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Download the full report in PDF form. We are pleased to release our latest quarterly State of Bitcoin update. This article will run through some of its key findings in the new report, which focuses on data and events in the third quarter of 2014 up to the present day.  Overall, the third quarter could perhaps be characterized as a ‘Tale of Two Bitcoins’.  On the one hand, significant bitcoin venture investment continued and much progress was made in furthering adoption, particularly in bitcoin’s use as a medium of exchange. Meanwhile, there was a steady erosion in the price of bitcoin throughout the quarter (Figure 1), which was further punctuated by a sharp plunge of roughly 20% at its start. SOB 1 Price still a focus Last quarter we noted how some noteworthy bitcoin observers felt that there has been too much emphasis placed on bitcoin’s price. However, out of the 10 most read stores on CoinDesk during the second quarter, four were about bitcoin’s price. In the third quarter this interest has only increased, as almost twice as many of the top 10 CoinDesk stories were focused on bitcoin’s price (Figure 2). SOB 2 Given how the fourth quarter has begun we do not expect interest in bitcoin’s price to abate any time soon. Q2 price gains lost in Q3 In the media business it is often said that bad news sells more than good, so perhaps the fact that bitcoin’s price fell nearly 40% in Q3 helps explain the greater relative interest in price in the most recent quarter.  The third quarter also featured a remarkable price coincidence: after rising 39.4% in Q2, bitcoin’s price fell by a nearly identical amount in Q3 (Figure 3).  SOB 3 A wide range of theories have been put forth to explain bitcoin’s price decline, ranging from macroeconomic factors (such as a strong US dollar) and regulatory concerns (like the BitLicense), to a lack of speculative investment momentum (Figure 4). SOB 4 One of the more widely debated and somewhat counterintuitive theories proposed by Citi and others on why bitcoin’s price saw a steady decline throughout Q3 is increasing merchant adoption. This theory goes as follows: growing merchant acceptance by companies like Dell is creating selling pressure as these companies quickly liquidate bitcoins they accept for national currencies.  However, right now there are arguably too few merchant transactions to have a significant influence on price (for example Overstock is only averaging $15k per day in bitcoin sales) while a single bitcoin exchange like Bitstamp can do upwards of several millions of dollars in bitcoin trading volume each day. Additionally, while it’s true that in the short-term timing differences may lead to commerce supply-demand imbalances, over the medium-term bitcoin-to-fiat conversions by payment processors should be balanced by fiat-to-bitcoin conversions by bitcoin-spending consumers (Figure 5). SOB 5 All-time VC investment up 27% While Q3 did not match the second quarter’s $73m in venture investment, the third quarter saw a substantial $60m of new venture capital invested in bitcoin startups. To date, a total of $285m has now been invested in bitcoin startups since 2012, with 67% of that figure ($191m) coming in 2014 alone (Figure 6). sob 6 2014 VC investment to exceed 1995 Internet One of the more widely discussed elements of earlier State of Bitcoin reports has been our comparison of the level of investment in early Internet startups versus investment in early bitcoin startups.  VCs such as Marc Andreessen have compared bitcoin’s overall potential, as well as its current stage of development, to the Internet circa 1993. Our comparison was meant to assess whether VCs are backing up their lofty bitcoin statements with their wallets. And notwithstanding a number of methodological issues which we discussed previously with making this comparison (including inflation and changes over time in the cost of launching a startup), we feel the comparison is still interesting and useful. We are currently projecting a total of $255m to be invested in bitcoin startups for the calendar year of 2014. This figure would exceed slightly the $250m invested in first sequence Internet startups in 1995 (Figure 7). SOB 7 *Note: Only includes first sequence venture deals; late-stage 1995 Internet investments totaling $257.6m are excluded. Sources: PricewaterhouseCoopers, National Venture Capital Association, CoinDesk, Dow Jones VentureSource, VentureScanner. The 2014 run rate for publicly-disclosed VC investment in bitcoin startups would also equal nearly three times more than the total investment VCs made in bitcoin startups in 2013.  In short, a ‘wall of money’ continues flowing towards bitcoin startups. This massive investment made by venture capitalists is shaping up to be one of the most important bitcoin stories for 2014. More commerce and consumer traction Bitcoin has seen much faster adoption as an alternative store of value, or object of speculation, than as a medium of exchange. In the third quarter Dell became the largest retailer by far to begin accepting bitcoin for payment for anything on the Dell.com site (Figure 8). sob 8 Companies like Dell and Purse.io are also giving consumers compelling reasons to actually spend bitcoins by offering savings off full retail price of anywhere between 10-30%.  While we have shaved our end of year forecast slightly we are continuing to see strong growth in the number of merchants accepting bitcoin (Figure 9).  sob 9 There were 1.2 million new bitcoin wallets created in Q3, representing 21% growth quarter-over-quarter. We continue to forecast 8 million total bitcoin wallets by the end of 2014 (Figure 10). sob 10 We hope you enjoy the State of Bitcoin Q3 2014 report. We thank you, our readers, for making CoinDesk the world’s leading source of bitcoin news, analysis and perspective, and we very much welcome your This email address is being protected from spambots. You need JavaScript enabled to view it. on how we can make the State of Bitcoin even better. Sincerely, The CoinDesk Team [1] You can access CoinDesk’s full spreadsheet of all bitcoin venture capital deals here. CoinDeskState of Bitcoin
Original author: CoinDesk

