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How bad is Bitcoin crime?

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As its value has skyrocketed, cryptocurrency Bitcoin has emerged from tech nerd obscurity to become a topic of mainstream conversation.


But despite this much wider recognition, Bitcoin’s origins remain shrouded in mystery and it is still regarded with suspicion by law enforcement groups and many financial watchdogs.


Developed in the early 2000s as a peer-to-peer transaction mechanism by the probably pseudonymous Satoshi Nakamoto, it quickly gathered a following of mathematical and computer geeks.


The lack of transaction traceability also rapidly attracted criminals such as illegal arms dealers, drug traffickers, money launderers, kidnappers and blackmailers.


Ever since, Bitcoin and other cryptocurrencies have largely remained in a digital space beyond law enforcement, out of the reach of financial regulators.


But with the rise in the value of cryptocurrencies – and fears of a bubble market that could threaten the stability of financial systems if left unchecked – policy makers are increasingly turning their attention to e-money and considering checks and balances that will deter their criminal use.


Crime doesn’t pay?


You don’t have to dig too deeply to find out why Bitcoin attracted organised crime.


To start with, the addresses of Bitcoin users are not linked to individuals or corporate identities, and the people or groups behind them are hard to trace. Blockchain, the  technology that underpins the e-currency, verifies and keeps a permanent record of all transactions, which lets users know exactly what they’ve been paid and when, and Bitcoin transactions, once fully confirmed, are irreversible.


Additionally, the idea that the currency – like other e-variants including Ripple – are encrypted gives users an extra sense that their transactions and identities are secure. And if there is one thing criminals love, it is remaining anonymous.


The actual criminal market value of e-currencies is hard to estimate accurately, and some experts reckon the only thing driving their use and growth is that they provide a convenient payment service to criminals.


Recent criminal activities that have been rewarded in cryptocurrencies include a reported $1 million ransom for a Bitcoin dealer kidnapped in Ukraine in December 2017, while the US government is to sell 512 Bitcoin and 513 Bitcoin cash – a spin-off of the original currency – seized from drug dealers and money launderers. At the time of writing, the value of the Bitcoin alone was more than $7.5 million.


The most famous convicted bitcoin criminal, Ross Ulbricht, who used the currency for illegal drugs sales on the “dark web” Silk Road website, had a personal fortune of at least $28.5 million in Bitcoin that was later seized by the FBI. Law enforcers estimated Silk Road processed transactions totaling $1.2bn between 2011 and 2013.


After Bitcoin


But Bitcoin is becoming a risky proposition for criminals. To start with, its volatility and the risk it is now a “bubble market” waiting to burst will decrease its attractiveness, while law enforcers have become better at tracing criminals trying to cover their tracks.


It is easy to forget that a digital footprint is harder to erase than a real one and law enforcement is becoming more adept at using the technology that underpins Bitcoin, blockchain, which verifies transactions, to trace these to other publicly available data.


As a result, criminals are reportedly moving to other currencies that have features that make them harder to trace. According to European law enforcers Europol  other cryptocurrencies such as Monero, Ethereum and Zcash are gaining popularity within the “digital underground”, although Bitcoin is still favoured by cyber criminals.

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A matter of regulation


Worries about the sudden growth in value of digital currencies and how they are traded are leading regulators to focus more tightly on some aspects of how they are traded, but any global context for monitoring them for illegal activities is still in the early stages.


Both the European Union and the British Government have announced plans to regulate them more tightly so they cannot be used for money laundering and tax evasion, with legislation expected soon.


Under the EU’s plan, online trading platforms will be required to carry out due diligence on customers and report suspicious transactions, while the UK is amending its anti-money-laundering directive to ensure e-currency transactions are overseen by regulatory bodies.


The Al Capone trick


Meanwhile, French economist Thomas Piketty, has suggested that the EU and US should create a world register of financial assets, which would trace exactly who owns what, to help combat tax evasion and fraud. Such a register could include electronic currencies.


In the meantime, governments around the world already have a proven weapon against criminals paid out in e-currencies: income tax. Notorious Chicago gangster Al Capone escaped justice for all manner of crimes from bootlegging to murder, but was finally convicted and sent to prison for tax evasion in 1931.


The world may have to turn to old-fashioned, tried-and-tested remedies to keep the bad guys in check while policy makers develop a strategy for tackling cryptocurrency crime.

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