Two recent federal investigations of virtual currency accepting websites—Liberty Reserve and Silk Road—has prompted warnings from law enforcement officials that the use of the currencies is attracting criminals to the sites.
Investigators say the anonymity of such sites has created a black-market bazaar for narcotics and other contraband.
“The perpetrators feel they can more easily conceal their activity, their identities and their proceeds,” Deputy U.S. Attorney Richard Zabel said at a hearing last month held by the New York State Department for Financial Services.
In one described investigation, an undercover federal agent signed into Liberty Reserve as Joe Bogus, 123 Fake Main Street, Completely Made Up City, N.Y. He was immediately able to begin transferring funds.
Actual cash must be smuggled and hand-delivered, Zabel said. But in the case of the Silk Road case—the site was shut by federal investigators—Zabel said “users were able to purchase drugs from drug dealers located anywhere in the world, essentially with a push of a button.”
Manhattan District Attorney Cyrus Vance Jr., speaking at the same hearing, urged state regulators to put tighter controls on digital currency exchanges to tame “a digital Wild West,” according to the Associated Press.
New York regulators have said they are considering adopting rules to license virtual currency businesses and other regulations to prevent money laundering.
The moves come as virtual currencies such as bitcoin have been riding a roller coaster of acceptability—being accepted by more businesses, but challenged by more international governments at the same time.
Users can exchange cash for digital money using online exchanges. The currency is then stored in “digital wallet” programs. The program can transfer payments to merchants or others without transaction fees and the need to provide bank or credit card information.
While advocates say the use of virtual currency is growing despite high-profile cases against virtual currency exchanges.
But those cases are troubling.
According to the AP, in the Liberty Reserve case, prosecutors estimated that over roughly seven years, the Costa Rica-based operation processed 55 million illicit transactions worldwide for 1 million users and laundered $6 billion in proceeds for credit card thieves, child pornographers, drug traffickers and other criminals.
