The Australian Transaction Reports and Analysis Centre (Austrac), the Australian government agency responsible for countering money laundering and the financing of terrorism, is able to track each conversion transaction from bitcoin into or out of Australian dollars.
"Australia is very fortunate among its international counterparts, in that we are one of the few countries which currently collects all international funds transfers, into or out of Australia," John Schmidt, CEO of Austrac, told Senate Estimates today.
"At some point, a person will be purchasing bitcoin using Australian dollars, for example, and then, if they are dealing in substances or services, will want to convert those bitcoins back into the legitimate currencies of wherever they are, so they can gain the benefit of them.
"Because we get the international funds transfers instructions, it is possible using other intelligence sources to identify transactions where people are purchasing bitcoins."
Schmidt said that most other countries do not possess the same capability as Australia, and prosecutions have already resulted from the agency's intelligence.
"Using intelligence which came into our possession, we were able to monitor the transactions of the conversion, the international funds transfer of Australian dollars to convert into bitcoins, which were then linked to drug shipments," he said.
The CEO said bitcoin is interesting, but from his perspective it is, in essence, merely a commodity used to transfer value.
"You can use gold and other things to transfer value."
"But at some point, in the current world, to realise the benefits of those transactions, you will want to convert them back into Australian dollars -- and at that point, we have an opportunity to identify those transactions."
Should the bitcoin community gain further independence from the world of fiat currency, and therefore become more attractive to criminal organisations looking to move money around, Schmidt said that international cooperation is the answer.
"Because they will operate on servers in jurisdictions around the world, and use very sophisticated methods to move and hide their identities. It's when you have the international cooperation ... that is the answer to being able to stop that criminal behaviour."
Schmidt did say that Austrac has not been able to quantify, even within an order of magnitude, the size of the bitcoin market in Australia, and that the agency does not consider bitcoin to pose a major threat.
"There's an argument that, in fact, they are being used more, as people are almost gambling on the value rather than using it for transactions," he said. "As we've seen just in the past few weeks, some of the exchanges have been targeted by hackers, who have stripped the value out from people's holdings.
"Because they are not backed by government, because they are floating in the ether and there is no regulator as such, there's a volatility and exposure there to individuals using them, which is limiting their usage, and the mere fact that there aren't that many sites where you can use them yet.
"But at this point in time, when you consider all the existing threats we face from the criminal perspective, they are not top of the list."
Update: Clarification that other nations do not have the capability to track international funds transfers.