On Monday 16 January 2017, some 400 law-enforcement agents from all over the world converged on a conference hall in Doha, Qatar, for the first Global Conference on Money Laundering and Digital Currencies. The hot topic for the three-day seminar was Bitcoin, the virtual money system rapidly becoming the currency of choice for hackers, international drug dealers, and the money movers of organised crime.
Simon Riondet, the head of Financial Intelligence at Europol, opened proceedings with a warning to the audience that had assembled from more than 60 countries. “Digital currencies are now undoubtedly part of the payment system,” said Riondet. “Their use is expected to increase exponentially in the coming years.
And understandably so, since they improve payment efficiency, reduce transaction and fund transfer costs, while facilitating international remittances. But the other side of this narrative is that they are also a powerful new tool for criminals and terrorist financiers to convert, remit and conceal illicit funds from law enforcement authorities.”
At the very same moment the conference was being opened, managers at the Seehotel Jäegerwirt, a four-star hotel on the Alpine Turracher Höhe Pass in Austria, had a problem: the switchboard was melting down as hundreds of guests were complaining they could not get in or out of their suites, their electronic room-key cards having been somehow rendered useless.
One call to come through was not a frantic complaint, but a calm demand for €1,500 worth of bitcoin to be deposited in an anonymous account, at which time hackers would release their lock on the hotel’s IT system. Christoph Brandstaetter, hotel managing director, said they had “no choice but to pay the ransom.” He also said the hotel was in the process of replacing its electronic-card locking system with old-fashioned locks and keys.
Bitcoins & blockchains
The story of Bitcoin is so strange and dystopian it could have come from the mind of Phillip K Dick, the sci-fi writer who dreamed up Bladerunner and Minority Report — stories of systems designed to be perfect that turn out to be anything but.
Bitcoin was created by a programmer, or several, who went by the name of Satoshi Nakamoto, although their true identity has never been confirmed. The basic tenets of the idea were explained in a white paper released to an online mailing list in 2008, in which Nakamoto wrote:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution … an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
The idea is both complicated and elegant, and, while a multitude of websites offer 101 explanations or ‘Bitcoin for Dummies’ tutorials, almost all of them are authored by geeks or technocrats whose dependence on the language of the cyberverse renders them almost indecipherable to the layperson attempting to come to grips with the formula.
The story of bitcoin is so strange and dystopian it could have come from the mind of the sci-fi writer who dreamed up bladerunner and minority report — stories of systems designed to be perfect that turn out to be anything but.
The best way to understand Bitcoin is to imagine an actual coin attached to a long piece of string. Follow that string and you’ll find every person who has held that coin, in sequence, before passing it on to the next. The people are disguised to protect their privacy, but their identities don’t matter — the important thing is that the history of the coin is secure and knowable; any attempt to pass off a duplicate or phony coin is betrayed by a second string branching out from the counterfeiter, or no string at all. When you take possession of the coin, you are the latest piece of history in the chain, known as the ‘blockchain’, and you’ll remain on that string forever.
Getting rid of bitcoin to stop ransomware would be like the us government getting rid of $100 bills to try to stop drug dealers from laundering their dirty money. it’s not the right solution. – Richard Henderson, global security strategist
With so many coins, so many lengths of string, and so much history of which to keep track, it might seem inevitable that a third party will need to be brought in to oversee and umpire the game; a role traditionally played by banks or similar financial institutions. But this is where Bitcoin becomes quite brilliant; instead of a bank, the system relies on enthusiasts of Bitcoin to check each transaction on an online ledger, to record the passing of the coin from one hand to another, to check that the string is not broken or perverted, and then to confirm the latest transaction. The accuracy and integrity of each confirmation is established by mass agreement; the speed of the transaction assured by the fact that the first miners to confirm a transaction are paid in bitcoin for their efforts.
The Bitcoin software was released in January 2009, with the ledger, known as the ‘blockchain’, available online to be checked and confirmed by enthusiasts, known as ‘miners’. Nakamoto had built an anti-inflationary measure into the system by limiting the number of bitcoins ever to be created to 21 million. Through this measure, Bitcoin could remain a self-supporting, self-regulating machine, rewarding its technicians in the very currency they were helping to create.
Just a bubble?
In 2010, Bitcoin leached into the real world when Laszlo Hanyecz bought two pizzas from Papa John’s in Jacksonville, Florida, paying 10,000 bitcoin (BTC) for the two. It’s been a white-knuckle ride since then, with the value of the currency fluctuating wildly until, today, it is comparatively stable at around US$1,100 a coin.
Since the very beginning, economists and finance journalists have suggested Bitcoin to be little more than a ‘bubble’, similar in vacuity to the dot.com bubble of 1999. Many have predicted its imminent death (at the time of going to print, the website 99Bitcoin.com has accrued no less that 121 Bitcoin ‘obituaries’ in the popular press, from such respected titles as Forbes, Reuters, The Weekly Standard, Salon, The Financial Times and USA Today). But the faithful disagree.
Nathan Clark, a computer scientist and business administrator from Victoria, Australia, was a miner in the very beginning when Bitcoin went live in 2009. “There no way it’s a bubble,” says Clark, “because it now has applications in the real world. You just can’t say it’s a bubble anymore, and those who do are just people who are deeply offended by the possibility that Bitcoin is circumventing their industry. They’re also the people who didn’t see it coming. They failed to predict Bitcoin, so they’re trying to save themselves by predicting the death of it.”
