U.S. Federal authorities have seized more than $3 million worth of Bitcoins after closing down Silk Road, the online marketplace that allegedly allowed more than a billion dollars of illegal drugs and illicit services to be bought using the virtual currency.
As part of the raid, the Federal Bureau of Investigation arrested Silk Road's alleged proprietor, the 29-year-old Ross William Ulbricht who goes by the name "Dread Pirate Roberts." He appeared in a San Francisco court on Wednesday, charged with conspiracy in narcotics trafficking, computer hacking and money laundering
The shutdown of Silk Road, which has drawn ire from regulators and politicians in recent years for allegedly aiding illegal activities, is a major blow to Bitcoin. The price of Bitcoin, which has been lauded by its proponents as a possible alternative to government-controlled currencies, fell 8.6 percent to $128 on Wednesday.
The closure of Silk Road comes as authorities in the U.S. target 'black market' banks and websites as they try to dismantle cyber criminal networks operating around the globe. Regulators are debating whether Bitcoin might fall under their supervisory remit, which could further threaten its existence.
The criminal complaint against Mr Ulbricht provides a rare insight into the secretive Silk Road. The site has been touted by its supporters as a beacon of libertarianism amid oppressive government control, and attacked by others for allegedly abetting a vast underground network of drug dealers and other criminals.
In the complaint, an FBI agent described Silk Road as "a sprawling black-market bazaar, where illegal drugs and other illicit goods and services have been regularly bought and sold." The agent accuses Mr Ulbricht of having "deliberately set out to establish an online criminal marketplace outside the reach of law enforcement".
(Read more: Bitcoin gets the FBI, Homeland treatment)
The bureau said a host of illegal substances – including marijuana, opioids and ecstasy pills – were available to purchase on the site, alongside various "services" such as computer hacking and professional forgeries.
The FBI estimated that in two-and-a-half years of operation, the underground website generated 9.5 million Bitcoins worth of sales, with Silk Road itself collecting 600,000 Bitcoins worth of commission. Though the market price of the virtual currency has veered wildly in recent years, the FBI estimated that the figures would equate to about $1.2 billion in revenues and $80 million in commissions for Silk Road.
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Following the seizure of $3.6 million worth of the virtual currency from Silk Road the U.S. government now owns roughly 0.22 percent of the total Bitcoin market, estimated to be worth about $1.6 billion.
A lawyer for Mr Ulbricht did not respond to a request for comment.
The loss of a major source of Bitcoin's business comes just as the virtual currency has been attracting increased attention from mainstream investors.
(Read more: Beware of bitcoin-related Ponzi schemes, says SEC)
Last week, SecondMarket, the trading platform, began raising money for a vehicle that would allow large accredited investors to put their money in the cyber-currency. The Winklevoss twins have emerged as major investors in Bitcoin and have also filed a plan with the US securities regulator to set up an exchange-traded fund that would replicate the performance of the virtual currency.
—By Tracy Alloway and Kara Scannell, Financial Times.