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Bitcoin’s Black Market Will Continue Post Silk Road

“The proliferation of digital currencies fuels the proliferation of tools and services necessary for cybercrime. This in turn helps fuel the growth in cybercrime, and other forms of digital disruption.”

This finding was just one major conclusion of a recent McAfee white paper that aimed to assess why virtual currencies remain a popular payment method among criminals.

Entitled “Digital Laundry,” the study went beyond recent headlines to draw a clear connection between the essential qualities of the burgeoning payment system and illicit spending. The result is new analysis that suggests bitcoin and other forms of virtual currency will continue to be a magnet for criminals, even in spite of increased attention from government officials and law enforcement.

This pattern of crime, the report indicated, began in 1996 with the creation of “the forerunner to virtual currencies,” e-gold, which quickly became a “favored location for cybercriminals.” Its offices, McAfee noted were eventually raided by law enforcement officials, and its founder was indicted. e-gold users, however, quickly migrated to another service.

The white paper went on to detail the similar fates met by other virtual currencies such as WebMoney and Liberty Reserve, painting a vivid picture of how bitcoin’s story could come to a close. But, the question remains is this fate destined to befall bitcoin, or does its greater popularity among U.S. consumers, businesses and entrepreneurs provide it with unique advantages its predecessors did not?

For on how the history of virtual currencies could shed light on this essential question, we break down McAfee’s report for answers.

What Is Virtual Currency?

McAfee began its report by detailing how bitcoin is just one of many digital currencies, and that these forms of payment can actually be divided into two categories: electronic money schemes, whose units are traditional currency and virtual, or “invented,” currencies, like bitcoin, e-gold and emerging player litecoin.

In virtual currency, the paper explains, the money format is still digital, but its legal status is unregulated. Likewise, unlike with electronic money schemes the possibility of redeeming the funds is not guaranteed and there is no supervision of the payment system, two attractive qualities for criminals.

How Virtual Currency Benefits Criminals

McAfee also profiled the reasons why the virtual currency market is expanding, first citing its ease of use. The report noted that virtual currency offers enormous benefits to legitimate businesses looking to sell online, but it is “equally appealing to those offering services that may not be legal.”

The design of certain virtual currencies, according to the report, makes potential investigations challenging to law enforcement. It noted that because bitcoin does not have a central authority “law enforcement agencies have more difficulty identifying suspicious users and obtaining transaction records.”

The report also indicated that this lack of currency does have a number of drawbacks, citing the distributed-denial-of-service (DDoS) attacks that have crippled the currency’s operations and called its reliability into question in the past.

Virtual Currency And Underground Markets

McAfee indicated that bitcoin continues to foster underground black markets where the currency can be used to acquire illegal products and services. The report illustrated two examples of illegal sites that accept bitcoin, BlackMarket Reloaded and the Hitman Network.

The report indicated that these websites were included “to demonstrate that confidence in the privacy of virtual currencies has enabled the sale of some frightening services.”

Despite the strength of bitcoin’s architecture, some top economists, like Global Economics Group’s David S. Evans, have suggested that bitcoin’s association with illegal activities will eventually lead to the payment system’s demise.

For more a full analysis read “Bitcoin Is A Remarkable Innovation, Here’s Why It Will Fail” to learn more. For McAfee’s full white paper, click here.

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