Reason for today’s selloff

It’s because bitcoins are not real money, it’s a large laundering scheme. Apparently the DEA does not like them being used to buy contraband via the internet.

ST. LOUIS (Thomson Reuters Accelus) – Two senators are pressing federal authorities to crack down on an online black market and “untraceable” digital currency known as Bitcoins after reports that they are used to buy illegal drugs anonymously.

Democratic Senators Charles Schumer of New York and Joe Manchin of West Virginia wrote to Attorney General Eric Holder and Drug Enforcement Administration head Michele Leonhart in a letter that expressed concerns about the underground website “Silk Road” and the use of Bitcoins to make purchases there.

The letter prompted a discussion among Bitcoin enthusiasts about whether the government was capable of closing related bank accounts and thereby stifling the currency.

The senators released a copy of their letter on Monday. It cites recent media reports that some tech-savvy individuals were using an “anonymizing network” known as Tor to gain clandestine access to Silk Road and buy illegal drugs.

Silk Road buyers pay with Bitcoins and sellers mail the drugs, the Gawker blog reported. The transactions leave no traditional money trail for investigators to follow, and leave it hard to prove a package recipient knew in advance what was in a shipment.

“The only method of payment for these illegal purchases is an untraceable peer-to-peer currency known as Bitcoins. After purchasing Bitcoins through an exchange, a user can create an account on Silk Road and start purchasing illegal drugs from individuals around the world and have them delivered to their homes within days,” the senators’ letter states. “We urge you to take immediate action and shut down the Silk Road network.”

The DEA is “absolutely” concerned about Bitcoins and other anonymous digital currencies, agency spokeswoman Dawn Dearden said when asked for a response to the senators’ concerns.

“The DEA is constantly evaluating and analyzing new technologies and schemes perpetrated by drug trafficking networks. While we won’t confirm or deny the existence of specific investigations, DEA is well aware of these emerging threats and we will act accordingly,” she said.

Silk Road may be hard to close. It could easily move from server to server around the globe and change its Web address and name at will, while remaining accessible through Tor.

However, Bitcoins must be purchased with real money; of late, they have been selling for roughly $10 each.

Therefore, there are exchanges with bank accounts, such as the Mt. Gox Bitcoin Exchange, that the Justice Department and other law enforcement agencies may be able to target. It is this weak link that worries the currency’s enthusiasts.

A discussion thread this week on the primary Bitcoin forum was titled “Will Mt. Gox US Bank accounts eventually get frozen?” Some speculated that if the government bans transactions involving Bitcoin exchanges, a layer of shell companies might allow them to continue.

One user described this process as simply “growing pains” and asserted that the government “can’t stop a peer-to-peer service.”

U.S. law enforcers might have difficulty stopping Bitcoins without help from their peers in other countries.

While little information about Bitcoin exchanges is publicly available, an item posted on a website called Bitcoin Watch states that Mt. Gox’s bank account is in Japan, and anecdotal evidence suggests many other exchanges operate outside of the US.

Mt. Gox’s website does not list a phone number, representatives could not be reached via email.,0,6328122.story

Anyone else here remember the e-Gold fiasco?