Cryptocurrencies And Criminal Activity: What Should Be Done About Bitcoin?

In 2009, computer programmer Satoshi Nakamoto created an open source peer-to-peer digital currency known as “Bitcoin.”  As such, Bitcoin has no physical manifestation and removes the need for third-party intermediaries (e.g., PayPal or Visa).  In addition, because it is peer-to-peer, its controlling computer code is open to public view.  However, the unique feature of Bitcoin is that it is the world’s first completely decentralized digital-payments system, meaning that no government or central authority has control over Bitcoin.  Businesses and venture capitalists have both taken notice of the potential promise of Bitcoin, and so too have criminals.

Considered a “cryptocurrency,” each Bitcoin is secured from third party access, encrypted with its own identity, and recorded on a “blockchain,” or decentralized public ledger.  While this ledger can be viewed by others on the network, it can also be used pseudonymously: revealing no personal information of those involved in the transactions.  Instead, the ledger only reveals whether the buyer has the correct amount of Bitcoin in order to purchase, and that he or she has in fact transferred the appropriate amount to the seller.  While interactions are direct, no personal information is revealed because identities are encoded.

Further, digital currencies had always been managed by a central controlling authority.  However, Bitcoin is a private system: there are no financial institutions involved in any Bitcoin transactions.  Instead, all transactions are completed by the users of the Bitcoin system.  With no third party intermediary, the buyer and seller complete transactions directly.   

Bitcoin is believed to have many benefits for both consumers and businesses.  Among these benefits are lower transaction costs and increased privacy.  Bitcoin eliminates the third party intermediary, and allows two consumers to exchange money for goods directly.  In most instances, this eliminates the additional transaction fees collected by banks and credit card companies, allowing goods and services to be offered at lower prices.

However, many of these features are viewed as a golden opportunity for those seeking to engage in criminal activity.  In many ways, Bitcoin has revolutionized the criminal world.  The greatest black market that ever existed cannot be found in the real world, and the primary currency being used there – Bitcoin -- cannot be controlled by any government.  As a result, individuals are able to make quick, secure, illicit purchases – on demand.

For example, twenty-three year-old Daniel Brian Springer III used the virtual currency to purchase Ecstasy from China.  Springer spent the equivalent of $2,000 in Bitcoin on the drug and intended to sell it for profit.  Springer and his father pleaded guilty to a federal drug conspiracy charge.  In addition, a twenty-four year-old New York-based entrepreneur was arrested for money laundering when he helped individuals acquire Bitcoins for illicit uses.  Just last week, two Miami men were arrested in Florida for the first state-law charges involving the illegal use of Bitcoin for the purpose of money laundering.  While seemingly uncommon, these arrests only scratch the surface with regard to the criminal uses of Bitcoin.

In October 2013, the federal government shut down the website Silk Road, and charged its alleged owner with narcotics trafficking, computer hacking and money laundering.  With nearly 1 million registered users, the website had become the go-to black market for all sorts of legal services, and had generated revenue worth more than 9.5 million Bitcoins (valued at nearly $1.3 billion).  When commenting on the website, FBI spokesman noted that “Silk Road has emerged as the most sophisticated and extensive criminal market place on the Internet today."

What, then, are governments to do when faced with a decentralized digital currency that is nearly difficult to track and even more difficult to control?  Some governments, such as Russia, have chosen to ban the digital currency and have declared its use illegal.  Some recommend that, even in the face of this criminal activity, policymakers should resist the urge to call for restrictions. 

Jerry Brito, a law professor and scholar at the Mercatus Center at George Mason University, has suggested four reasons why regulators should resist such an impulse.  First, he notes that “as a technology, Bitcoin is neither good nor bad; it is neutral.”  Paper money, such as the US dollar, can be used for illicit purposes, but no one considers outlawing the dollar.  Instead, policymakers should focus on prohibiting their illicit uses.

Second, Bitcoin is also used for legitimate purposes, and any attempt to restrict Bitcoin use will only harm these purposes without affecting the illicit uses.  Because it is decentralized and does not require third-party intermediaries, it is nearly impossible to shut down.  As a result, prohibiting its use will not end the use of Bitcoin, but will instead affect those law-abiding citizens using Bitcoin for legitimate purposes.

Third, Brito notes that “if Bitcoin were prohibited, the government would forego the opportunity to regulate intermediaries in the Bitcoin economy, such as exchangers and money transmitters.”  Keeping Bitcoin legal will give the government an opportunity to have a role in regulating its use.  Prohibiting it, as already mentioned, will ensure that it will only be used for illicit purchases.

Finally, prohibiting the use of Bitcoin on the basis of potential illicit uses could leave the United States at an international competitive disadvantage.  Even if the US decided to ban Bitcoin altogether, it is likely that many other countries would do the same.  Worse yet, this would leave other nations to play the central role in the development and use of Bitcoin, as well as other cryptocurrencies.  As a result, the United States could fall behind in what may be the next-generation of payment systems.

Cryptocurrencies, such as Bitcoin, open up a potential world of criminal arrangements that are far more sophisticated and untraceable when compared to those arrangements of the past, and there is little doubt that the technological advances of the 21st Century will lead to more developments that can be used for both legitimate and illegitimate purposes.  However, the potential dangers posed by these advances should not be met with prohibitions. 

In the future, especially in light of the recent arrests surrounding the use of Bitcoin, it will be important for all law practitioners to have some understanding of the growing prevalence of cryptocurrencies.  Furthermore, policymakers should be willing to accept the innovations of tomorrow, and work to dissuade criminal activity beyond general prohibitions of the tools used.  Current criminal laws already prohibit the acts that have gained most of the attention of those fearing the use of Bitcoin.  And because it is nearly impossible to shut down Bitcoin, criminal prohibitions on its use will only affect those law-abiding citizens using Bitcoin for legitimate purposes.  Pulling the plug on Bitcoin would be no more effective than attempting to ban the Internet because of cybercrimes.

Meghan K. Zingales

Senior Editor, Criminal Law Practitioner

Image by Satoshi, via Wikimedia Commons.