Since I began research into virtual, digital or crypto-currencies, media coverage of how they are used — to buy cars and cufflinks as well as malware and heroin — is generating interest in the blogosphere and beyond.
As with any new value exchange system, there is concern about how it will be used to launder the proceeds of crime or perhaps to fund terrorism.
The Liberty Reserve case, artfully busted wide open by the US Treasury and friends, has shown exactly how virtual currency exchanges and virtual currency itself can be used to for criminal ends. Liberty Reserve was used in India to pay a ransom demand for a kidnapped man; the cybercrims behind the US$45m prepaid account theft arranged the smurfs to pay the proceeds into a Liberty Reserve account, according to the US Treasury’s findings.
The only reason we know about these cases is because each connected transaction left an electronic footprint, which strung together led investigators back to the source of funds. The perpetrators of the prepaid card heist have already been arrested in Russia and the Ukraine. There’s no further news from India about the fate of the Rajasthani kidnappers but suffice to say Indian justice can be rough once it is meted out.
Small change
A fantastic story on KrebsonSecurity ‘blog sent to me last week detailed exactly how the author has become the victim of an attack from the hackers and online pirates he monitors and writes about in his blog. One particular group has taken offence to his efforts and attempted to get him arrested for drug possession. They managed to scrape together 2 bitcoins (worth approximately US$208 today) and bought some heroin on Silk Road which they mailed to Krebs’ home address, at the same time cooking up a plan to inform the local police of when it would arrive.
Krebs was one step ahead of them. He read about their dastardly plan in online forums and set a trap to catch them and alerted the local police of the campaign they were waging against him. The result is this fascinating read and probably a few aggrieved hackers. Krebs 1 Cybercrims 0.
Financial crime and bitcoins
The fact that they used bitcoins for this transaction shows only the international reach of the currency. How else could people in Russia directly target an individual in the US? Had the hackers been in the US, they could have bought the heroin with cash and sent them to the author’s house.
Using bitcoins can be as anonymous as using cash. Once the instrument has been passed on, it belongs to the bearer and there is no record of the previous bearer’s identity. There is, however, a record of the transactions made contained in the block chain. The obvious fear about the abuse of bitcoins by money launderers and terrorist financiers stems from its anonymity of transactions. If a drug producer in Bolivia wanted to sell cocaine directly to a buyer in Florida for example, he could go online, find a buyer and make the exchange in bitcoins. The producer could then buy a house using the bitcoins, provided he could find a seller willing to accept them.
Money launderers used the Liberty Reserve’s virtual dollars and euros to clean the proceeds of crime, so they are probably already using Bitcoins to do the same. This does not make bitcoins a bigger threat than dollars, for example, but it should make governments more willing to understand and work with bitcoin.
Governments around the world are starting to take notice of how the businesses who operate and exchange ‘virtual currency’ function and their vulnerabilities. We are starting to see more regulation or talk about regulation when it is exchanged for dollars, yen, euros or reals for example.
Various reports attest to this. A bitcoin exchange failed to get a license to operate in Thailand[6] perhaps because the government does not yet understand the currency. BaFIN, the German financial services regulator, has commented on the use of bitcoin’s in trade. Bitcoin.de – an exchange – should be registered with BaFIN as a financial intermediary from August 9th. In May, the US Department of Homeland Security froze the dollar bank accounts of Mt. Gox subsidiary company. Mt. Gox is the biggest bitcoin exchange, managing and estimated 52 per cent of the bitcoins in circulation. Although the exchange is based in Japan, the legal entity which it used to transfer fiat currency came under fire from the US government in Spring 2013 for failing to obtain an operating the proper operating licence. Mutum Sigillum LLC needs a money service business licence as under US law, crypto-currency administrators and distributors must be treated like MSBs and subject there for to the Bank Secrecy Act’s provisions on anti-money laundering and counter-terrorist financing. As of July 2013, the firm had applied for the correct licence and the currency keeps moving. Governments are not panicking about the threat of bitcoins but do appear to be paying the crypto-currency more attention.
Virtual, digital and crypto-currencies bring nothing ‘new’ to money laundering, just a few new channels for launderers to use.
Financial Crime Asia 