A leaked document from the FBI highlights the concern that the government has about increased criminal activity using the Bitcoin network.
The FBI is concerned that cyber criminals will come to treat Bitcoin as just another payment option alongside traditional and established virtual currencies. With no centralised authority, detecting suspicious activity and obtaining transaction records is problematic.
An Intelligence Assessment report dated 24th April 2012 and graded as: 'Unclassified/For Official Use Only' has appeared on the Internet.
Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activities documents the challenges the FBI face in tracing suspicious activities.
Bitcoin is a digital peer-to-peer currency created in 2009, and one of the first implementations of a concept called crypto-currency. No central authority issues new money or tracks transactions.
Transactions are managed centrally by the network itself in a publicly distributed database called the block chain.
Sites such as Wikileaks, Free Software Foundation and Freenet accept donations in Bitcoin. There are no historical records of account owners or their actual location. There are no monitoring capabilities in place to identify suspicious monetary patterns.
Bitcoin uses public-key cryptography. The coin contains the owners public key and transactions are recorded by the network to ensure that the coin cannot be spent twice by the same person. It is not a 'get rich quick' scheme, but rather an opportunity to trade goods and services for virtual currency.
There are opportunities for criminals to transfer, launder or steal bitcoins and target Bitcoin services using malware such as Infostealer.Coinbit -- especially as the bitcoin wallet is stored in an unencrypted form on the user's PC.
The Bitcoin network hides details of any transaction by publishing multiple unique addresses to the network. Only if the sender or the recipient decides to publish details, is the transaction known. The whole network knows how much has been transferred, but not by whom or to whom.
It is not entirely anonymous, however care can be taken to ensure anonymity is increased. According to the FBI document users can:
- Create and use a new Bitcoin address for each incoming payment.
- Route all Bitcoin traffic through an anonymizer.
- Combine the balance of old Bitcoin addresses into a new address to make new payments.
- Use a specialized money laundering service.
- Use a third-party eWallet service to consolidate addresses. Some third-party services offer the option of creating an eWallet that allows users to consolidate many bitcoin address and store and easily access their bitcoins from any device.
- Individuals can create Bitcoin clients to seamlessly increase anonymity (such as allowing user to choose which Bitcoin addresses to make payments from), making it easier for non-technically savvy users to anonymize their Bitcoin transactions.
There is a maximum number of 23 million bitcoins that can be generated and in circulation. Currently there are over eight million Bitcoins in circulation. Bitcoin might be the future of currency but there are a lot of issues that need to be addressed first.
The challenge of discovering who has sent the bitcoin is not totally impossible to discover. With careful passive analysis of the publicly available data set, it is possible to map many users to public-keys. The centralised services such as the exchanges and wallet services are capable of identifying considerable portions of user activity.
So your transactions can be identified with careful analysis of activity tracking which takes time and money. If the transactions are ignored by law enforcement agencies, then Bitcoin will be considered a safe haven for hackers and criminals to freely conduct their activities.
The challenge for the FBI will be whether it has have the extra resources and funding available to track down the criminals it so badly needs to find.