Oct 6 - FirstGlobalCreditLogo Suppose you could trade your bitcoin for shares in, say, Apple Inc, just as the company is on the cusp of rolling out its biggest product release in years. Or perhaps use that bitcoin stash to buy stock in London-listed Vodafone to enjoy its 5.4% dividend yield. That’s what First Global Credit wants to do with a new derivatives product for bitcoin holders that will allow them to participate in global equities markets, without cashing their bitcoin in for fiat. The fund allows investors to keep their funds in bitcoin, while seeking returns with those holdings. Gavin Smith, First Global’s chief executive, said: “If you believe bitcoin is going to increase in value, you don’t want to lose that potential. [Our product] will retain the value of your bitcoins, and you will also hopefully make money on your investment.” First Global formally launched yesterday at Inside Bitcoins Las Vegas, a three-day digital currency conference running through 7th October at the Flamingo Hotel and Casino. Blue-chip stocks for bitcoin First Global sells a type of derivative known as a ‘contract for difference’ (CFD). Further, it has created 109 CFDs that are based on blue-chip technology stocks, index funds for the major markets, including the S&P 500 and FTSE 100 and popular exchange-traded funds. When a First Global customer buys a ‘share’ of Apple through the fund, for example, she does not own the underlying equity. Instead, she owns a CFD issued by First Global. First Global then buys the Apple share and holds it in its own account, Smith explained. If Apple declares a dividend – it usually yields just under 2% since it resumed paying dividends regularly in 2012 – then the Apple CFD holder at First Global will receive a dividend in the form of a credit in her First Global account. The First Global customer can withdraw dividends or sell her Apple CFD holdings at any time, according to Smith. If the investor was long Apple and the stock price went up, then she would receive the difference between the purchase price and the sale price. She would then cash out of the trade in bitcoin. “The investor will walk away with bitcoins,” Smith said. CFDs and regulation CFDs are derivatives that can be created for almost any type of security, including treasury bonds, foreign exchange rates, commodities and indices. Unlike futures contracts, they don’t come with a delivery date. Instead, CFDs based on stocks mimic the purchase of actual shares. The benefit of a CFD is that it allows buyers to gain exposure to the underlying asset at a fraction of the cost of actually acquiring the asset. This is because CFDs can often be bought on margin, meaning the buyer need only pay a small percentage upfront. CFDs are offered by big banks like Barclays, for example, which offers its customers contracts on thousands of equities and commodities. Many countries allow trading in CFDs, like the UK and Australia. The US Securities and Exchange Commission (SEC), however, does not allow trading in CFDs, so US residents generally don’t have access to these derivatives. Leverage trading risks One of the reasons CFDs aren’t allowed by the US regulator is because of the high levels of leverage they typically require. Even Smith acknowledged that trading CFDs with large amounts of borrowed money can be risky, although he is quick to point out that it’s using too much borrowed money and not the contracts that are the potential issue: “The risk is really around the gearing rather than the product itself.” First Global will offer margin trading, he said, but at “conservative” levels. Traders can leverage up to five times what they deposit with First Global. The company charges commissions on each trade of 1.45% for long-only investors and 0.1% for active traders. An additional financing fee of 2.08% is also levied to make up for the difference when taking bitcoin deposits from clients, but buying securities in fiat. Active traders must also pay a holding charge of 0.1% if contracts are held overnight. Hedge management Smith stressed that First Global will not be taking risks with investors’ money. The fund will match all buys with underlying securities on a “one-for-one” basis, he said. In addition, the fund has a hedging strategy to ensure that its holdings aren’t affected by violent moves in either the cryptocurrency or traditional equities markets. Hedging risk is Smith’s specialty. He comes to the bitcoin markets from two decades devising hedging strategies for commodities and derivatives at Credit Suisse and Trafigura, one of the largest global commodity trading firms. At Trafigura, he constructed strategies to hedge metals and oil. He set up the bitcoin fund with Marcie Terman, who holds the post of communications director. The two have funded the company themselves, with no outside investment. Smith explained that First Global, which is currently domiciled in Belize, will move to the European Union in the coming months, and that customers will be expected to comply with know-your-customer (KYC) checks. “We can’t offer the anonymity that some people would like to have. But the flipside is we are operating fully within the legal framework,” he said. First Global is looking to expand the range of securities offered to include fixed-income assets and commodities in the future. Smith concluded: “It’s a new market now, it’s very small. But we believe it will grow significantly over the next three years.” Disclaimer: This article should not be viewed as an endorsement of any of the companies mentioned. Please do your own extensive research before considering investing any funds in these products. Stocks image via Shutterstock DerivativesFirst Global Credit
Original author: Joon Ian Wong

