Bitcoin Forum

Posted with permission.


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Loosely Managed Digital Currency Could Be Avenue for Crime That's Hard to Block
April 15, 2011
By Colby Adams [Alert Global Media, publishers of MoneyLaundering.com (http://www.moneylaundering.com/)]


An emerging virtual currency intended to be used in lieu of cash could also be a vehicle for criminals seeking to make international transactions anonymously, according to investigators.

Bitcoin, a loosely organized electronic payment system created in January 2009 by an otherwise anonymous computer programmer known by the possible pseudonym of Satoshi Nakamoto, allows users and merchants to make transactions through digital coins, with or without the aid of payment processors or other financial institutions.

While the project remains relatively small, it has already drawn enthusiastic users, including international vendors and nonprofit organizations like the Electronic Frontier Foundation, which accept charitable donations of the currency. Google developers have received the green light to research the coins, which are valued at a total of $5 million, according to estimates by www.mtgox.com.

The currency was "no doubt developed for altruistic purposes by conscientious people, and there are perfectly legitimate, legal and philosophical reasons for wanting the financial anonymity that [Bitcoin] gives, but the other reality is, if this type of currency takes off, it will be a dream for the bad guys," said Steve Santorelli, director of global outreach at Team Cymru, a Burr Ridge, IL-based Internet security firm.

By using multiple e-mail addresses and anonymous proxies to disguise their locations, criminals can open a new Bitcoin account for each transaction and ensure that their money movements are "virtually bombproof and untraceable to an investigator," said Santorelli, a former Scotland Yard cybercrime detective and a former senior manager of investigations with Microsoft's Internet Crimes Investigation Team.

Because Bitcoin users can disguise their locations while potentially transacting large sums of currency with the aid of offshore merchants and payment processors, "domestic court orders and subpoenas to pierce the transactions [are rendered] obsolete," he said.

"The decentralized, international system means that, unlike a financial institution, there is no one to serve a court order on," said Santorelli. "If this system takes off it will be virtually impossible to police it, requiring a fundamental rethink in the investigative approach."

Money from nothing

At first blush, the origin and value behind bitcoins will likely seem strange to some. Few, if anyone, has met Nakamoto, organization principal Gavin Andresen said, during a March 15 interview with EconTalk. Control of the organization is decentralized and based on the premise that all users can have a say in monetary decisions.

"The root problem with conventional currency is all the trust that's required to make it work," Nakamoto wrote in a February 2009 blog on P2P Foundation. "The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust."

How bitcoins work is a "step beyond any payment system I have ever seen," said Santorelli.

The currency, which is traded through software anyone can download, is not backed by precious metals or other commodities but relies on the fact that it is accepted by a group of consumers and merchants whose transactions are vetted by one another on a volunteer basis.

To obtain bitcoins, users can buy existing coins from a participating company—the currency has traded both above and below the value of a U.S. dollar—or try to win a batch of 50 newly-minted bitcoins by first solving a cryptographic puzzle with proof that other users can evaluate. The puzzles are generated by an algorithm designed to make the challenges solvable at a rate of once per 10 minutes, thus establishing a steady rate of coin “creation.”

Among other methods, the coins can be redeemed for prepaid Visa cards, PayPal credit, cash shipped via mail, digital currency used in the online site Second Life and precious metals and coins, including in pounds of pennies, according to https://en.bitcoin.it/wiki/Trade , which is hyperlinked from the organization's Web site.

The coins can also be traded between users or spent with the approximately 100 vendors currently accepting the digital money, including electronics dealers, clothing retailers and online bookstores. Among those accepting the currency are a handful of merchants purporting to sell psychoactive drugs, including heroin and LSD, and over a dozen online gambling Web sites, according to the Wiki page.

A statement on Bitcoin's Web site contends that "sometimes you just want to send money from A to B without worrying about limits and policies."

Like cash?

Checks against misuse are already built into the system, which operates as a "pretty loosely organized open source project," said Andresen, in his interview with EconTalk.

Because the software is open-source and money movements are made via a public platform that anyone can scrutinize, users have the ability, and the incentive, to check whether their peers have engaged in suspicious activity, or have tried to game the system, he said during the interview. Currently, between 5,000 and 10,000 individuals participate in the project, Andresen told EconTalk.

