Futures: Is Bitcoin Merely a Virtual Currency for Criminals?

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Picture caption: The virtual currency Bitcoin has been tied to the illegal trade of Ivory, child pornography, drugs, firearms, and assassination services due to its position outside of formal regulation.

Recapping the Case for Bitcoin as a Virtual Currency for the Poor

In a recent article posted on this site it was stated that virtual currencies such as Bitcoin could improve the quality of financial services in developing countries. It was stated that virtual currencies could allow citizens in developing countries, perhaps living and working in urban areas, to more affordably transfer remittances to family members living in rural areas. It was also stated that migrants working in developed countries could remit money back home to family members left behind. Virtual currencies make remittance transfers more affordable because they usually have zero transaction cost. No intermediary takes a cut of the money sent. In traditional remittance transfer, intermediaries such as Western Union or MoneyGram, or banks, and even mobile money services take substantial portions of amounts sent.

The previous article also stated that Bitcoin had potential to serve as a more stable currency due to its separation from nationally based monetary policies. It outlined that developing countries such as Argentina, Zimbabwe and some post-soviet countries in the 1990s underwent hyperinflation due to inept national monetary policy. The relatively fixed and predictably controlled supply of Bitcoins does have the potential to prevent such cases of hyperinflation. Bitcoin therefore was deemed to have potential to serve as a stable currency for those in countries which have not proven to be able to control the value of their currencies. A study conducted in Argentina interviewed Bitcoin users on the purpose behind their use of the alternative currency. They claimed that they did use Bitcoin as an alternative store of value due to the instability of the national currency of the Peso.

My article did however stress that the widespread use of virtual currencies such as Bitcoin had potential but was a far and distant future. It also highlighted that perhaps the biggest challenge for Bitcoin to take on the identity of the “virtual currency for the poor”, was its current and more dominant status as a “virtual currency for criminals”. This particular article will specifically expose Bitcoin’s history of use in criminal activity. This includes its use in the illegal trade of drugs and ivory. This article will therefore temper the optimism of the previous one.

Bitcoin as a Virtual Currency for Criminals

How Bitcoin and Silk Road  Work

Any account of criminal activity using Bitcoin also has to mention the online black market for illegal goods. This is because Bitcoin is the primary currency used to buy and sell illegal goods online. Silk Road has been the most prominent of these online black market for illegal goods. This site allows buyers and sellers to exchange illicit illegal material online anonymously through a series of clever processes. These processes are roughly outlined below.

  1. Buyers and sellers of illegal goods log on to Silk Road anonymously using an advanced digital encryption program known as Tor. Tor allows users to access the Silk Road website. Without Tor, Silk Road is inaccessible and “hidden” in the “dark net”.
  2. Once Silk Road is anonymously accessed, buyers and sellers trade in illegal goods through the website’s interface.
  3. A third party administrator, present in the Bitcoin system, facilitates the financial transaction and appropriates a certain percentage of the sale. Bitcoin is the dominant form of currency used in these online financial transactions because it is also encrypted. Due to this encryption the buyers’ and sellers’ identities and/or addresses are untraceable.
  4. The sellers then post the illegal goods directly to the buyers’ address.

The Illegal Trade of Drugs and Ivory using Silk Road and Bitcoin – Implications for Developing Countries

The image below shows the Silk Road interface with various illegal drugs up for sale. With just a couple of clicks illegal drugs can be purchased anonymously. The ability to access Silk Road through the Tor program and the creation of a Bitcoin wallet is considered a relatively complex process, but it seems like with a little bit of effort this can easily be mastered by someone in need of drugs.

It also seems as though that the Silk Road system makes the distribution chains of drug sellers become much more secure and cost effective. Traditionally, drug distribution chains usually consist of a variety of large, complex, decentralised groups and entities. Controlling and making these distribution networks profitable is difficult. Furthermore it is harder to maintain anonymity within these complex chains. Through Silk Road and Bitcoin, the need for complex distribution chains are no longer necessary. Distribution chains can become much smaller and be easily utilised online. This therefore reduces their costs. Anonymity is also secured. Even if it is found that drugs are being transferred through the postage system by authorities, it is difficult to prove guilt as the transaction occurs online with encrypted user names with encrypted virtual currency. Silk Road, with its use of Bitcoin, is therefore an oasis for drug dealers and buyers.

What needs to be considered in the distribution of drugs is that they are produced primarily in developing countries where there are less watchful eyes. These drugs are then mostly transported to and consumed in developed countries. Just think of the massive cocaine production in South America. Most of this cocaine is transported to North America. It is estimated that 40% of global cocaine consumption occurs in North America alone. Silk Road allows easier and more secure trade of illegal drugs, and the creation of distribution networks, from developing countries to the developed. This may further solidify developing countries status as drug producers.

