With crippling debt, banking scandals like LIBOR and HSBC and the financial banking crisis in the Eurozone, many people are left losing faith in banks and the financial institution altogether and are ready to try the virtual money system where, essentially, the customer is his or her own bank.
Bitcoin is a virtual banking system with a decentralized virtual currency that allows customers to buy, trade, invest and have loans. There are no banks securing money transactions correspondingly. There are no bank fees, no regulators, no greedy CEOs and board members making bad investments with bank money that are recouped in customers fees — sounds too good to be true, perhaps.
Mint Press News purchased Bitcoins to find out the real truth behind the virtual currency.
Bitcoin, a safe bet?
“In Cyprus we’ve not got a lot of choice. I can’t get money out of my account so I’m not putting my money in, I thought the bitcoin would work for me.” — Bitcoin user
Many Cypriots escaping the collapsing financial banking crisis in Cyprus turned to bitcoins as a safe way to deposit wages and income. At the beginning of last week, Bitcoin virtual currency rose to its highest value where one bitcoin was worth $70, with 10 million bitcoins in circulation. But can this virtual currency replace banks?
The experience of using bitcoins isn’t straightforward; be prepared for hours of frustration, as there are many choices of downloadable software, depending on the site you visit. Joining the member forum of Bitcoin requires very little personal information, so once you’ve signed up you need to download software wallets that act as your anonymous and individual bank. There are though, e-wallets like Blockchain Wallet that requires no downloading.
The wallets contain your bitcoins and you can use them to buy goods from Amazon, clothes, pizza and a variety of electronic products, cars and even a house. In my case, I chose to buy hair products from a purported hair site that was closing down hair. Joining forces with another bitcoin user with the user ID 29942, I made the purchase and received the goods but I had no real idea who I was buying from, or if I was buying illegal goods, nor do I know anything about user id 29942. The whole transaction is based on trust, not knowledge, as all identities remain anonymous throughout all transactions. Some sites though, are more trustworthy than others.
But because of the anonymous nature of these transactions, you cannot be entirely sure that you will indeed receive goods you have paid for, or if you will unknowingly become involved with an organized crime money laundering scam.
Buying with anonymity is the biggest selling point of this virtual community, especially if you are looking to purchase items like legal prescription drugs outside of the United States. There are many monetary advantages to this bitcoin community, but there is also a darker side — that of organized crime, money laundering, illegal drug trades and slave trafficking.
“Right now, we’re in the Wild West days of Bitcoins,” said Gaven Andresen, chief scientist with the Bitcoin Foundation. “And some of the smaller exchanges and smaller services just don’t have their security up to snuff yet.”
The FBI sees the anonymous bitcoin payment network as an alarming haven for money laundering and other criminal activity — including a tool for hackers to rip off other bitcoin users.
Speaking to one bitcoin user, “I was badly ripped off and I’m still paying for it. I thought I was buying three iPads for my family for Christmas. I made the payments but I didn’t get any goods. I tried to get back my bitcoins, but they had some hacking software that emptied my account. So not only did I pay for goods I didn’t receive, I also lost the rest of my money.”
According to the FBI, these incidents of theft are believed to be perpetrated by organized criminal gangs. In a report titled, “Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity,” concerns about the difficulty of tracking and identifying anonymous Bitcoin users are discussed.
In the document, the FBI notes that because Bitcoin combines cryptography and a peer-to-peer architecture to avoid a central authority — contrary to how digital currencies such as eGold and WebMoney operated — law enforcement agencies have more difficulty identifying suspicious users and obtaining transaction records.
Organized criminals exploit the weakness in tracking accounts and use third/fourth party anonymous accounts to “cash out” their bitcoins into dollars and pounds in offshore accounts. But organized crime is just one element of this virtual community; another common user of the Bitcoin virtual world are people looking to buy drugs.
Ordering drugs online
Silk Road, a digital black market, sits below the radar of most Internet users. Through a combination of anonymity technology, like TOR, and a sophisticated user-feedback system, as well as some assistance from geek and technical support, you can access the Silk Road website, a trading website for the buying and selling of drugs. From a shopping list you can put in your shopping cart: Afghani hash; one-eighth ounce of “sour 13” weed; 14 grams of ecstasy; one gram tar heroin, and many other drugs.
Sellers feel comfortable openly trading hardcore drugs because the real identities of those involved in Silk Road transactions are utterly obscured. If the authorities wanted to identify Silk Road’s using computer forensics, they’d have nowhere to look and nothing to find as TOR masks a user’s tracks on the site. To purchase something on Silk Road, you need to first buy some bitcoins using a service, such as Mt. Gox Bitcoin Exchange. Once that’s created, all you have to do is deposit some bitcoins and start buying drugs.
Silk Road has been under attack from the U.S. government and the FBI. The site has been infiltrated by Drug Enforcement Administration (DEA) agents but regardless of these attempts to close the site down, Silk Road remains defiant and resurfaces in a different URL.
In an interview with Wired, Silk Road’s administrator said, “The state is the primary source of violence, oppression, theft and all forms of coercion. Stop funding the state with your tax dollars and direct your productive energies into the black market.”
Silk Road highlights the problems of this anonymous world. In the Bitcoin community, geeks and cyber criminals are constantly creating new anonymous technology to mask the buying and selling of drugs and there have been reports on the selling of sex slaves. Although in states like Colorado and Washington where the sale of marijuana is legal, Silk Road black market trade of all drugs poses a huge problem to law enforcement on the net.
Bitcoin brokerage company gets hacked
Last week was a difficult week for the Bitcoin currency. At the beginning of the week, the Bitcoin community was increasing in users as a response to the financial crisis in Cyprus. Over recent months, the Eurozone central currency, the euro, has been under attack and looked to be on the verge of collapse. As Cyprus agreed on a 10 billion euros bailout with the European Union and the International Monetary Fund (IMF) in an attempt to stave off the collapse of its banking sector, it also meant that the bitcoin value has been driven up by the Cyprus debt crisis.
As Cyprus banks were temporarily shut down and were forced to financially limit customers to 300 euros a day, it spiked the numbers of users of the virtual Bitcoin community to its highest levels. There are about 10 million bitcoins in circulation, and each bitcoin were valued at $70 — by the end of the week, Bitcoin brokerage accounts were hacked, which instantly plummeted the value of bitcoins to $40.
One Bitcoin user said, “I joined Bitcoin because the euro doesn’t look safe, but now it looks like this is a bad deal also. I don’t know who to trust anymore.”
The Bitcoin brokerage company Bitinstant, which handles Bitcoin transaction services, announced that hackers broke into one of its accounts last week, stealing $12,000 worth of the digital currency. Bitinstant was forced to close down last weekend and suspend transactions. The company said that while it lost bitcoins, no customers were affected by the hack. With control of the domain name site (DNS), criminals took control over Bitinstant’s email, reset the password and started emptying Bitinstant’s account.
The FBI estimates in its report that the Bitcoin economy was worth between $35 million and $44 million and as it gains popularity, the FBI is concerned that Bitcoin will see more hacking into Bitcoin brokers’ services, as well as more black market activity. The system is too easy for criminals to hack.
“If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful tool for various illegal activities beyond the cyber realm,” the FBI writes in the report. “For instance, child pornography and Internet gambling are illegal activities already taking place on the Internet which require simple payment transfers. Bitcoin might logically attract money launderers, human traffickers, terrorists and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers.”