BANKTHINK

Romney Shakedown Attempt Shows Bitcoin's Laundering Potential

Print
Email
Reprints
Comments (10)
Twitter
LinkedIn
Facebook
Google+

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. 

JOIN THE DISCUSSION

(10) Comments

SEE MORE IN

RELATED TAGS

Fintech CEOs' Candid Advice, Bold Predictions for 2015

Several chief executives of financial technology companies offered a glimpse into a coming blend of old and new technologies, and made suggestions on where bankers can best spend their time and money next year, at the recent BAI Retail Delivery show in Chicago.

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, Editor in Chief, 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, Editor in Chief, 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
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.
Already a subscriber? Log in here
Please note you must now log in with your email address and password.