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.