Clark no longer mines for Bitcoin, but he still keeps abreast of its currency, and he keeps a few bitcoins tucked away, just in case. “I’ve done the mathematical calculation on what each bitcoin would be worth if it overtook the world economy. Being that there’s only 22 million bitcoins allowed to exist, it works out to be something like AU$50 million per bitcoin. So it’s worth hanging onto a few.”
Peter Strachan, commodities and resources analyst formerly with the Asian desk at Smith New Court, isn’t so enthusiastic. “The fact that Bitcoin has caught the eye of investors more so than the transaction world is revealing,” he says. “There was a big push early for people to transact with Bitcoin, but, in the few years since its inception, we’ve had the introduction of Paywave for small transactions, which makes EFTPOS so much easier and cheaper, so the benefits of Bitcoin have become almost superfluous. There’s really no need to use Bitcoin unless it’s for some nefarious reason.”
And here is where Bitcoin has entered into its own; the anonymity of its transactions attractive to anyone moving money in the criminal sector, which is always looking for new ways to launder ill-gotten gains.
A currency for crime
Bitcoin was not even two years old when former Eagle Scout Ross Ulbrich created Silk Road, a black-market trading site buried deep in the dungeons of the ‘dark web’, an area of the internet not indexed by search engines or accessible to those without authorisation. Existing primarily as a hidden platform on which to buy and sell illegal narcotics, with Bitcoin as the accepted currency, Silk Road continued for two years until being raided by the FBI in October 2013, with agents seizing 144,000 bitcoins worth close to US$28.5 million at the time. Ulbrich is now serving life in prison.
Silk Road represented a turning point for law enforcement agents who, until the case of Ulbrich, had struggled to find their way around an economy that doesn’t leave a paper trail. In 2014, before the Silk Road case had reached closure, intelligence chief of Europol, Rob Wainwright, lamented the situation faced by police.
“Digital currencies such as Bitcoin are an excellent example of the disconnect between online practice and legislation,” he said. “The currency is totally unregulated — there is no public body like the Bank of England accountable for its protection.
“Some regulation is needed to put virtual currencies on a level playing field with electronic banking with regulated currencies. If not, the lack of traceability will leave the door wide open for money laundering and terrorist financing.”
Since then, the prosecution of Bitcoin-related crimes has advanced at an exponential rate: In March 2015, Czech national Tomáš Jiríkovský was arrested on suspicion of laundering $40 million in stolen bitcoins; in October of the same year, 33-year-old American Trendon Shavers was busted running a $150-million Ponzi scheme; and the collapse of Bitcoin currency exchange Mt Gox saw 30-year-old Frenchman Mark Karpelès charged with fraud and embezzlement of US$390 million.
But these are the big fish — the more frequent criminal acts involving Bitcoin are enacted by small-time hackers chasing a quick payday, like the gang that locked the guest rooms at the Seehotel Jäegerwirt for a modest few thousand. According to the SonicWall GRID Threat Network, ‘ransomware’ attacks increased from 3.8 million in 2015 to a staggering 638 million in 2016, another report finding that 49 per cent of businesses in the US were attacked by ransomware last year.
It’s a situation that has given rise to calls for a global ban on Bitcoin altogether. Richard Henderson, global security strategist at data security firm Absolute, says it’s not so easy. “Getting rid of Bitcoin to stop ransomware would be like the US Government getting rid of $100 bills to try to stop drug dealers from laundering their dirty money,” he says. “It’s not the right solution. Would it momentarily create a bump in the road for cyber attackers who are making millions off ransomware? Absolutely, but only for a fleeting moment.”
Are Bitcoin’s days numbered?
With Bitcoin here to stay (for the time being, at least), the way ahead seems to exist in its own system of security. Anonymous as Bitcoin’s transactions may be, the system itself is vulnerable for the fact that it’s readily accessible online and respects no borders, meaning law enforcement doesn’t have to concern itself with warrants, court orders or foreign governments to access the data. Once inside, with every Bitcoin transaction rigorously recorded in the blockchain, investigators have all the incriminating evidence at their fingertips. With more law enforcement agencies employing the assistance of former Bitcoin miners and traders, their ability to unscramble Bitcoin’s wilderness can only improve over time.
In Qatar, the Global Conference on Money Laundering and Digital Currencies concluded with at least one concrete resolution: bitcoin mixing services, which exchange bitcoins off the blockchain to disguise each transaction’s pathway, are to be aggressively pursued.
“Such services are designed exclusively to anonymise transactions and to make it impossible for law enforcement agencies to detect and trace suspicious transactions,” explained the Basel Institute of Governance, co organisers of the conference, in a press release. “The existence of such companies should not continue to be tolerated.”
The conference also recommended that law enforcement agencies should cooperate globally to identify “suspicious Bitcoin addresses that threaten economic stability” — even “unexplained wealth” should be considered a prosecutable crime. The days of Bitcoin may be numbered, but not because of its volatility.
“Bitcoin’s a game,” says Peter Strachan, “and it’s indicative of the times in which we live, where people are so desperate to find new answers for poverty, or the inequity of wealth distribution.
In the end, it’s just a big, crazy experiment, more interesting to nerds and criminals who don’t really live in the real world. And it’s in the real world that we need real solutions to those old problems.”