By Miranda Sumey
Bitcoins have made headlines yet again as of late, this time as the target of a Senate investigation into ‘virtual currency,’ a term that the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) uses to label Bitcoin. The Senate Homeland Security and Government Affairs Committee is working through the Departments of Treasury, Homeland Security, and other agencies to glean information on the potential for regulation of virtual currencies, including Bitcoin. The investigation comes after the issuance of 22 subpoenas by the New York Department of Financial Services to Bitcoin businesses nearly three weeks ago, questioning them about their regulation methods and consumer protections.
Bitcoin, a widely-used virtual currency, is an alternative to state-backed money that over the past few years, has rapidly gained popularity online. Unlike recognized legal tender, Bitcoins are not backed by any government, are not regulated or taxed, and can be circulated sans the use of traditional intermediaries such as banks. Bitcoins themselves have no inherent value: they are the product of complex cryptographic calculations, solved through computationally-intensive “mining” processes. Their value is derived simply from the supply and demand of their online user base. Because they are not regulated, exchange rates for Bitcoins are subject to wild fluctuations: the current rate is somewhere around $120 USD per Bitcoin.
As of late, Bitcoin has come under fire from a number of federal authorities: the FBI, for example, who is concerned that the anonymous nature of the digital currency would make it a law enforcement nightmare when it comes to crime, and Treasury, who is worried primarily about money laundering. As Bitcoin gains popularity, federal concern is likely to rise. This week, in fact, The Bitcoin Foundation, the group charged with overseeing the development of Bitcoin software, went to Washington to try and work with the feds.
In March, FinCEN published guidelines that treated Bitcoin businesses the same as other money services businesses. This is the first step to generating a regulatory scheme for Bitcoins, and Bitcoin founders are not necessarily opposed. The Bitcoin currency underlies more than $1.2 million in online sales of contraband items, including guns and drugs, according to Nicolas Christin, a researcher at Carnegie Mellon University.  The legal “gray-area” of the Bitcoin is not sustainable, and Bitcoin proponents know it. Alan Reiner, developer of the Bitcoin software Armory, endorsed regulating Bitcoins to avoid "an unregulated system that is used mainly in black markets."
Despite all of the qualms, however, fighting financial crimes committed using Bitcoin may not be as impossible as the government anticipates. The paradox is that despite Bitcoin’s highly-touted anonymity, every Bitcoin transaction is completely public and transparent, meaning it’s actually quite difficult to launder money using Bitcoin. Individuals can set up anonymous Bitcoin accounts with no linkages between their real-life identities and their Bitcoin usernames, but each Bitcoin transaction is verified and recorded in a public ledger called a Blockchain. Though transactions cannot easily be traced to individuals, Bitcoin “privacy” isn’t necessarily a given. Blockchain transactions include information on the accounts involved in each transaction as well as the number of Bitcoins moved. Therefore, users drawn to Bitcoin for privacy reasons actually leave a significant trail of information publicly available to anyone who cares to see it – without probable cause or a subpoena.
To test its “anonymity factor,” the University of California and George Mason University teamed up to conduct an examination of Bitcoin’s Blockchain. By tracking money moved around the Bitcoin network, they concluded that criminals may be able to steal Bitcoins, but converting Bitcoins to cash or merchandise proved significantly more troublesome. A criminal who wanted to rapidly convert a large number of Bitcoins to legal tender would likely have to visit a Bitcoin exchange, but most exchange companies are putting in extra effort to abide by anti-money laundering regulations. Furthermore, there just aren’t a large enough number of exchanges – or Bitcoins flowing through the system, for that matter – to disguise large transactions in Bitcoins. In fact, a theft of the equivalent of roughly $400,000 in Bitcoins that occurred in 2011 is still just sitting there in the thief’s account: no Blockchain transactions exist that indicate the thief actually converted the virtual currency to real cash, possibly because he or she is still contemplating how to do so without getting caught.
Because of this, potential regulators are primarily focused on exchanges, the point at which Bitcoins are converted to actual money. Fortunately, the university researchers found that law enforcement, especially with their authority and tools, could realistically still “catch the bad guys” where Bitcoins were concerned. For example, the Silk Road, an online marketplace of mostly illicit goods, accepts only Bitcoins. “We saw a lot of people deposit into Silk Road directly from their Mt. Gox address,” one of the researchers from the University of California said. Mt. Gox, a popular Bitcoin exchange, could easily be presented with a legal subpoena for the names of its users. Mt. Gox requires valid identification from all of its users, to include a scan of their passport.
With the increasing interest in Bitcoin, it’s likely the push to abide by the law will encourage exchanges and online marketplaces to become ever more stringent in an attempt to prevent fraudulent activity. Despite whatever other criticisms may exist of Bitcoin, the argument that it’s easy to use for criminal purposes does not exactly ring true. Nonetheless – and as usual with technology – the criminals can and will find more sophisticated ways to protect their anonymity and stay out of the radar of law enforcement.
 Kavya Sukumar, “Government Eyes Regulation of ‘Bitcoins,’” USA Today, August 26, 2013, available at http://www.usatoday.com/story/news/politics/2013/08/26/bitcoin-virtual-currency-regualtions/2702653/.
 Robert McMillan, “Sure, You Can Steal Bitcoins. But Good Luck Laundering Them,” Wired, August 27, 2013, available at http://www.wired.com/wiredenterprise/2013/08/bitocoin_anonymity/.
 Jeremy Kirk, “Bitcoin offers privacy—as long as you don't cash out or spend it,” PC World, August 28, 2013, available at http://www.pcworld.com/article/2047608/bitcoin-offers-privacy-as-long-as-you-dont-cash-out-or-spend-it.html.