Bitcoin Users Lose $40 Million in Apparent Narcotics Bazaar Heist

Sheep Marketplace, an illicit virtual drug mart, has folded, potentially freezing $40 million worth of bitcoins that sellers and buyers had used to cut deals anonymously. U.S. authorities, as of Sunday night, were not commenting on the situation.

The narcotics bazaar had filled a void left when feds in September shuttered Silk Road, a similar site, and subsequently seized bitcoin valued at $33.6 million.

But it might not be the feds who seized funds this time. FBI and Secret Service officials declined to comment on whether authorities closed the shop. Users are alleging on message boards that Sheep Marketplace’s operator took off with the virtual cash.

"It appears as though the entire site was a scam, resulting in all of the buyers and sellers losing their money," Tapscape reported on Saturday. "Concerns regarding the legitimacy of the site came into play once the administrators at the marketplace decided to prevent vendors from withdrawing any of their bitcoins from the site."

FBI and Secret Service officials also declined to say if they are investigating fraud allegations.

Reddit conversations delineate a chain of events that began more than a week ago when the site stopped allowing withdrawals. Blockchain, a site that tracks bitcoin transactions, showed that a money flow of 39,918 bitcoins, or about $40 million, matched Sheep Marketplace’s holdings.

Over the weekend, a post on Sheep Marketplace asserted the shutdown was prompted by a seller who abused a security hole in the site to steal 5,400 bitcoins. Despite the message's claim that user bitcoins will be returned, Reddit commenters said they still are unable to retrieve funds.

"We are sorry to say, but we were robbed on Saturday 11/21/2013 by vendor EBOOK101. This vendor found bug in system and stole 5400 BTC – your money, our provisions, all was stolen. We were trying to resolve this problem, but we were not successful. We are sorry for your problems and inconvenience, all of current BTC will be ditributed to users, who have filled correct BTC emergency adress. I would like to thank to all SheepMarketplace moderators by this, who were helping with this problem. I am very sorry for this situation. Thank you all," the homepage of the now-defunct site stated. 

Bitcoin, which can be exchanged for products and services or hard currency, is transferred through a decentralized, peer-to-peer network almost untraceably. Advocates say it has the potential to lower transaction fees for small business owners and remittance senders. But the cryptographically-signed currency also offers an avenue for money laundering and other crimes that thrive on anonymity, some authorities argue. 

Despite the collapse of underweb storefronts and various bitcoin storage hacks, the virtual currency is gaining credibility in the physical world and even in the centralized monetary system. 

Ahead of Senate hearings on the issue, Federal Reserve Chairman Ben Bernanke on Nov. 12 wrote a letter to lawmakers acknowledging the benefits of cryptocurrencies, according to Quartz: "While these types of innovations may pose risks related to law enforcement and supervisory matters, there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system."

Over the weekend, bitcoins were priced at $1,086 a piece on Mt. Gox, a popular online exchange for trading bitcoins for U.S. dollars. 

(Image via Flickr user zcopley)