"Like cash, Bitcoin can be used for good, and it can be used for evil," according to Jeff Garzik, a Bitcoin developer and creator of www.BitcoinWatch.com, a Web site that follows Bitcoin's financial trends. Since transactions are public, and thus traceable, the currency is "slightly less anonymous" than cash, he said.

"In practice, this provides anonymity for the average transaction, but a government with subpoena power and the ability to perform statistical analysis may be able to track illicit bitcoin activity with a higher success rate than with hard cash U.S. dollar transactions," said Garzik.

"Every bitcoin transaction ever made is public, and the life of every bitcoin is fully recorded in public for all to see," said Garzik, referring to http://www.blockexplorer.com , a Web site that tracks each transaction by unique number. Yet penetrating beyond the number to the initiator of the transaction "would be the difficult part" of an investigation, he said.

Still, court orders may be served to bitcoin exchanges, users and other operators, ordering them to "ban" specific bitcoins if needed, he said.

Nothing stopping them

Even in instances when wrongdoing is discovered, the organization's decentralized nature would make it "extremely difficult for the government to regulate, and may require them to prosecute only individuals, rather than the system as a whole," according to Tom Kellerman, vice president of security awareness and government affairs for Core Security Technologies, a Boston-based data security firm.

Although both cash and bitcoins offer a degree of anonymity, they differ in one key aspect: how quickly they can be transported, said Kellerman. Like remittances, bitcoins can be sent across borders rapidly and with little chance of retrieval, he said.

"The speed difference is roughly that of e-mail versus conventional mail," he said.

"It avoids every reporting requirement out there, which is scary, and it's open source software, meaning someone could start their own currency, which is also scary," said Arnie Scher, Director at the New York office of BDO consulting and a former compliance manager at JP Morgan Chase.

"There's nothing preventing drug dealers from starting their own bitcoin currency - nothing," he said.

Already regulated?

In response to a request for determination for Bitcoin USA, an independent digital currency exchange company affiliated with the project, the U.S. Treasury Department referred the business to a January 2009 Financial Crimes Enforcement Network (FinCEN) ruling defining digital currencies as prepaid value providers.

Bitcoin USA eventually closed, in part, because "identification requirements stopped people from completing the registration completely," according to an April 9 post on Bitcoin's main public forum. "I had a total of three people upload their documents out of all the registered people," according to the post, which cited FinCEN's ruling.

Other bitcoin exchanges have been following the FinCEN ruling "in an ad hoc manner, in an attempt to proactively comply with AML regulations," said Garzik.

Under U.S. regulations, digital currency companies are prohibited from selling or redeeming more than $1,000 per person per day without registering as a money services business (MSB) with FinCEN, and filing suspicious activity and currency transaction reports.

Registering with FinCEN would bring Bitcoin-affiliated businesses under the Bank Secrecy Act examination authority of the Internal Revenue Service, which oversees 200,000 MSBs, according to a February 2009 report from the U.S. Government Accountability Office that also noted numerous logistical hurdles the agency faced in overseeing the companies.

But even if bitcoin exchanges with high-value transactions register with FinCEN, the IRS' monitoring of Bitcoin's vendors would be "unworkable" in part because of confusion over "which part of the system to regulate" and because the IRS is already stretched thin with its current roster of MSBs, said Scher.

Spokespersons for the IRS and FinCEN declined to comment on the organization. Nakamoto and Andreson did not respond to e-mails seeking comment by press time.

Room to grow

Currently, most bitcoin users keep their transactions below the $1,000 threshold because they would prefer to avoid reporting requirements, said Garzik. "Once Bitcoin grows larger, and can profitably support MSB-registered exchanges, those will flourish," he said.

The fact that the digital currency remains relatively small is also a sign that whatever potential problems Bitcoin may face, it's still too early to worry about large-scale money laundering, said Scott Dueweke, a senior associate at Booz Allen Hamilton who studies alternative payment systems.

"When you're talking about laundering drug profits, you're talking about millions - even billions - of dollars, and that's too big of a fish for a model like Bitcoin to fry at this point," said Dueweke. A laundering scheme involving Bitcoin would still need a "complicit or willfully ignorant financial institution to move anything in useful amounts," he said.

Other digital currency businesses have met with skepticism from federal regulators.