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Picture Caption: Buying and selling illegal drugs on Silk Road

The same can be said for the trade in ivory. In a stunning must read article by Derek Stead, the process of buying Ivory using Bitcoin is outlined. He elaborates how he himself went online, searched on forums for ivory dealers using the Tor system and contacted them, feigning interest in purchasing ivory. He makes it clear that it was not difficult to obtain contacts and prices for ivory. Some prices were extraordinary up to $180,000 for one horn. The use of Bitcoin which is facilitated through a third party, who cannot read or trace the encryptions of buyers or sellers, would make this large and definitely suspicious transaction untraceable, and therefore possible.

Just like illegal drugs, ivory is harvested almost exclusively in the developing world. The trade of ivory facilitated by Bitcoin makes this trade easier and less controllable by the authorities. Regulation has focused primarily on hunting the poachers and even the use of surveillance drones. This is because regulation of the financial transactions involving ivory has become much more difficult.

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Picture Caption: Bitcoin is the primary currency used in the trade of ivory and therefore is connected to shocking images such as this

These are just two despicable transactions that Bitcoin help facilitate. Others include child pornography, illegal firearms, and assassination services.

Can Silk Road or Bitcoin just be Shut Down?

The primary question I asked when looking into this article was why don’t authorities just shut down online black markets like the Silk Road website? It seems as though that it is just not that easy. The original founder of Silk Road, Ross William Ulbricht, was arrested by the FBI on October 2nd 2013. He was charged with money laundering, computer hacking, and conspiracy to traffic narcotics. He was also suspected for hiring assassins to kill 6 people via Silk Road, however the murders never took place, and he was not prosecuted for attempted murder. The hidden website was seized by the FBI and the image below replaced the homepage. This however did not deter users and administrators of the Silk Road website as a new version called Silk Road 2.0 was uploaded in November 2013. The architects of Silk Road 2.0 were also subsequently arrested and the website taken down, but it always seemed as though new administrators were willing to take their place, creating new addresses to access it from. The fact that there are current posts and forums about Silk Road 2.0 on the “visible web” indicates that it is still operating. There is also nothing stopping other similar sites from springing up.

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Picture caption: Silk Road seized by the FBI

Bitcoin which facilitates these illegal transactions can also not be effectively cracked down upon. Firstly, its status as a virtual currency does not necessarily mean that it will be used for illegal activity. It is used in many instances for legitimate online purchases. The grounds for illegalising its use are therefore indirect. Secondly, Bitcoins are not created in one centralised location but in the wider computer network of users. Bitcoins are created through a “mining” process. This process involves user’s computer computing capacity to create “block chains” which record but encrypt the transactions of others (this is how I have come to understand it anyway). The main point here is that because Bitcoins are created in the wider computer network, no one individual can be arrested (or even traced!). Furthermore one location where Bitcoins are created can also not be traced and would only represent a minuscule portion of Bitcoin creation anyway. Countries such as Russia and China have made the use of Bitcoin illegal, but how they intend to inforce its ban is unclear. Formal legitimate companies such as Apple have also ceased making Bitcoin applications compatible with their software, but this does not prevent PCs in general from using it.

Potential to Change Bitcoin’s Image?

It seems as though the above description of Bitcoin as a “virtual currency for criminals” cannot be easily altered. The above examples show that virtual currencies such as Bitcoin encourage drug and ivory production and distribution networks that originate in developing countries. It seems like the very nature of Bitcoin as an anonymous and untraceable currency enables this. It is also shown that the solution of just shutting down Silk Road and Bitcoin is fruitless. This therefore makes me think that alternative solutions need to be continued to deal with the drug and ivory trade, such as the drone surveillance methods used in identifying poachers. One thing is for certain, the image of Bitcoin as a “virtual currency for criminals” is not abating anytime soon.

That does not necessarily mean however that virtual currencies such as Bitcoin cannot still have some use for the poor in developing countries. The benefits mentioned at the start of this article and in the previous article are still relevant and have potential for expansion! It’s just likely that virtual currencies such as Bitcoin will have that dual personality of good and evil.

The last thing to consider is that Bitcoin is not the only virtual currency out there. I have only focused on it due to its dominance in virtual currency use. There is certainly potential for other virtual currencies to develop specifically for the use of everyday populations in developing countries. Perhaps a virtual currency that is centrally administered and regulated. This train of thought could lead on to a part three, so stay tuned!!



Lucas Watt is a PhD candidate with the school of Media and Communications at RMIT University. His project title is “The Domestication of Mobile Money in Fiji: An Ethnographic Study”.