In Wake of FBI Report, Bitcoin Backer Says Benefits Outweigh Risk of Criminal Use

A Federal Bureau of Investigation report warning that criminals could use the electronic currency Bitcoin for money laundering and other illicit activities does not reflect the majority of activities for which the currency is actually used, a Bitcoin developer tells Digital Transactions.

“Asking Bitcoin if they have a response to the FBI report is like asking Gold what it thinks that some people have used it for crime,” Donald Norman, co-founder of the Bitcoin Consultancy, says in an e-mail response to Digital Transactions’ questions.

Bitcoin is an electronic currency developed and maintained by a decentralized network of cryptologists and application developers. It offers anonymity, international utility, and inflation protection, and is completely unfettered from the existing payment systems. Users can download software from a number of so-called exchanges that provide Bitcoins at prevailing exchange rates. Specialist processors serve merchants.

To send Bitcoins, users enter the recipient’s address and the amount to be transferred. The user’s computer than digitally signs the transaction and sends the information to the Bitcoin network. The network verifies that the person sending the Bitcoins is the current owner. Once the transaction is validated, recipients can spend the Bitcoins. The process, which usually takes a few minutes, is not reversible.

Because of the anonymity provided by the Bitcoin system, law-enforcement agencies have difficulty in identifying suspicious users and obtaining transaction records, the FBI says. That means it can be exploited by criminals to transfer, launder, and steal funds and for other illicit activities, according to the confidential report issued by the FBI in late April.

The FBI says it based its conclusions about Bitcoin on observed criminal activities, investigations, and prosecutions of other virtual currencies, such as e-Gold and WebMoney, not on Bitcoin activities. The report, marked For Official Use Only, was leaked on the Internet last week.

While all Bitcoin transactions are published online, the only identification is a randomly generated Bitcoin address, the FBI says.

Bitcoin also operates as a decentralized digital currency system and is incapable of insuring compliance with regulatory guidelines, monitoring and reporting suspicious activity, running an anti-money laundering compliance program, or accepting and processing legal requests like subpoenas, according to the FBI report.

If Bitcoin grows in popularity, it will become an increasingly useful tool for illegal activities beyond the cyber realm, including purchasing child pornography and Internet gambling, the FBI says. “Bitcoin might logically attract money launderers, human traffickers, terrorists, and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers,” the report says.

But Norman says the benefits of Bitcoin outweigh any criminal use of the currency because it gives consumers a digital currency that can’t be manipulated by government enforcement agencies like national currencies or payment methods based on those currencies. “If people were using Paypal or Visa/MasterCard for payments, they would be subject to a single point of failure,” Norman says. “The currency they operate in can be printed almost at will (there are many cases of hyperinflation). The company can lock your account.”

Norman compares the freedom offered by Bitcoin to that offered by the printing press and the Internet. “…if regulatory agencies try to stifle Bitcoin, they will only tarnish its public image and simply postpone the amazing social potential it has,” he said. “They will not at all (affect) the sensationalist criminality which is unrepresentative of the overall Bitcoin community.”