Evolving dark web markets: How to face the threat of ‘ungoverned spaces’

Governments and technology must evolve with dark web markets to ensure that the ungoverned spaces are carefully monitored as they continue to grow post-pandemic.

That is the view of a group of economic and scientific experts, who spoke at an online panel event, hosted by Bayes Business School’s Centre for Banking Research.

The lockdown in 2020 impacted lives, societies and economies across the world, but it also saw an influx of online trading for Covid-related goods – such as vaccines and proof of vaccination – alongside goods more traditionally traded on the dark web, including drugs.

Dr Angela Gallo, a Senior Lecturer in Finance at Bayes, was joined by Dr Andrea Baronchelli, Associate Professor in Mathematics, at City, University of London on November 3, to discuss what is next for the shadow online economy which closed with a record year of revenues in 2020. Also on the panel were Professor Anthony Finkelstein, Professor and President of City, University of London, Dr Alex TeyTelboym, Associate Professor of Economics at the University of Oxford and Philip Gradwell, Chief Economist at Chainalysis, a blockchain data platform.

Why should we care about dark web markets?

Dr Baronchelli, who was the Principal Investigator on an ESCR-funded project exploring dark markets, said the pandemic was always going to impact dark web markets, which he described as a “rapidly expanding universe”.

Professor Finkelstein, who was the former Chief Scientific Advisor for National Security before joining City in July, said:

“I apply a national security lens to this so my interest is protecting citizens from threat and protecting democracy and the rule of law. In that context it is easy to see dark web markets as an ungoverned space.

" All governments are interested in ungoverned spaces such as South Sudan, the borders of Mali, the tribal hinterland of Pakistan and very little good comes out of them - and thus dark web markets.”

Mr Gradwell, whose analysis informs research and investment in cryptocurrency markets, suggests these spaces need to be explored – using the evolution of digital currency Bitcoin as an example.

“Bitcoin entered the mainstream consciousness because of a dark net market – the Silk Road. It’s interesting to see how cryptocurrency adoption has gone hand-in-hand with the revolution of our digital lives. When thinking about how the legitimate and positive use of cryptocurrency might develop, we look at how the power users of cryptocurrency have used it in the past and the fact we do see networks forming around them. The methods that can be used to understand it, once you have that raw data, include how you can analyse the economics and network methods around it.  Those methods can be applied more generally, as the crypto-economy grows.”

Dr TeyTelboym described dark web markets as “an observable, large, well-functioning, and resilient economy” but added it was also an area that spawned mistrust during the pandemic.

“It is remarkable to be able to observe transactions on this scale, with millions of users transacting billions of dollars. The way that dark web markets function is not dissimilar to what we observe in the regulated economies - you can learn about each one from the other. It’s a reflection of the modern shadow economy and incredible time to do this kind of research.”

Tech must progress with dark web advances

Dr Gallo drew a comparison between dark web markets and mainstream regulated financial markets, saying that innovation is often spurred by regulators’ actions trying to constraints activities associated with undesirable outcomes.

But what are the challenges that the monitoring dark web markets is posing?

“Dark net markets are unique as payments are in cryptocurrency, typically bitcoin and thus all transactions are public and visible,” said Mr Gradwell. “But the challenge is to be able to map [pseudonymous] crypto addresses to entities. What is needed is to map the cryptocurrency addresses to the real-world entities, [and then] naming them.”

Will increased use of cryptocurrencies result in dark web markets booming?

The future of dark web markets relies on how widely cryptocurrency is adopted in the future. Developing countries are becoming the biggest users, in countries including Vietnam and Nigeria, as cryptocurrency works as a substitute of a weak currency or for those individuals that are not served by a traditional banking system.

“I don’t think it’s cryptocurrency that is facilitating illicit activity, but the more that cryptocurrency adoption occurs, the more illicit activity there will be,” said Mr Gradwell. “It is important to note that far more people are holding cryptocurrencies for investment and speculation than for illicit activity.”

“Colouring cryptocurrency with criminality is not where we want to go and doesn’t reflect the actuality,” added Professor Finkelstein. “It facilitates the existence of ungoverned spaces but doesn’t necessitate it.”

“Going after marketplaces and trying to shut them down in a sledgehammer way won’t work,” concluded Dr TeyTelboym. “You need to be smarter, and governments need to figure out ways of embedding themselves in these systems and creating distrust. There are things we can learn from how we regulate and police criminal activity at the moment.  These tools have to move on, as things move very quickly and this space will only grow and become more complicated.”

Find out more about the Food for Thought events series at Bayes Business School.