Is the Bitcoin frenzy making the world less safe?
What are the risks with Bitcoin? Bitcoin is the first and most valuable cryptocurrency and it has seen massive growth in 2017. But many people are warning about the risks associated with Bitcoin. A number of high-profile investors regard Bitcoin as a ‘bubble’ or ‘mirage’, and expect the market to crash, like the dot-com bubble. Others highlight that cryptocurrencies like Bitcoin help to enable financial crime and funding of terrorism, due to the level of anonymity that digital currencies can provide to technologically adept criminals.
It seems like everybody is talking about cryptocurrencies at the moment. With apps like Coinbase making it possible to buy and trade cryptocurrencies at the tap of a button, thousands of people – from political idealists to economic opportunists – have been jumping on the crypto investment bandwagon.
Cryptocurrencies are creeping into the mainstream, with even Goldman Sachs recently announcing their plans to start trading Bitcoin. 2017 saw the asset value of Bitcoin boom, amidst growing confidence in the first and most important cryptocurrency.
Many cryptocurrency investors have seen the growth of Bitcoin as a win-win situation for all concerned. But are crypto-investors inadvertently paying into a system that is making the world less safe, and putting us all at risk?
Since its early days, Bitcoin has had its share of ties with criminal activity. With the increased level of anonymity that it provided, Bitcoin was a popular currency on the darknet marketplace the ‘Silk Road’, where it was used chiefly to trade illegal drugs, as well as other contraband.
As it crawls towards the mainstream, Bitcoin has certainly shaken off some these negative associations. But the fact remains that crypto transactions continue to afford criminals with a veil of anonymity, enabling them to evade justice – and enabling the financing of all manner of malicious activities.
The problem is that, unlike conventional currencies, cryptocurrencies are decentralized, and therefore not subject to the same regulations, reviews, and monitoring as in financial institutions or banks. This means that potential criminal transactions that are processed in cryptocurrency bypass the regulatory controls that banks are legally required to perform.
Bitcoin – a digital cryptocurrency and payment system. It is a decentralized digital currency, as it operates independently of a central bank.
Cryptocurrency – a digital asset designed to function as a medium of exchange. Encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds. Bitcoin is the first, and, at present, the most valuable cryptocurrency.
Blockchain – an encrypted ledger which records the history of cryptocurrency transactions
Bitcoin and terrorist funding
Amongst the criminal organizations that are benefitting from unregulated cryptocurrency transactions are ISIS. In a PDF circulated on social media, entitled “Bitcoin and the Charity of Violent Physical Struggle”, one ISIS supporter explains, “This system has the potential to revive the lost sunnah of donating to the mujahideen, it is simple, easy, and we ask Allah to hasten it’s (sic) usage for us”.
As academics from Macquarie University have highlighted, the utility of crypto for helping to fund ISIS terrorist operations is significant.
Ghost Security Group, a hacktivist and anti-terrorism group, claimed to have identified a chain of transactions to Bitcoin wallets believed to be owned by ISIS which contained funds between $4.7m and $15.7m – between one to three percent of their estimated annual income. The group stated to news network NewsBTC that ISIS is “extensively using Bitcoin for funding their operations”.
In 2015, German media company Deutsche Welle reported that one Bitcoin wallet believed to belong to ISIS received around $23m within a single month.
Lack of verification
One of the key issues is how easy it is for potential criminals to buy and transfer Bitcoin using Bitcoin ATMs. Irwan and Milad note that using a Bitcoin ATM, a bad actor is able to very quickly and easily transfer funds anywhere in the world. “In many cases, insufficient or ineffective levels of verification are being carried out to determine their money laundering or terrorism financing risk,” they state.
For many years, Irwan and Milad explain, financial institutions have successfully used red flag indicators and suspicious behaviour models to detect money laundering and terrorism financing activity. They state that it is “unlikely that similar behaviour models or red flag indicators exist for detecting illicit transactions in the Bitcoin blockchain.”
In another recent article, Reynolds and Irwin highlight that although Bitcoin users’ public keys can be traced through transaction history, they remain anonymous unless accompanied by other requirements of confirming identity data, such as an email address. This limits detection if an account user submits fraudulent information or simply doesn’t submit any personally identifiable information.
As Bitcoin and other cryptocurrencies continue to grow, the question of regulation becomes increasingly pressing. “It is essential that steps are taken now to understand potential areas of weakness in this technology before it, and others like it, become mainstream methods of transferring illicit funds around the world,” Irwan and Milad conclude. “Failing to respond now may be a recipe for disaster.”
Read some of latest research on cryptocurrencies
- Tracking digital footprints: anonymity within the bitcoin system
- The use of crypto-currencies in funding violent jihad
- Bitcoin transactions: a digital discovery of illicit activity on the blockchain
- Categorical Anarchy in the UK? The British Media’s Classification of Bitcoin and the Limits of Categorization
- Bitcoin and modern alchemy: in code we trust
- Accounting for the Bitcoin: accountability, neoliberalism and a correspondence analysis
- Using sentiment analysis to predict interday Bitcoin price movements
- Blockchain: properties and misconceptions
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