In July 2008, the three principal directors of E-Gold, a digital currency backed by gold, pled guilty to money laundering and charges of running an unlicensed money transmitting business. The Treasury Department fined the business nearly $3 million in October 2009 for helping others evade Iran and Cuba economic sanctions.

In February 2006, New York indicted three Western Express International executives for exchanging up to $25 million in international criminal proceeds for digital currencies, including digital gold acquired from the purchase of goods with stolen credit card numbers.

"We are concerned that mechanisms such as the Internet increasingly can be used to conduct business within the United States from a foreign jurisdiction," wrote FinCEN, in a May 2009 ruling. "Use of such mechanisms may avoid both our regulations and the regulations of the foreign jurisdiction," the ruling said.

And so it begins....

Damn,  it happened much earlier than I thought.

Bitcoin is finally acknowledged.  And even feared.



Are they talking about bitcoin.com here?  This stuff is not related to bitcoin.  At all.

Loosely Managed Digital Currency Could Be Avenue for Crime Freedom That's Hard to Block

There, fixed. Crime is done with guns and violence not with money and trading.
Of course the establishment is much more afraid of freedom than any real crimes.

Hilarious. Thank you. :D

They got Gavin’s name wrong by the way.

If you use open source software youre a terrorist.....

It is related to bitcoin; it is referring to this: http://bitcointalk.org/index.php?topic=5627.0

Altruistic what?

THEY are the worst criminals.  They declare wars with people's tax money.  They conterfeit money.   They prevent people from doing business freely.


What criminals are they talking about?  Drug dealers?  Don't care.   Weapon dealers?  Don't care either.  Terrorists?  Pff,  I don't buy that.

Well, at least this sentence is a nice tribute to Satoshi's work.

That statement is from:
  http://www.weusecoins.com/
  and the meaning of that might have been taken out of context:
  "More complex types of transactions can be built on top of Bitcoin as well, but sometimes you just want to send money from A to B without worrying about limits and policies."

http://k.min.us/ikJfku.jpg

i honestly can't tell which is which

We all apparently support the "mass illusion" that is called the US Dollar when it is backed by nothing (other than a really big army). Governments only become suspicious and threatened when other groups voluntarily create and support their own "mass illusion", because they view it as competition to the THEIR illusion.  Bitcoin, more than anything, is a study in sociology and human nature.

Okay. A $5 million sideshow warrants the investigative efforts of a Scotland Yard expert? And by the sounds of his comments he's spent enough time "looking into" Bitcoin to speak in a quite reasonably informed manner. He probably already reads this forum and has tried to do some transactions, maybe even in contraband already ...

From the number of people, establishment types who watch these kinds of things, who are already up to speed with what Bitcoin can do, I'd say they are worried. They are watching their gravvy train and free lunch on taxpayer dime fading away, who needs regulators when you can't regulate?

It's gonna be priceless watching the bankster's shit sandwich central bank fiat NWO monetary system unravel in real time.

Yeah, the tone of the article is really like "guys this things is out of our control"

I get really worried about this. But I try to rationalize it.

Since bitcoin is highly decentralized what is the worst case scenario?

A former Scotland Yard expert. I'd assume, since he's also worked for Microsoft, that he's now a consultant, and hence paid to have an opinion. I'll be more worried when serving officers with the City of London Police comment openly, as they specialise in financial "crimes" much more than the Metropolitan Police.

Where did this article come from?

It's a news item at moneylaundering.com (http://www.moneylaundering.com/) (right hand side, top). Registration required, hence (I assume) why it was posted here with permission.

I feel like registering, in case there is a forum or a comment space associated to this article.  Is there?

A full and complete byline was included with the article.

MoneyLaundering.com keeps its articles behind a paywall, so special permission was needed to post it here.  You can see the article right now on the front page of MoneyLaundering.com, in the right-hand column ("News").

Yes, but the URL for the article (http://www.moneylaundering.com/News/Pages/117102.aspx) was not included.

Eh...this isn't the worst news in the world. Sounds like an eye is being kept on it, is all.

On a side note, while I can certainly understand freedom and openness and a sustainable currency, pissing off the US Government is not high on my to-do list. At least not blatantly pissing them off. ;)

This is a really bad thing for the overall bitcoin legitimate economy, not so much for the money launderers.