European Parliament
The European Parliament is set to quiz several nominees for European Commission posts this week, including Britain’s Lord Jonathan Hill, who is scheduled to appear before parliament today. Notably, Lord Hill is expected to discuss digital currencies during his appearance. Lord Hill, the commissioner-designate for the Financial Stability, Financial Services and Capital Markets Union portfolio, has already attended one hearing, which took place last week. At that hearing, Hill and other designates were posed a number of questions from lawmakers and committees, submitted by Martin Schulz, the President of the European Parliament. Lord Hill was asked to elaborate his position on the matter and to outline his recommendations for digital currencies like bitcoin. Finding a balance In his response, Lord Hill pointed out that bitcoin is just one of more than 200 virtual currencies and indicated his belief that there is a need to find a balance between safety and innovation. Cryptocurrencies can often bring “faster and cheaper” means of payments than traditional bank transfers, he said, but they suffer from a lack of regulation, security and capital requirements that currently apply to other payment services providers, thus creating prudential risks. The issue falls within the responsibilities of the new Director General for Economic and Financial Affairs, Lord Hill added, pledging that he would ensure the development of digital currency markets is kept “under close scrutiny” with a view to early identification of potential emerging risks. “If such risks are identified,” he continued, “I am ready to discuss quickly with this House what needs to be done in terms of better protecting users – as, in fact, was done for payment services.” Lord Hill further outlined his first proposal for digital currency regulation: “One possibility would be to propose to include Virtual Currency Exchange Platforms as ‘obliged entities’, and thereby subject to the customer due diligence requirements in the Directive. This would send a clear signal to Member States and encourage common solutions at EU level.” Commission role The European Commission has played an active role in discussions of the EU’s task force on virtual currencies, led by the European Banking Authority (EBA). That effort, Lord Hill said, helped identify the main risks associated with cryptocurrencies and put forth a number of recommendations, explaining: “This resulted in an Opinion of the EBA that recommended that EU legislators consider declaring market participants at the direct interface between conventional and VCs, such as virtual currency exchange platforms, to become ‘obliged entities’ under the EU Anti Money Laundering Directive and thus subject to its anti-money laundering (AML) and counter terrorist financing (CFT) requirements.” According to existing EU legislation and the 3rd AML directive, financial institutions are deemed obliged entities, which means they must comply with AML and CFT requirements. The directive itself offers a certain level of flexibility, since it enables a tailored risk-based approach, proportionate to the size and nature of the obliged entity. The EBA recommended that EU legislators consider declaring digital currency exchanges as obliged entities earlier this year. Further discussions on the subject are expected later this month, during a new round of negotiations on the commission’s 4th AML directive. Lord Hill indicated that commissioner designate Věra Jourová would be in charge of the issue. European Parliament image via Shutterstock Europe
Original author: Nermin Hajdarbegovic

