightly reassured his customers that he had a long-term interest in seeing the market grow so that it could challenge traditional forms of politics). It is not certain yet that his successors have the same interests, and even some degree of uncertainty can generate spiraling distrust.
For the sociological reasons that Gambetta outlines, it’s very hard to create trust among criminals. This creates huge vulnerabilities in trade among criminals. Even when they do seem to have solved the problem of trust for a little time, their solutions are likely to be fragile, and vulnerable to attack. Perhaps the surprising thing is not that Silk Road is turning into a mess, but that it worked reasonably effectively for as long as it did.