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Bitcoin: The dark side of cryptocurrency

Bitcoin, an electronic currency on the internet, is now giving law enforcement officials a run for their money.
February 11, 2014 8:40:33 PM PST
The ABC7 I-Team investigates something that doesn't even physically exist, but is making headlines daily. Bitcoin, an electronic currency on the internet, is now giving law enforcement officials a run for their money.

If a $20 bill is public money, Bitcoin is a private money system. The electronic currency is attracting new users every day, and as the I-Team follows the money, we've found Bitcoins also lead to criminal networks.

The cryptocash has only a virtual value-- the coins just symbolize a digital dollar. They really exist only as numbers in a public database, operating similar to those prepaid gift cards you buy at the store.

"I decided to take the currency because it liberates me of a lot of fees that I pay when I take credit cards," said Alex Anon, owner, Bucephelus Bikes.

Thousands in fees this Evanston bike shop pays every year were eliminated according to the owner through virtual currency.

Here's how it works: let's say you buy a bike with Bitcoin. The store sends the bill to an online currency exchange where the total owed is converted into a Bitcoin equivalent, and made into a scan bar, known as a QR.

"The customer would, with his app and phone, would receive this request and approve it and within seconds the funds would move from his wallet to my wallet, that's the digital wallet of course," said Anon.

But Bitcoin's reputation has taken a beating. Consider the shuttered Silk Road, described as "criminal eBay," selling "counterfeit identification, narcotics and weapons" and pulling in an annual revenue stream of over $250 million."

Bitcoin millionaire Charlie Shrem was charged last month with money laundering; allegedly selling more than $1 million in online currency to Silk Road users. Shrem pleaded not guilty.

"When they shut down Silk Road, they seized $30 million of Bitcoin. It was a major way that people were able to pay each other," said Austan Goolsbee, economics professor, University of Chicago Booth School of Business.

The feds also shut down Liberty Reserve, a digital currency bank that prosecutors say laundered $6 billion in proceeds of criminals' crimes."

"Once you start looking at the online drug markets where Bitcoin became the primary means of circulation, you see the money laundering," said Goolsbee.

Austan Goolsbee was Barack Obama's top economist when Bitcoin was invented in 2008.

"We kind of have yet to see the government pushback," said Goolsbee.

Unlike conventional currency, there is no government regulation. Yet, during Senate hearings in December:
-Homeland Security officials testified they are "actively investigating the emerging threat and criminal exploitation of virtual currency systems"
-the Justice Department said cryptocurrencies make it harder for law enforcement to follow the money.
-the FBI created a new task force, VCET, or Virtual Currency Emerging Threats working group
-the Treasury Department sent these warnings to banks reminding thrifts to look out for money laundering.
-and then Fed Chief Ben Bernancke testified the reserve doesn't "have authority to. . . regulate" cyber money

The Bitcoin Foundation, an international nonprofit, says their currency's transactions are more transparent than traditional ones.

"Bitcoin is not some magical cloaking device that allows criminals free reign, nor does Bitcoin pose a unique or unsolvable threat to the law enforcement and regulatory community. Industry led efforts are underway to help prevent abuse," said Patrick Murck, attorney, The Bitcoin Foundation Inc.

"Government is torn between, should we have nothing to do with this, is this like a video game, should people like do whatever they want, or is this an actual currency to transact illegal things. The tax authorities are not going to, I think, allow this to get to be bigger than a small curiosity," said Goolsbee.

Government regulators haven't touched Bitcoin even though an FBI intelligence assessment two years ago reported holes in Bitcoin security and a high probability of theft and criminal hacking.

Federal agents concluded that Bitcoin would likely continue to attract cyber criminals needing to launder money and fund illicit organizations-such as terrorist groups.

Additional information:
What is Bitcoin? https://www.youtube.com/watch?v=Um63OQz3bjo
Bitcoin website: https://bitcoin.org/en/
US SENATE HEARINGS: Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies
Bitcoin Foundation: https://bitcoinfoundation.org/
Bucephalus Bikes in Evanston: http://www.bucephalusbikes.com/
Prof. Austan Goolsbee: http://www.chicagobooth.edu/faculty/directory/g/austan-d-goolsbee

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