Coin Stacking
New York City-based SolidX has raised $3m to bring financial instruments – namely, something called a ‘total return swap’ – to large institutional bitcoin investors. Founded in early 2014, SolidX’s funding round came from a group of investors led by Liberty City Ventures and hedge fund manager James Pallotta. The team at SolidX is comprised of professionals with backgrounds on Wall Street. The company sees a huge opportunity to provide the traditional finance industry a way to access bitcoin. SolidX CEO Daniel Gallancy told CoinDesk the company wants to provide a Wall Street with bitcoin investment tools: “Institutional investors, a large pool of capital, have largely been left out of what is a tremendous innovation.” A way to institutionally invest Gallancy has a proprietary trader and tech sector investment analyst background. He’s also been paying attention to bitcoin since 2011. The problem, he said, is that bitcoin is a tough sell to the people making investment decisions in the millions of dollars. He says Wall Street analysts, “are very aware of bitcoin, a lot of them think it’s great. [But] they can’t pitch it to their portfolio manager because there’s no real way for them to buy.” Gallancy said this is why SolidX is bringing the total return swap to bitcoin: “We offer financial entities, hedge funds and family offices a total return swap – an instrument they are very accustomed to dealing with.” A total return swap allows buying or short selling of a security that an investor does not have direct access to. The total return swap is a form of derivative used, for example, by many investors when buying securities in a foreign market where access is limited to only local investors. In this same way, the total return swap offered by SolidX gives an institutional investor an avenue to bitcoin. The flexible swap  The term ‘swap’ received a negative image during the 2008 financial crisis – especially the credit default swap, which was a complex instrument used in theory to limit exposure to credit risk. Gallancy told CoinDesk the total return swap is simpler: “A swap, for all intents and purposes, is simply a legal contract. You are entitled the dollar return on the underlying asset.“ “The idea is to give a return on the underlying asset without having to think about anything except for its price,” he added. The company gave careful thought to choosing the right financial instrument to provide wider investor access to bitcoin. SolidX eventually chose the total return swap as the right vehicle to get off the ground, as it is flexible enough to work with any block chain-based technology, not just bitcoin. Other block chain-based currencies, should they become popular, could conceivably be used by this particular instrument in the future. “We didn’t just jump right into this,” said Gallancy. “One of the reasons we chose this is because of the flexibility of swaps. “ Bitcoin in financial markets As bitcoin becomes more well-known on Wall Street, investment funds will want to put capital into the digital currency. This is what the financial industry as a whole does – it’s always on the lookout for new financial opportunities. Institutional-grade bitcoin exchanges such as itBit and Vaurum have been around for some time now, yet they are more trading platforms than anything else. Gallancy also noted Bitfinex offers bitcoin swaps on its platform. However, he said SolidX is offering an internationally recognized swap as accredited by the International Swap and Derivatives Association, or ISDA. It’s possible SolidX’s entrance into the market could mean further institutional investment into digital currencies outside of major VC funds that have put money in bitcoin startups. David Lehmann, SolidX’s president, told CoinDesk: “While institutions to date are invested on the venture capital side through Andreessen Horowitz and Fortress, we believe that financial institutions are going to want exposure to bitcoin as an asset class.” Growth image via Shutterstock SolidXswapstotal return swap
Original author: Daniel Cawrey

RussiaRussian authorities confiscated four bitcoin mining machines from an unidentified citizen last week at a security checkpoint located on its southern border with China. A report from the Siberian Customs Department suggests that an unnamed Russian citizen attempted to bring “four undeclared metal objects”, later identified as ROCKMINER R4 units, through a customs checkpoint at the Manzhouli Sino-Russian Inter-Trade Tourist Area. However, he failed to provide the necessary documentation or pay required fees. The customs officers evoked a 2012 decision issued by the Board of Eurasian Economic Commission to validate the confiscation. The decision, amended in 2013 and 2014, governs the import and export of encryption facilities to and from Russia, Belarus and Kazakhstan, all of which are members of a united customs agreement. Despite the increasingly stern stance Russia has taken toward its domestic bitcoin industry in recent weeks, the incident appears to be unrelated to the country’s proposed ban of “monetary surrogates“. Further, it does not suggest a more immediate crackdown on bitcoin’s domestic mining industry and community. The draft bill, first announced in August, garnered even more headlines internationally last week as Russian lawmakers revealed the full text of the proposed law. If passed, the law would apply to virtually all of the country’s industry, from individual bitcoin miners to bitcoin businesses and even news sites. In addition to the loss of the mining units, the unidentified miner also faces potential fines, as the Siberian Customs Department indicated it has initiated administrative proceedings against the individual. Russian community reacts Due to initial confusion surrounding the news, there was speculation on Russian bitcoin blogs that the incident was perhaps part of a more immediate crackdown by the local government on bitcoin activities. Russian-language bitcoin news blog Coinside.ru, for example, wrote in its report that the news could be seen as “the start of the practical part of the Russian campaign against bitcoin”. However, Artem Tolkachev, managing partner at the law firm Tolkachev & Partners disagreed with this interpretation, noting that it suggests mining equipment is simply subject to the same special customs regulations as all types of encrypted materials. “The document makes no special reference to the mining equipment, but it divides the encryption facilities into different groups and establishes the order of import and export,” Tolkachev told CoinDesk. Mining imports still possible In absence of the formal approval of the draft bill banning bitcoin activities, Tolkachev asserted that, in his opinion, the import and export of bitcoin mining equipment is still legal in Russia provided the owner seeks a one-time license from the Ministry of Industry and Trade. Still, the procedures required could prove to be a deterrent to local mining operators, especially in light of potential forthcoming regulation. Tolkachev said: “To get [a one-time license], one needs to present an application for a license, a copy of the equipment purchase contract, a copy of the certificate of registration with the tax authorities, license to conduct the activity (if needed), authorisation of the Federal Security Service (FSB), the description of all encryption facilities that the imported equipment contains.” Further, he said this procedure must be completed in 90 days, but that in some cases, only approval from the FSB is needed. Tolkachev provides legal consultation to a number of regional startups, though he says most are now turning focus away from the Russian market in light of recent events. Image credit: Pavel L Photo and Video / Shutterstock.com MiningRockMinerRussia
Original author: Pete Rizzo

