Wednesday's arrest of alleged Silk Road founder Ross William Ulbricht appears to be having a negative effect on the Bitcoin market. The value of the virtual currency began to plummet in the minutes after the FBI announced that it had shut down the online marketplace where it said anonymous users bought and sold illegal drugs and engaged in other criminal activity funded by bitcoins.
One immediate effect of Silk Road's closure, according to the nonprofit Digital Citizens Alliance, is that some users' bitcoins have simply vanished. That includes about $300 that DCA had purchased for use in its own investigations of the industry.
"We just lost them; they're gone," Adam Benson, the group's communications director, said.
DCA has been tracking Silk Road activities for months, and the marketplace was featured heavily in a paper the group published in July on Bitcoin's impact on Internet safety.
Garth Bruen, president of the KnujOn spam-reporting service and a member of the DCA's advisory board, said that he thinks the Silk Road case could be a blow to one of Bitcoin's greatest selling points: its reputation for secrecy. That reputation was central to Silk Road's ability to operate, and to Bitcoin itself, he said. But the federal investigation that led to Ulbricht's arrest shows that even purchases made with anonymous profiles on an anonymous site are still trackable.
"This goes to show you that though this is an anonymous currency, if you use it for illegal purposes, you will get caught," Bruen said.
However, that new public crack in anonymity could turn out to be a positive thing for Bitcoin, he said, particularly among those who want to change any perception of Bitcoin as the currency of choice for seedy online activities.
"This could be a way to say that Bitcoin is clean," Bruen said, "or it could dirty its reputation as a currency that just exists to do illegal, nasty stuff."
He said the Silk Road arrest is likely to bolster arguments for stronger tracking in the Bitcoin system as a way to make it more viable as a currency.
Groups such as the Digital Asset Transfer Authority (DATA), founded by members of the digital currency industry to address consumer and regulatory concerns, have suggested that anti-laundering and business and technical standards be developed and put in place for digital currencies.