How Bitcoins Are Used to Conceal Assets and Launder Money
Bitcoin transactions are currently quite difficult to trace, which is why Bitcoin has been associated with illicit activity.
M. Palmer and Richard L.
February 2016 | More Articles
Although most people have heard of Bitcoin software, very few
understand how it works. We will explain what Bitcoin is and how it works.
However, you should be aware from the outset that despite its myth of
anonymity in most cases Bitcoin wallets (accounts) can be identified by
experienced asset investigators, and transactions can be traced from origin to
Note: Generally, Bitcoin with a capital B means the software
and the system; bitcoin with a lowercase b means the actual money.
A Brief Glance Back in Time
The first recognized medium of exchange (money) was Anatolian
obsidian as a raw material for stone-age tools. It was distributed and used for
payments as early as 12,000 B.C. As trade increased, the need for coins with
intrinsic value emerged. This led eventually to the use of copper and silver as
the content of early coins, beginning in the third millennium. Paper money was
initially backed by gold but later came to have its value largely based on
public confidence in the government issuing the currency.
The Appeal of Cryptocurrency
With the increase in digital transactions, the indispensable
role of the banks also meant that they had information on the persons/entities
involved with these transactions. The banks also charged service fees and kept
records of these transactions, which impacted the account holders anonymity. In
other words, banks bring with them various costs and prevented absolute
anonymity for holding or transferring currency. Increased secrecy and lowered
bank fees became the goal. The concept of cryptocurrency was born.
It All Started with Satoshi
Bitcoin is the worlds biggest cryptocurrency. Bitcoin is a
digital asset and a payment system invented by cryptology experts using the
pseudonym Satoshi Nakamoto. They published their invention in 2008 and
released it as open-source software in 2009. (Note: Sathoshi Nakamotos true
identity has never been confirmed.)
The Bitcoin Protocol
At its core, Bitcoin is a cryptographic protocol,
cryptocurrency. The protocol creates unique pieces of digital property that
can be transferred from one person to another. Bitcoin is a virtual medium of
exchange. It is not issued by, backed by or tied to any particular nation or
government. As such, the value of bitcoins can rapidly and widely vary in value.
It is the longest standing, best-known and most widely traded cryptocurrency.
In essence, all Bitcoin account holders, wallets and
transactions (i.e., deposits, transfers and debits) are simply individual,
randomly generated numbers that become the key or password for that item or
activity. Each key or password is thought to be totally unique and anonymous,
and the owner of that key becomes the owner of that account, wallet or
Absolute Privacy Almost
The Bitcoin system functions peer-to-peer; users can transact
directly without an intermediary. Transactions are verified by network nodes and
recorded in a publicly distributed ledger, called the blockchain, which uses
virtual bitcoins as its unit of account. The system works without a central
repository or single administrator, which has led the U.S. Treasury to
categorize bitcoin as a decentralized virtual currency. Bitcoin is the first
decentralized digital currency and the largest of its kind in terms of total
Blockchains: Who Needs Banks Anyhow?
The blockchain automatically tells one party that the other
party in the transaction is legitimately paying for a good or service. There are
no third parties involved. The system is literally monitored by everyone. Each
person who takes part in cryptocurrency commerce has the same ability to oversee
the operation. The blockchain is the cornerstone of Bitcoin and is constantly
updated in real time.
All confirmed transactions are included in the blockchain. This
way, Bitcoin wallets (accounts) can calculate their spendable balance. New
transactions can be verified to be spending bitcoins that are actually owned by
the spender. The integrity and the chronological order of the blockchain are
enforced with cryptography.
Bitcoins: What For?
Bitcoins can be created as a reward for payment processing work
in which users offer their computers to become part of the Bitcoin system. They
verify and record payments into a public ledger or blockchain. This activity is
called mining, and miners are rewarded with transaction fees and newly
created bitcoins. In addition to being obtained by mining, bitcoins can be
exchanged for other currencies, products and services. Users can send and
receive bitcoins for an optional transaction fee.
Wallets, Seeds, Keys and Mining
A transaction is a transfer of value, between Bitcoin wallets,
that gets included in the blockchain. Bitcoin wallets keep a secret piece of
data called a private key, or seed, that is used to sign transactions. The key
or seed provides a mathematical proof that they have come from the owner of the
wallet. The signature also prevents the transaction from being altered by
anybody once it has been issued. All transactions are broadcast between users
and usually begin to be confirmed by the network in the following 10 minutes,
through a process called mining. Basically, mining occurs when a computer or
a network of computers runs Bitcoin software. That software creates new entries
in Bitcoins blockchains.
Bitcoin Software: Is It Free?
Because anyone can download and install the Bitcoin software for
free, the payment processing and record-keeping for Bitcoin is done in a widely
distributed way, rather than on one particular server. When blockchains are
created, so are new bitcoins. Each bitcoin is defined by a public address and a
private key, which are long strings of numbers and letters that give each a
specific identity. This means that the bitcoin itself is not only a token of
value but also a method for transferring that value. Buying a bitcoin can be
thought of as buying a spot in the blockchain, which then records your purchase
publicly and permanently.
How Many Bitcoins Are There in the World Today?