Gold chains
Blockchain announced today that it has secured a record $30.5m Series A funding deal, co-led by Lightspeed Venture Partners and Wicklow Capital. Such a figure would be one of the largest ever single investments in a bitcoin company, after BitPay announced a new record with its $30m Series A round in May and Xapo set the current gold standard with $40m in July. Blockchain is the world’s most popular bitcoin wallet provider, search and technical information source with 2.3 million wallet accounts and a total $26bn in transaction volume. Today’s news marks its first funding round from external investors. It was previously bootstrapped 100%, which included first backer Roger Ver, who remains with the company.   Blockchain president Peter Smith said: “The company has grown exponentially in every way over the last eighteen months. We are honoured to add investors and partners to the team with deep expertise in financial services and consumer technology.”

 

Future Plans

According to a report in the New York Times, Lightspeed partner Jeremy Liew will take a seat on Blockchain’s board. Wallet services would be the “central nexus of value creation” in the digital currency industry, he said.

The report also quoted president Peter Smith as saying Blockchain would use the extra funding to expand and invest in developing markets, as well as to develop software enabling more people to transfer and use bitcoin with ease.

Blockchain produces software tools for merchants to accept bitcoin, and acquired bitcoin price and data company ZeroBlock last December. It also manages the premium domain name bitcoin.com, which it uses to introduce bitcoin to total newcomers.

Key bitcoin player

The announcement from one of bitcoin’s oldest and more respected service providers is bound to warm hearts in the bitcoin world, amid news dominated recently by price drops and market anomalies.

Blockchain is notable for practicing the cryptocurrency ethos it preaches. Its mission is equal parts growth of its own business and building an international bitcoin ecosystem.

Fervently decentralized and traditionally bitcoin only, Blockchain’s international staff have received salaries in bitcoin and the company has until now done its deals, including acquisitions, in bitcoin.

It is also one of the only major bitcoin companies to not have a bitcoin trading or even a buying platform, preferring to focus on making bitcoin accessible and useful to everyone.

Rapid expansion

Blockchain’s growth reflects the rise of bitcoin’s own popularity and awareness levels. The company, which was a one-man operation from its August 2011 beginning until the spring of 2013, and operated with only a handful of employees as recently as seven months ago, now has a total 21 employees in various locations around the world.

It recently announced its two millionth wallet account (there are now 2.3 million), more than half of which are from sign-ups this year. At the beginning of January 2013 it had just 110,000 accounts and by the end of October that year it had 500,000.

The Blockchain mobile app’s relaunch on both Android and iOS, together with its re-admission to Apple’s iOS App Store in July, are in part responsible for those numbers.

