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Shadow currency: how Bitcoin can finance terrorism

May 5, 2013   ·   15 Comments

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This week, the “underground” website known as “the Silk Road” made headlines when a DDoS attack brought the website’s servers crashing down. The Silk Road is known as the black market of the internet, a site where the anonymous browser can obtain a wide range of illegal substances. The site is accessible only through a Tor network (a software protocol that reroutes traffic through hundreds of servers and computers to conceal identities).

Most interestingly enough, the Silk Road’s transactions are not in dollars or euros, but in Bitcoins. Bitcoins are a decentralized electronic currency that is free from government control or interference. Recently, Bitcoins have traded as high as $260 USD, before a crash brought them back down to roughly $150 USD per coin. Libertarians and anarchists hail Bitcoin as the herald of a free, internet-based economy with minimal regulatory interference, but Bitcoin has a potentially sinister side as well.

This “crypto-currency” has already been the inspiration for several online robberies where cyber-thieves hack into a computer to steal the vital electronic information at the heart of Bitcoins. Beyond cyber-larceny, the secrecy of Bitcoin poses unique, and even frightening security challenges for a world that has yet to fully understand the problems posed by the internet age.

For example, consider the various national and international anti-money laundering statutes. These laws seek to prevent the illegal flow of currency between criminals, terrorists and other unsavory characters. But these laws require that there are actual shipments of cash between countries and criminal networks (or at the very least funds transfers between banks).

The Bitcoin protocol promises to remove the fundamental risk in money laundering: the risk of interception and detection. By using a monetary exchange like Mt.Gox, criminals can buy Bitcoins at the market rate and then they can sell to a confederate across the world at a higher price, effectuating the exchange of money. Even if Bitcoin performs poorly, it nevertheless provides an opportunity to exchange money via the anonymous P2P network.

The Silk Road can make Bitcoin even more insidious.  While the Silk Road, as site policy, forbids the sale of destructive items (stolen credit cards, explosives, etc.), it could be a matter of time before a similar website arises. Then, the firearms laws of the Western world will become virtually useless. Guns can be disassembled, and their parts shipped piecemeal through the postal service. Even substances like Tannerite could be bought and shipped across the globe, providing new opportunities for destructive capacity. If this alone is not enough to compel attention to the growing black market on cyberspace, consider the following.

Bitcoin can make security and law enforcement measures less effective by simply removing the possibility of detection. Terrorist cells or lone wolf operators can get supplies and currency by using the anonymous underbelly of the internet. Government agents are able to detect terrorists through logistical networks (Usama bin Laden was found through his courier). Counter-terrorism, for better or worse, succeeds when it has human networks to exploit. Terrorists need accomplices, handlers, recruits, and suppliers. Sooner or later, one of the individuals in this vast network becomes frightened or disillusioned with the cause and becomes a government informant. Remove the extended logistical network that exposes terrorists to investigation at a critical juncture (where their plans are neither theoretical nor well-supplied enough to implement) and there may be grievous results.

So what legal paths can be utilized to make sure such a development does not occur? The easiest and most effective way to deal with this threat is to make sure that it never comes into fruition. The Silk Road is difficult to take down given its place within the “Deep Internet”, but an arms-trading counterpart may be more susceptible to infiltration and dismemberment.

The second option spells doom for electronic currencies. Much like domestic laws that flag large banking transactions, governments and the private sector can collude to run Bitcoin out of the currency market. Simply put, laws could be passed that force banks to reject bitcoin transactions. Thus, even if Bitcoins continue to be traded, there is no way to turn them back into real currency. The final approach would require nations to expand the police power of domestic and foreign intelligence agencies on the web. While there is a visceral aversion to government personnel infiltrating internet communications, the ultimate security benefits may outweigh the cost to certain freedoms.

Bitcoin promises to usher in a new age in economic development. Ultimately, Bitcoin’s founder Satoshi could try this grand experiment again if Bitcoin fails. Regardless of what may happen, the raw power of internet-based economic systems is not going away any time soon. It is now time that the law catches up.

Photo Credit: bradipo

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Terence Check

Terence is a current Juris Doctor (J.D.) candidate at Cleveland-Marshall College of Law where he is specializing in international and comparative law. He is also the current Editor-in-Chief of the "Cleveland State Law Review", a Top-100 ranked general subject journal of legal scholarship. Terence also holds a BA in History, specializing in NATO and European Security. He currently works for an international property management corporation in Cleveland, Ohio, USA.

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9 comments
SeanBrizendine
SeanBrizendine

I have to check our FinCEN requirements but we should within reason be able to supply or most likely refer clients to reputable coin sellers that can supply what is needed for little above the current market price coinage fee included along with initial client verification fee. Those exchanges are risky to leave your money in and rarely do you get your coins as fast as most would expect. Bitcoin in itself seems to survive best in a peer to peer structure than corporate. Trust must be built and has to start somewhere.     

http://bitcoinconsulting101.wordpress.com



michaelgoldstein2004
michaelgoldstein2004

Interesting. Perhaps you should write an article on outlawing the US dollar, since it is the currency of choice for drugs and crime. Global drug and arms trade is 99% in USD. Bitcoin is a drop in the bucket. Just this week, president Karzai in Afghanistan said he had received million in cash from the CIA. If you are really concerned about safety, then focus on the USD since it facilitates much more crime than bitcoin could ever. Bitcoin has a 1.1 billion dollar market cap. How can you seriously claim it's a problem when the global drug trade measures in the trillions per year? 

mmeijeri
mmeijeri

You can't stop people from trading cash for BTC. Things like Ripple.com and nashx.com make this even easier.

Biggly
Biggly

"Thus, even if Bitcoins continue to be traded, there is no way to turn them back into real currency." So let me get this straight, a digital currency that openly displays every transaction ever is impossible to track, yet somehow the banks will know that if I send my friend Bob $500 that I'm buying some bitcoins with that money? 

In truth, the favorite currency of international arms and drug dealing is the $100 bill, and many banks wilfully engage in "laundering" such money. 

Bitcoin is only a threat because no particular government profits from printing it and no banks profit from people sending money to each other. Saying bitcoin "can finance terrorism" is like saying "money can finance terrorism!"

Well.. yes. If you have a lot of it, and know what to buy and who to buy it  from - in which case the currency used is almost entirely irrelevant.

paulsnx2
paulsnx2

The tl;Dr here is, "Banks keep us safe (just ignore when they launder cash for terrorists), so don't use a technology that eliminates the massive bank tolls on transactions, and the decimation of value of curencies by the central banks."

paulsnx2
paulsnx2

What fud. Bitcoin trades overt control for a permanent record of transactions open to all.

Most terrorism today funds it self in totally untraceable dollars. Should we eliminate printed cash?

Bitcoin is a terrible idea for terrorism because just a little injection of covert funds can expose the entire finances of the terrorists. When government really cares about crushing an organization, a public record of transactions is a "gold mine" of data.

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