Corruption and Virtual Currency – We Need Whistleblowers

Posted by Shannon Walker

on November 27, 2013

graphic bitcoin accepted hereThe emergence of virtual currencies such as Bitcoin has democratized money and encouraged discussion of the way in which we value it.  However, they are also proving to be the currency of choice for criminals, a fact which emphasizes the importance of adapting the legislation surrounding transactions and money laundering.

Bitcoin was introduced in 2008 and allows for anonymous peer-to-peer transactions.  Because it  is not affiliated with any international bank, it is currently unregulated and unmonitored.  Without an intermediary such as a bank involved in the transaction, Bitcoin payments are quick and untraceable, much like cash.  Because of its anonymity, it acts like ‘pre-laundered’ money and as such is quickly becoming the method of choice for illicit transactions.  Bitcoin has a series of encrypted private computers set up in order to facilitate the movement of funds, and the fact that large sums of money can be transferred anonymously is very attractive to those engaging in criminal activities.  Drug and human trafficking operations have already been found to be relying on virtual currency, and this is likely the tip of the iceberg.

As Bitcoin grows in prevalence and the rate of criminal transactions increases, governments are being forced to look at adapting existing legislation to crack down on the illicit activities facilitated by the currency.  The US FBI has created a Virtual Currency Emerging Threats Working Group (VCET) in order to track the use of Bitcoins and other virtual currencies and prepare a guidance on legislation related to virtual currency.  Although anti-money laundering and banking laws in the US can be applied to virtual currency, their anonymous nature makes it more difficult to put together a case.  Furthermore, any currency must register with the Financial Crimes Enforcement Network and obtain a license to operate within individual states.  However, the encryption of the ‘wallets’ belonging to senders and recipients means it is incredibly difficult for the US Department of Justice to track transactions.

The fact that these currencies emphasize a democratization of money has inspired many to create measures by which this democratization can be preserved.  In fact, researchers at Johns Hopkins University are working on a system that makes Bitcoin transactions truly anonymous.  The head of the study, Matthew T. Green, has stated that he does not mean to encourage criminal activity, but rather protect the democratic tenets that virtual currencies are built on.  This is a difficult notion, as challenges governments’ role in combatting corruption.  Aligning the anonymity associated with virtual currencies with ‘democracy’ suggests that their regulation is in some way a violation of democratic rights and privileges.  However, what is clear is that legislation is required to combat corruption, and must evolve with technology.  As corrupt and criminal activities adapt and utilize new avenues such as virtual currency, so must legislation.  Allowing Bitcoin and the like to remain truly anonymous is facilitating illicit activity, and the only way to combat that and protect those who are impacted is to understand the technology and put necessary laws in place in order to ensure its fair use.

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Sources: E.J. Fagan, “Bitcoin and International Crime” in The Baltimore Sun. Nov. 25, 2013