Gold chain image via Shutterstock 

BlockchainRoger Ver

Original author: Jon Southurst

Inside Bitcoins Global e-commerce giant Overstock.com has hired the developers behind peer-to-peer decentralized exchange Counterparty to develop a new stock market platform powered by cryptocurrency technology. The developers will work on a platform called ‘Medici’, that will build on Overstock’s previously announced ‘cryptosecurity’ offering to allow not only Overstock, but other businesses, the ability to issue cryptosecurities to the investing public. Overstock CEO Patrick Byrne made the official announcement at the Inside Bitcoins Las Vegas conference today during his keynote speech entitled “Cryptosecurities: the Next Digital Frontier“. The three-day conference began on 5th October and will run through 7th October at the Flamingo Hotel & Casino. Speaking to CoinDesk, Byrne indicated that this latest move finds Overstock advancing beyond the exploratory phase with crypto 2.0 technologies. Byrne told CoinDesk: “We’re committed. We formed a business unit within Overstock, we have lawyers, we have developers, these guys have a multimillion-dollar budget and they have moved to Utah. We’re full speed ahead.” With the announcement, Counterparty founders Adam Krellenstein, Robby Dermody and Evan Wager told CoinDesk that they have now turned their focus fully to the Medici project, and that they’re working to find replacement candidates to fill their former roles at Counterparty. Launched in January, the project quickly built itself into a market leader using a DIY approach, the bitcoin protocol and Counterparty’s own native currency XCP to facilitate digital asset exchange. The developers will first work to create the software as part of the Overstock corporate entity, but they will eventually be allocated to a new company that will seek to monetize the platform and introduce new value-added services. All-star team In addition to the Counterparty development team, Byrne told CoinDesk that the project will also involve Perkins Coie, the Seattle-based law firm that represents some 40 startups in the bitcoin space, including major players such as bitcoin wallet provider Xapo and digital currency exchanges Kraken and Coinsetter. Byrne indicated that Perkins Coie will help the Medici project with what will perhaps be its toughest challenge, securing approval with the US Securities and Exchange Commission (SEC), the US federal regulator that enforces securities law and regulates that nation’s stock and options exchanges. Byrne told CoinDesk: “The technology is a hurdle we can quite comfortably clear. We don’t know yet how high the regulatory hurdle is, but we’ve jumped regulatory hurdles before and we don’t have reason to think this is insurmountable.” Overstock first announced its intention to explore a cryptosecurity offering via a company wiki page in late July. At the time, Byrne told CoinDesk that the move was, in part, an attempt to raise the issue of cryptosecurities with the SEC. Kindred philosophies For the initial proposal, Overstock asked the bitcoin community to provide the company with information on asset trading platforms that might be able to host the offering, with BitShares, Counterparty, Ethereum and NXT all receiving attention among a wider field of competitors. Byrne said that while he had considered other platforms, he ultimately felt that the Counterparty team and its underlying use of the bitcoin protocol provided the best opportunity to bring his ideas to light. “The block chain has been pounded on by all these hackers around the world,” he said. “It’s the most secure.” Byrne went on to laud Krellenstein, Dermody and Wager for their dedication to philosophy, math and computer science, as well as their decidedly non-Wall Street approach to finance. “They’re true to the ethics of bitcoin, true to the open-source nature, they’re true to the principles,” Byrne added. At press time, the value of XCP, Counterparty’s native currency has increased more than 150% on the news. Regulatory focus Dermody told CoinDesk that his team saw the Medici project as too big to ignore, given the effects its success could have on businesses and the wider economy. Likewise, Wagner said Medici will go beyond previous asset exchange projects through its effort to ensure the technology meets the approval of US regulators. “Medici will provide a comprehensive built-in digital asset exchange, [but] that’s very different when you’re going through a process of regulatory compliance,” he said. “This project is going to make that effort.” Byrne said the name Medici was also chosen as a reflection of the project’s ambitious goals, as it takes the name of the famous 15th century Italian bank that made notable contributions to the fields of accounting and banking. “It seemed like an appropriate tip of the hat,” Byrne said. Hat tip to WIRED Images via CoinDesk; Anthony Correia / Shutterstock.com CounterpartyCrypto 2.0OverstockPatrick Byrne
Original author: Pete Rizzo

