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If bitcoins are traceable, what's the next step in cybercrime?

After the federal takedown of the so-called “Silk Road” online drug marketplace, the pubic quickly became aware that criminals were among the many enthusiasts using the online currency called bitcoins. The virtual currency was first introduced in 2009 as an open-source, peer-to-peer electronic payment network. Since then, organizations ranging from online merchandisers to Subway restaurants and even Virgin Galactic accept them -- they’re especially popular for their low transaction fees. They are even traded in official currency exchanges.

That may explain why a Nov. 18 meeting of the Senate Committee on Homeland Security and Governmental Affairs didn’t focus on shutting down the electronic currency in light of its potential for use in cybercrime. To the contrary, both the Securities and Exchange Commission and the U.S. Department of Justice sent letters to the committee emphasizing that bitcoins are a legitimate financial instrument, albeit with both benefits and risks.

Silk Road users preferred bitcoins for a variety of reasons, but largely because they were extremely hard to trace and provided anonymity. While it seems the feds did find a way in, the process was still easier and safer than cash.

Since the 1960s, when drug sales became big business, the federal government has working to follow the money. Starting with the Bank Secrecy Act in 1970, Congress has passed law after law to make money laundering through U.S. banks more trouble than it was worth. As money launderers found new ways around the rules, Congress passed more.

In the 80s and 90s, drug traffickers began physically shipping cash out of the country -- but cash is heavy. In 1997, the Justice Department estimated that a pound of cocaine generated six pounds of cash, a pound of heroin resulted in 10 pounds having to be shipped. A Costa Rican payment processor called Liberty Reserve began converting currencies into its own money called Liberty Reserve dollars and then back again, stymieing regulators until just this year. Meanwhile, bitcoins were even easier -- private, liquid and totally legal to own.

Shutting down bitcoins is no longer feasible, but regulating them isn’t. Congress has already imposed money laundering controls similar to those involving legal U.S. currency. If bitcoins are no longer advantageous in cybercrime, Internet gurus will use something else. What that may be, however, isn’t yet known to the uninitiated.

Source: San Diego Daily Transcript, "Are Bitcoins the Criminal's Best Friend?" Stephen Mihm contributor, Bloomberg News’s The Ticker, Nov. 27, 2013

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