If the exchanger is in possession of a badcoin, looks like they'll have to eat it. If the legitimate user is in possession of a badcoin, they'll eat it. And while exchangers can put a price on the risk (or remain informed of newly-outlawed badcoins via a centralized list or somesuch), end user's won't be expecting that to happen - why would they? They're legitimate and law-abiding, it's the equivalent of a police officer running up to you on the street, demanding a $100 bill from your wallet on pain of arrest, stamping BEARER SPENDS BLOOD MONEY - BEWARE on it, handing it back and saying, well, good luck with that.

Money launderers are still functioning. Unless the enforcement will can be found that will cover dozens of countries and hundreds (thousands?) of exchangers to grapple with badcoins, they'll just move them to jurisdictions where such laws don't apply. And there they will re-enter circulation until they eventually end up with an exchanger or user who is unwilling to break the law.

I wonder if there's a way around this mess.

I'm not sure it is really possible to ban a bitcoin address, at least not in any practicle way.

Say I own a "bad" bitcoin address with 100 BTC on it.


If my bitcoin software tries to use it in a transaction to a currency exchange or anything alike, then police will be called and I'll go to jail, or the transaction will be refused.

I think the best solution for me is just to transfer it to several other bitcoin address, mix bitcoins in those address with "legitimate" bitcoins, do this again and again, and finally merge everything in a brand new address (or just leave everything in many different addresses, doesn't matter).

Basically, it's what the bitcoin launderer service do, I think it is pretty much efficient enough, and I doubt anyone can do anything to prevent anyone from doing this.

It is not legally "money laundering" as Bitcoin is not legally recognised as money but virtual commodity tokens. How can it be?

They are in a chicken and egg until they decide to go whole hog and declare Bitcoin as a bonafide currency, by which point it will be too late.

Good point.

Honnestly I do think a bitcoin address can correctly be called "bitcoin account", although it is a bit misleading.



But really, a bitcoin address is technically precisely this:  an account in the block chain.

All,

Thanks for reading. I wrote this article, I worked hard to give it balance, citing three Bitcoin sources, and including Satoshi Nakamoto's take on the current global system of payments posted in a respected blog a couple of years back:

“The root problem with conventional currency is all the trust that's required to make it work,” Nakamoto wrote in a February 2009 blog on P2P Foundation. “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

Jeff Garzik's analysis:

“Like cash, Bitcoin can be used for good, and it can be used for evil,” according to Jeff Garzik, a Bitcoin developer and creator of www.BitcoinWatch.com, a Web site that follows Bitcoin’s financial trends. Since transactions are public, and thus traceable, the currency is “slightly less anonymous” than cash, he said.

I think Nakamoto's and Garzik's statement here reflects a lot of what I'm reading in this forum. From an EconTalk article I also cited Gavin Andresen's explanation on how Bitcoin's network of users polices the payment system.

My point is that our publication does not take sides. We frequently break stories on the criminal behavior of banks, as well as U.S. law enforcement's eavesdropping on Swift financial messaging; laundering of dollars flowing from drug cartels (Wachovia) and the stashing of funds pilfered by corrupt Afghan leaders from their own central bank in Kabul (hundreds of millions of stolen funds stashed by two major U.S. banks headquartered in New York).

It's safe to say that my editors and myself, as well as all of my sources, were floored by the novelty of this invention, which I liken to something out of a Phillip K. Dick novel. That being said, I reported what many knowledgeable sources said were money laundering vulnerabilities.

Thanks,
Colby

It is indeed one of the best quote from Satoshi (http://bitcointalk.org/index.php?topic=5141.0).  I personnaly think you should have quoted it more extensively.

In particular, I whish you had quoted this part:


It would have been fun to think about banksters reading this.

Yes, but which Dick novel?  If it was The Man in the High Castle someone would need to write some code to toss bitcoins and generate an I Ching hexagram from the result.  If it was Do Androids Dream of Electric Sheep? one of us would be asking you what a tortoise is.¹


1 = Yes, I know that scene was only in the film.

There is a link at the very top  ???

I was floored too, then elated.

Not sure what you mean by "money laundering vulnerabilities", maybe it is strength that ALL trade can be private in this currency rather than a vulnerability?