Silk-Road-Article-Banner-v3 In this concluding article of our series looking at Silk Road, a year after its closure, we examine the impact the Silk Road bust had on the dark markets and their most widely used digital currency, bitcoin.  The FBI may have taken down the Silk Road in spectacular fashion, slapping a seizure notice on the dark marketplace’s website and executing the high-profile public arrests of Ross Ulbricht, and later, bitcoin executive Charlie Shrem and digital currency trader Robert Faiella. According to academics and researchers studying dark web markets – which transact almost exclusively in bitcoin – listings for illicit goods and services have actually grown in the aftermath of the Silk Road bust. The rising popularity of such markets among drug vendors and customers means that illicit trade is set to expand even more, one researcher believes. Bitcoin’s creation and subsequent explosive popularity has been a crucial factor in the growth of global dark markets, according to James Martin, a senior lecturer and researcher at the Macquarie University Centre for Policing, Intelligence and Counter-Terrorism, who has written a new book about the subject. Martin said: “Bitcoin was absolutely critical to the development of Silk Road and cryptomarkets more generally. This was acknowledged by [Silk Road mastermind] Dread Pirate Roberts; he said it was one of the pillars of Silk Road.” Bitcoin economy and dark markets In the six months following Silk Road’s shakedown by the FBI, new dark markets proliferated and listings for illicit goods surged, researchers at the Digital Citizens Alliance (DCA) have found. The non-profit group, which works on promoting Internet safety to ordinary web users, found that the number of drugs listings on the biggest dark markets had almost doubled by March to 32,029, compared to six months earlier when Silk Road was taken offline. The DCA report looked at listings on 11 currently live dark markets, of which six were newly launched platforms. It compared the latest listings to the 18,174 for drugs on the four major dark markets that existed last October. Among the current markets it examined are Silk Road 2.0, Agora and Evolution, plus new entrants White Rabbit Anonymous Marketplace, Outlaw Market and The Pirate Market. The dark markets operating last year also included now-defunct dark markets Silk Road, Black Market Reloaded, Sheep Marketplace and DeepBay.   Sept 25 - Silk Rd - Digital Citizens Dark Web_cropSource: Digital Citizens AllianceSilk Road and the bitcoin economy Given that the most widely used digital currency of dark markets is bitcoin, just how much of the cryptocurrency is sloshing around in these illicit bazaars? The proportion of the bitcoin economy undergirded by dark market trade is best estimated in a 2012 paper by Nicolas Christin, a computer engineering professor at Carnegie Mellon University who does work at its information security lab. Christin collected data from Silk Road over eight months between the end of 2011 and 2012. Over this period, he found that 1.35 million BTC were exchanged on the dark market. Comparing that to the 29.6 million BTC traded on other exchanges over the same period, he found that Silk Road transactions corresponded to 4.5% of all traded BTC.   The homepage of Agora, a popular new dark market.The homepage of Agora, a popular new dark market.When Christin took other factors into account, like the possibility of Silk Road users buying bitcoin to fund their dark market purchases and then trading bitcoin back to fiat currency, the number of potential transactions attributed to Silk Road activity could double from a conservative estimate of 4.5% to as much as 9% of all bitcoin trading activity, as measured by traded value on exchanges at the time. But 2011 and 2012 were very different times for bitcoin. The bitcoin price hit a high of $9 during Christin’s observation period; it’s trading between $350 and $400 today. Christin also found that at the time, 24,000 items were being sold on Silk Road over a six-month period. Contrast that to the 13,000 in drug listings alone on Silk Road that the DCA recorded in just one October day, before the bust. That’s why Christin is updating his study. He said he’s collected a fresh set of data from dark markets that he’s in the process of analysing. He won’t say what markets he’s looked at, and won’t be drawn on any preliminary analysis of his new data. He said it will be several months before the research is ready for publication. Christin said he’s not surprised by the growth of new dark markets in the wake of Silk Road’s demise, alluding to the amount of publicity generated by the busts and the arrests of Ulbricht and Shrem, but he noteed that the growth in listings recorded by the DCA may not mean dark web trading activity has increased. “I want to emphasise that it is unclear that the number of listings is a good proxy for economic activity. One might list a large number of items and yet not carry out that many sales,” he said. Dark market comforts drive growth The growth of dark markets poses the question: If law enforcement agencies have already shown they can break the screen of anonymity afforded by the Tor network and bitcoin transactions, why are new dark markets popping up with more listings than ever before? Martin, of Macquarie’s policing and intelligence research institute, thinks it’s because drug dealers are finding it’s far safer to do business this way – even with the threat of an FBI raid hanging over them. He said: “Law enforcement is only part of the risk for people who sell drugs. The bigger risk and more frightening risk is not someone kicking down the door to arrest you, but someone kicking down the door to kill you and steal your stash.” For drug dealers, Martin says, dark markets present a new opportunity to strip away the “systemic violence” associated with the distribution and secure storage of narcotics. A dark market vendor doesn’t have to deal with the organised crime groups that traditionally take care of drug distribution and security in return for protection