Shedding Light on the Dark: The Impact of Legal Enforcement on Darknet Transactions

Abstract

Darknet markets have been increasingly used for the transaction of illegal products and services in the last decade. In particular, it is estimated that drugs make up two-thirds of darknet market transactions. The growth of illicit transactions on darknet markets have led enforcement agencies to invest greater proportion of time and efforts to monitor and crack down on criminal activities on the darknet websites. Despite the successes in convicting perpetrators, it is unknown whether these policing efforts are truly effective in deterring future darknet transactions, given that the identities of the transacting parties are well protected by the markets’ features and that these participants may migrate to other darknet platforms to transact. To this end, this study attempts to empirically evaluate the susceptibility of darknet markets breaking down upon successful policing of participants on the platform. Using drug review data from three largest darknet markets, we rely on a difference-in-difference procedure to assess the impact of policing on future transaction levels, by contrasting various outcomes from the policed site with those from the non-policed sites. Our analyses found that enforcement efforts produce a negative effect on subsequent transactions on the policed site, for both vendors in the same country and in different countries as that of the arrested perpetrators. Not only do the average number of transactions per vendor decreased, we also found that the number of active vendors that remained on the site dropped significantly. This dampening effect cannot be explained by migratory behaviors, to which we interpret as evidence of a deterrence effect at work. Furthermore, we find heterogeneity effects in the enforcement effort, wherein small vendors and vendors with short site tenure are relatively more affected by the arrest shock. Study findings have policy and theoretical implications to law makers, enforcement agencies, and academicians.