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Romney Shakedown Attempt Shows Bitcoin's Laundering Potential

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It may be an elaborate hoax, but an apparent attempt to blackmail Mitt Romney shows the dark side of a disruptive financial technology and raises serious legal questions.

In an anonymous letter addressed to PricewaterhouseCoopers, an individual or group of individuals claims to have obtained the presidential candidate's unreleased tax returns from a PwC office in Tennessee. The letter claims these documents will be sent in encrypted form to "all major news outlets" and lays down a twisted challenge. Those who want to prevent the alleged tax returns from being decrypted must send $1 million worth of bitcoins to an address provided in the letter by Sept. 28. But if those who do want the purported tax returns to become readable send the same amount of money to a different Bitcoin address first, the blackmailer or blackmailers will release the encryption key anyway. "Who-ever [sic] is the winner does not matter to us," the letter says, chillingly.

Aside from the obvious crimes involved with obtaining these documents (if the letter's claims are genuine), the use of Bitcoin for extortion has legal implications that hold true even if the claims prove bogus.

For the uninitiated reader, Bitcoin is a decentralized peer-to-peer cryptographic currency which facilitates partially anonymous transfer of units of value (known as bitcoins) between peers through unique Bitcoin addresses. Bitcoins may be sold or purchased for cash through highly liquid exchanges.

Bitcoins, along with many legitimate uses, enables the easy laundering of funds. The illicit online drug marketplace known as the Silk Road exclusively uses bitcoins for transactions. In doing so it employs a proprietary "mixing system" which instills a sense of security in their users, whose sales generate a $6,000 per day profit for the site's operators. In a mixing system, bitcoins are sent between a number of addresses to provide a greater degree of anonymity. Numerous such services exist, and nothing within Bitcoin itself prevents users from creating elaborate transactions that effectively mix dirty coins with clean ones. One mixing service markets itself as a "the world's most popular Bitcoin betting game."

Money laundering is a federal crime in the United States, and is defined by Black's Law Dictionary (ninth edition) as "the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced." State legislation also deals with the issue, using the template of the Uniform Money Services Act, and internationally efforts are undertaken by Interpol to police such actions.

It should be noted that enforcement officials have not and may not be required to define Bitcoin as money to pursue the individuals in the Romney tax return caper. The use of Bitcoin complicates the process of tracking these individuals by law enforcement, but it has been demonstrated that the Bitcoin protocol does not provide for entirely anonymous transactions. However, elaborate Bitcoin mixing techniques could make it prohibitively expensive for enforcement officials to track down desired individuals.

It is also plausible that these actions are motivated by a desire to manipulate the market price of bitcoins, regardless of whether this is a hoax. Someone holding a large position in bitcoins would have a strong incentive to create demand for the large number of coins needed to meet the $1 million ultimatum. The Bitcoin/U.S. dollar exchange rate has historically been very volatile, and an influx of $1 million could drive up the price by as much as 25% (other Bitcoin statistics can be found here).

The Secret Service is investigating this matter. This will be the first time that many people have heard of Bitcoin. The legal questions are many, and we look forward to analyzing the facts surrounding this story as they unfold.

Matthew Elias and James Woods are directors of the Cryptocurrency Legal Advocacy Group, a nonprofit at the University of Mississippi School of Law that seeks to promote a clear regulatory environment for peer-to-peer currencies. 

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Comments (10)
Blackmail is ugly. Theft is criminal. It would be a shame, though, if this stunt were used as a pretext to try to stamp out anonymous digital transactions. The eventual elimination of paper bills and coins, and all their costs and inefficiencies, is desirable and likely. But an all-seeing monetary surveillance state is a terrifying and avoidable prospect.
Posted by Marc Hochstein, Executive Editor, American Banker | Thursday, September 06 2012 at 11:32AM ET
The hoax is not really about money laundering, which wouldn't even enter into the picture if blackmail was legalized.

Aside from the purported break-in, blackmail in and of itself is a victimless crime as Prof. Walter Block has pointed out in this 1999 paper, http://www.walterblock.com/wp-content/uploads/publications/block_blackmail-as-a-victimless-crime-1999.pdf
Posted by Jon Matonis, The Monetary Future | Thursday, September 06 2012 at 11:41AM ET
Remember Mondex? DigiCash? and other anonymous eCash programs? All had substantial controls to monitor large transactions and to protect against fraud or misuse. Anonymous can be used properly if the providers establish rules to guard against misuse. eCash is for small transactions, not million dollar items.