money, he said. Listing for cannabis on AgoraListing for cannabis on AgoraIt’s not just the vendors who are enjoying the benefits of illicit e-commerce. Drug buyers can now browse a vast catalogue of narcotics on their phablets, with comprehensive reviews from fellow customers to provide an indication of quality. Consumers are also safer because they don’t have to interact with potentially violent gang enforcers, either. Instead, the postman drops off their latest dark market order at their doorstep. Martin cautions that the amount of trade taking place on dark markets is tiny compared to the global trade in illicit narcotics. Global Financial Integrity, a non-profit focused on tracking illicit financial flows, estimates that drug trafficking amounted to trade flows of $320bn in 2011. The dark web trade is a tiny slice of that, Martin says, although researchers haven’t been able to quantify it. By comparison, the FBI alleges that Silk Road made annual revenues of $1.2bn. However, dark web drug sales are attractive to both vendors and customers, so they are set to grow, Martin said: “As long as the technology holds strong, they are very good reasons for this trade to get bigger and bigger.” Deep or dark webs? While the terms ‘deep web’ and ‘dark web’ are often banded about interchangeably, they don’t mean the same thing. The deep web refers to any portion of the web that isn’t indexed by a search engine. Content that lives on the deep web includes relatively innocuous – and sometimes stultifying – material, like the database containing North Dakota’s court records, which is maintained by the government of the rural US state. Google and other search engines don’t crawl through the contents of these databases, so they’re invisible to someone traversing the web on its most well-travelled highways. The deep web, then, is the part of the web that’s hidden from the ‘surface web’, which is what search engines can find. That’s the definition of the term according to Bright Planet, a consultancy focused on the deep web founded by the man credited with coining the term, Mike Bergman. So much for the deep web. What about the dark web? As you may have guessed, this is where things can get illicit. The dark web is that section of the web that is both intentionally hidden and cannot be accessed by a standard web browser, according to Bright Planet. Dark web sites usually have addresses that aren’t governed by the Internet Corporation for Assigned Names and Numbers (ICANN), the international body that regulates domain names. Websites ending in .com or .org, for example, are governed by ICANN. Oct 3 - Agora ebook Domains that exist beyond the ICANN system are known as alternative DNS roots or ADRs. These include websites that end in .geek, .micro or .bit, as is the case with Namecoin domain names. Websites on the Tor network, which include Silk Road and other marketplaces for illicit goods mentioned in this article, are examples of dark web sites. These sites end with the .onion suffix. Accessing websites with ADR domains usually requires a specific piece of software. For sites on the Tor network, the Tor Browser, a piece of software designed specifically for surfing that network, must be installed to access them. The mainstreaming of dark markets? There are signs that dark markets are evolving beyond the drugs-infatuated niche of Silk Road and its genre. The creators of OpenBazaar, for example, want to bring their decentralised market to a wider swathe of Internet users who aren’t interested in buying drugs, but do want to preserve their autonomy and privacy. OpenBazaar is a peer-to-peer marketplace that lets vendors hawk their wares anonymously and without relying on a central platform. Vendors host their product listings on their own computers. Trade is conducted in bitcoin. Sam Patterson, who leads operations for the open-source project, says OpenBazaar is nothing like Silk Road or its successors. “Silk Road was a centralised marketplace – directly controlled by an individual or small group – that catered almost exclusively to a subset of the population who wanted to trade in illicit substances.” By contrast, Patterson, said, the platform he’s building is decentralised – no one owns the network – and it’s simply a platform for individuals to conduct business without an intermediary skimming off commissions and fees. “It is a platform for people to manage their own trade online, directly with others,” he said. The coming e-commerce boom… in drugs Even as the dark web develops at a rapid clip – there is a now a trade publication reporting on market goings-on and a search engine to make dark market shopping easier – law enforcement agencies seem to be left trailing in the wake of decentralised, encrypted platforms. Martin, the drugs trade researcher, said he has spoken to law enforcement agencies and they are struggling to police dark markets, despite US agencies’ spectacular takedown of Silk Road. “With online drug trading, you have hidden financial transactions; the dealer and customer never meet in the same place; you have drugs arriving in the post [...] all of this breaks the ‘business model’ of conventional law enforcement,” he said. Anti-narcotics agencies need to come to grips with dark markets quickly because they are only set to grow, Martin added. Just as e-commerce was pooh-poohed by brick and mortar retailers 20 years before giving rise to retailing giants like Amazon and Alibaba today, law enforcement is now only dimly aware of the development of dark markets. “We’re in a position now like the big department stores of the 90s, for example, who saw online retailing as a flash in the pan, thinking it would never take off. They thought people would want to come to a store to buy sunglasses or shoes. Clearly we know that isn’t the case now. There are compelling reasons to speculate that the online drugs trade is going to expand further in years to come.”  Image via Shutterstock OpenBazaarSilk RoadSilk Road 2.0Silk Road: One Year On
Original author: Joon Ian Wong
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