Bitcoin estimates that the final bitcoin will be mined in the
year 2140, bringing the permanent circulation to just under 21 million.
(Currently, there are roughly 12.4 million bitcoins in the world.)
Secure Wallets: How Do They Work?
You save bitcoins in a wallet (account). The wallet stores the
public and private keys needed to identify the bitcoins and execute a
transaction. They can be digital wallets that exist in secure cloud environments
or on a computer. However, they can also take physical form. If a wallet is
hacked or you lose your private Bitcoin key, you no longer have access to that
Bitcoin. The possession of the public address and private key amounts to
possession of the bitcoin(s). You could physically pass your Bitcoin wallet on a
flash drive or electronically to another person as an anonymous form of payment.
Where Can I Use Bitcoins and What For?
Bitcoins can either be used to buy things online from merchants
and organizations that accept Bitcoin, or cashed out through an exchange, broker
or direct buyer.
The Bitcoin Veil
People primarily buy and sell bitcoins through online exchanges.
The public address and private keys are both required to trade, sell and spend
bitcoins. Since transactions are done using the public keys, the identities of
the buyers and sellers are veiled to each other and to the public, even though
the transaction is recorded publicly.
Bitcoin Exchanges: More than 100
There are over 100 bitcoin exchanges in existence today. To
mention just a few of these exchanges, they are available as BTC China,
Bitcoin.de (Germany), VirtEx (Canada), Bitstamp (Slovenia), BTC-e (Bulgaria),
CampBX (U.S.), and Bitcurex (Poland). There are also fixed-rate exchanges and
brokers, such as Coinbase.
How Is a Bitcoin Wallet Being Set Up?
Once an individual has settled on a broker or exchange, he/she
creates an account with a user name and password and links his/her bank account.
Most exchanges ask for personal information and a photographic scan of a
drivers license, passport or national ID card. Some exchanges, such as Coinbase,
ask for your phone number, and some exchanges even require a recent utility bill
to confirm your identity and location.
Bitcoin and Illicit Activity
People often say Bitcoin is anonymous, but pseudonymous is
more accurate. Transactions are currently quite difficult to trace, which is why
Bitcoin has been associated with illicit activity, such as buying and selling
drugs on the now-defunct Silk Road market.
Pros and Cons of Using Bitcoins
Bitcoin as a form of payment for products and services has
grown, and merchants have had an incentive to accept it because fees were
generally lower than the 2% to 3% typically imposed by credit card processors.
Unlike credit cards, any fees are paid by the purchaser, not the vendor. It
should be noted that Bitcoin users are not protected by refund rights or
Who Accepts Payments by Bitcoin?
Hundreds of companies now accept bitcoins, including Amazon,
CVS, eBay, Home Depot, Kmart, Sears, Subway, Target, Victorias Secret and
Zynga. Even recent Presidential candidate Rand Paul accepted bitcoins for
Regulating Bitcoin: Is It at All Possible?
U.S. Federal Reserve Chair Janet Yellen has testified that the
Fed has no potential for regulating Bitcoin. She testified that Bitcoin is a
payment innovation thats taking place outside the banking industry, and to
the best of my knowledge theres no intersection at all, in any way, between
Bitcoin and banks that the Federal Reserve has the ability to supervise and
regulate. So the Fed doesnt have authority to supervise or regulate Bitcoin in
How Stable Is Bitcoin as a Currency?
Bitcoin continues to have issues with stability. In 2013 alone,
Bitcoin went from lows of $10 to $1,200 per Bitcoin. It surpassed the value of
gold at its peak before crashing down to $500. Today, it fluctuates between $380
and $682 on different exchanges. However, Bitcoin is becoming more stable and
legitimate, and mainstream adoption seems possible.
Bitcoin is primarily used as a vehicle to transfer funds with
anonymity. As of mid-February 2016, a bitcoin is worth US $396.61. At this same
time in 2015, a bitcoin was worth over US $600. Shifts of over $90 per month are
not unusual. Therefore, due to the volatility of bitcoins, the Bitcoin system is
most commonly used solely as a transfer vehicle and not to store money.
Bitcoin and Fraud
Caution should be practiced when placing our trust and our
money: Bitcoin exchanges are not meaningfully regulated. While this is part of
Bitcoins appeal, it does make it easier to get defrauded.
Mt. Gox was one of the largest Bitcoin exchanges in the world.
It was based in Tokyo starting in July 2010, and by 2013 it was handling 70% to
85 % of all Bitcoin transactions. In February 2014, the Mt. Gox company
suspended trading, closed its website and exchange service, and filed for a form
of bankruptcy protection. In April 2014, the company began liquidation
proceedings. It was announced that around 850,000 Bitcoins belonging to
customers and the company were missing and likely stolen. Later on, that amount
was valued at more than $450 million. Subsequently, 200,000 Bitcoins were
New evidence presented in April 2015 by WizSec led them to conclude
that most or all of the missing bitcoins were stolen straight out of the Mt.
Gox wallet over time, beginning in late 2011.
To discuss a corporate intelligence or financial
investigation matter, or to learn more about Cachet Internationals
investigative resources in your jurisdiction, contact
Michele Palmer by
email or at
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