Mike Nash retired eCash advocate
Posted by mnash900 | Thursday, September 06 2012 at 12:33PM ET
Mike, Thank you for commenting. Bitcoin's decentralized nature may make such controls impossible. Is that always a bad thing, necessarily? Humor me: I'll play devil's advocate on the transaction size limits you alluded to. Might there be innocent reasons for someone to want to move even large amounts of money under the radar? Imagine a member of a minority ethnic and religious group facing persecution, or a political dissident, who plans to escape his home country and wants to put his wealth somewhere it won't be confiscated by the government he's fleeing. Swiss bank privacy, as I understand, is not what it used to be....
Posted by Marc Hochstein, Executive Editor, American Banker | Thursday, September 06 2012 at 1:13PM ET
It's not really fair to call SatoshiDICE a "mixing/laundering system." It's a casino game. The fact that it can mix coins during this process is no different than a grocery store which combines cash deposits from various customers. You wouldn't call a grocery store a "laundering system" even though it could be used for such.
Posted by sean.orchard | Thursday, September 06 2012 at 3:24PM ET
Sean.Orchard,

I characterized SatoshiDice as a "mixing service" because in practice, it is much closer to laundering than the grocery store you describe.

There are 98% break-even odds. We can verify that a player does not receive their original coins back when they "win". In fact, they receive different coins. This looks a lot like paying a 2% fee for different coins. Nominally it may be a casino game, but in practice it takes one set of coins, and spits out 98/100 new coins.

For more info on SatoshiDice and the impact it has had on Bitcoin, I recommend the following threads:

https://bitcointalk.org/index.php?topic=77870.0
https://bitcointalk.org/index.php?topic=86679.0
Posted by MatthewElias | Thursday, September 06 2012 at 5:14PM ET
Just for clarity, I misspoke in saying "new coins" in the above comment. I intended to say a player receives Bitcoins which are not the same Bitcoins initially "bet".
Posted by MatthewElias | Thursday, September 06 2012 at 5:49PM ET
If they have the information they claim, in one sense they are doing the public of the USA a favour, in letting them decide if they want to know their coming presidents tax behaviour. Is he a cheating person or a stand up guy? But they gave this to the public in the whole world.

If he have things to hide from public, it could be abused by chinese/russian government hackers. It could also had been sold to them. They could have used in closed negotiations to affect his decision making. Thats a weakness you do not want in a president running one of the worlds biggest countries.

Whats worse? US hackers revealing it now or information later abused by another government when he acctually have power.

I would say this act gives people more power over cheating leaders.
I see a glimse of a future where leaders can no longer get away with everything. There is allways the risc of things leaking out.

But this could ofcourse also be abused.

Its also not that easy to launder money with Bitcoin on any of the bigger exchanges since they require passport/id bills etc.

It might even be so that they cant get the money out.
If thats true, this would only be a voting mechanism.

Because if it is immoral behaviour from his side. You could argue that the voters have a right to know who they are voting on? And they are thus patriots who give everyone a chance to know the true candidate?

Would you not want to know what kind of person you really are voting on to run your country?
So in one sense they have made a democratic decision of that issue.

Well not really a democratic system, since it costs money. But he do have the money and even he himself can pay if he think its important. Though that would reveail him as trying to hide something or maybe not...Since Bitcoin is quite anonymous.

But that is also the way the US have made their system.
The president with the most money backing wins, so in a sense they have made a "parody" of that system. The very same system which Mitt Romney likes.

Unless its a fraud. Which I think its not. Why go through the trouble of getting caught if it is just made up?

If he have something to hide, he should be nervous.
Because right now someone could in the name of the best interest of the US people or even the world, pay to see the truth about someone who could be named the president of one of the worlds most powerful countries in the world.

Imagine what would had happened if Hitler would had been revealed as a Maniac before he was elected? I´m not saying he is a maniac. Just that this gave more power to everyone.

Btw. Should not the secret service also look into his taxes?
Or do the secret service want a president that have things he needs to hide to get elected...
Posted by Roughforth | Friday, September 07 2012 at 6:33AM ET
While SatoshiDICE will change the makeup of coins in your wallet, it is the worst mixing systems that would ever exist as 100% of the transactions are traceable -- a part of each wager, win or lose, is returned to the original sender.

This is discussed here:

- http://bitcointalk.org/index.php?topic=79079.0
Posted by sgornick | Saturday, September 08 2012 at 11:53PM ET
You can't really do anything about casinos "spamming" the bitcoin network but they can be anonymous, I still got big hopes for Casinobit, Casinobit seem to take anonimity a bit more seriously.
Posted by sirebral | Friday, November 23 2012 at 9:26AM ET
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