One man's terrorist is another man's freedom fighter. Ghaddafi's fighting Western Bloc forces alongside rebels with allegedly "Al Quaeda" amongst them, Things are pretty messed up already so deciding who are the bad guys anymore is arbitrary and those in power abuse it, cutting off commerce because some meglamaniacs want to play god and tell everybody what they can and can't trade is a blind alley for humanity, nothing surer. We are on the threshold of a new enlightenment, if the power-brokers can let go peacefully.

Im sorry you must have wrote that incorrectly because the title of your editorial says otherwise.

I was initially infuriated upon reading the title and most of the article.

The conclusion I got was that you overwhelmingly sought to demonize bitcoin.

I think you should work a bit on that not picking sides thing.

I was initially infuriated upon reading the title and most of the article.

What in the article did you find to be factually incorrect or misleading?

Colby's article was probably about as balanced as you can be when the immediate, direct audience is the anti-money laundering crowd and those tasked with compliance. I think it's great that the web address is moneylaundering.com instead of antimoneylaundering.com.

Money laundering is a pejorative term to begin with because it insinuates that the participants do not have certain inherent rights to financial privacy. The Jews "laundered" their money to Switzerland in order to escape Hitler's holocaust.  Come on, people!  Financial privacy is a fundamental human right that has been consistently eroded and violated by governments.  We must take a step back and comprehend that "secrecy" does not mean "concealment", but rather that "secrecy" means "privacy" in its most basic sense.

I thought the article pretty good actually. It makes points made on these forums many times, related to AML regulations and financial privacy. If you don't like the way this article paints BitCoin, consider that you'll see far less balanced and accurate pieces from other publications in future, guaranteed.

There has been a lot of talk about how governments could effectively regulate BitCoin given their mandate to fight crime. It's definitely worth discussing that more. Banning BitCoins at the merchant or exchanger level is a non-starter because coins can be split and merged arbitrarily. Attempting to ban an address across all economic actors would cause "badness" to ripple outwards transitively eventually causing system collapse.

A much more workable approach is to freeze assets at the miner level. I posted a discussion of what I mean here:

  http://bitcointalk.org/index.php?topic=5979.0

Amen to that, +1.

Let's bring back the "radical" old idea that a man's financial affairs are his alone, private and nothing to do with the state.

The facist creep away from economic freedom has set back advancement of humanity immeasurably in untold ways.

+10

+1   (don't want to inflate the rating so I stick to +1, not +10 nor +100)

+10
[/quote]
+1   (don't want to inflate the rating so I stick to +1, not +10 nor +100)
[/quote]

Actually, since Bitcoin uses fundamentally a deflationary economic model, shouldn't we be writing "-1" when we like something?

Bitcoin is not fundamentally deflationary. Today, there are 7200 Bitcoins introduced each day. In 80 years, only 0.01 Bitcoins will be introduced daily (math might be slightly off). If by the time inflation reaches zero the economy is still growing, we will continue to experience falling prices, but not monetary deflation.

Long story short, it would be more like .1, .01, .001, .0001, etc, but never go negative.

I have some questions/comments regarding this article.


I found this quite hilarious, given Satoshi's apparent purpose for creating Bitcoin, which seems to be to circumvent bank and government controlled financial systems.


What do email addresses have to do with Bitcoin?


I feel like they are misunderstanding what Bitcoin is. There is no organization, other than that which is spontaneously formed by the community. Gavin (in my opinion) is a principal only in the sense that he is filling the role, not that he was appointed or has an official title. (For what its worth, I think he's doing a great job.)


People just don't understand that all currencies rely on the fact that they are accepted by a group of consumers and merchants.


How did he get that idea? Would a court have authority to order an exchange to do such a thing? What does it even mean to "ban" specific Bitcoins?


This is my favorite quote of the article. If drug dealers started their own currency, presumably only drug dealers would use it, and it would be a dead giveaway. They need to be part of the main Bitcoin network if it is to be useful at all. Like with Tor, if only spies are using the software, it kind of defeats the point.

Well, for a real commercial transaction, at some point a bitcoin address has to be communicated.  And email is often used.  So, in order to make sure your transactions remain anonymous nor can they be related one to another (thus allowing evaluation of your total income), you have to use different email addresses, not just different bitcoin addresses.

But basically the guy could have said "by using internet in an anonymous way,..."

I think that's what he meant.  I doubt he confused bitcoin address with email address.