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Bitcoin: Paying For Crime

February 19, 2014, 10:05 PM by Hailey Higgins

Bitcoin: Paying For Crime

Their prices have surged high enough to equal the cost of an ounce of gold -- but you will never hold one your hand.

That's because a Bitcoin is an increasingly popular form of virtual currency that's best described as virtual cash.

It's generated by computers, lives on the internet, and can be used to purchase real and digital goods across the world.

"It is creative. You always have the same crimes and just a new way to commit them," Digital forensic investigator Ashley Podhradsky said.

It's an underground economy that some see as a digital Wild West, while others call it the future of money.

"Every year it seems to pick up more steam," Podhradsky said.

It's a form of money that only exists in ones and zeros. Users exchange cash for digital money using online exchanges, and then store the Bitcoins in a wallet program on their computer or smartphone.

You put money in, you have your exchange rate, you go through your virtual goods, you bring it back out and you can take it out in any denomination that you want.

The virtual currency can transfer payments anywhere in the world, and because it's not regulated by a country or banks, it eliminates transaction fees or the need for credit card information. Bitcoin is difficult to track and the users remain anonymous, according to digital forensic investigator Ashley Podhradsky, who says criminals use Bitcoin to easily conceal their identities and crimes.

"It started in a gaming environment, and then people realized, 'Okay, I can sell my drugs and have the transaction virtually so that way I can take the money out of the equation at that point, or human trafficking or sex trafficking," Podhradsky said.

Hard cash can be difficult to smuggle and hand-deliver, but when it's online, it can be shielded by anonymity. While Sioux Falls Police say they haven't had any cases involving Bitcoin yet, it is becoming an enticing option for money laundering, sex trafficking and drug deals across the globe.

"When you are able to have a convergence of in-game or virtual world economies, with a physical world denomination, that's where you begin to see some of that anonymous factor come through," Podhradsky said.

For six years, Podhradsky has looked for clues left on game consoles to track the exchanges of virtual currency for illegal goods and services.

Earlier this month, a Bitcoin exchange founder was arrested for drug charges and money laundering on the of drug websites: Silk Road. In October, federal authorities shut down the Bitcoin-only website, used for purchasing drugs and hiring hit men. But a new version is already up and running, raising the question of are authorities fighting a losing battle?

The illegal activity is also catching the attention of country leaders. Russia recently banned the use of Bitcoin and the US Senate is looking at possible regulations.

"Our responsibilities as prosecutors is to ensure we continue to enforce the law even in new technological settings and to prevent criminals to use those technologies to create zones of impunity," Mythili Ramen said, acting Assistant Attorney General for the Department of Justice Criminal Division.

Still, more retailers are catching on to Bitcoin. now accepts it, as well as smaller merchants across the country.  Just this week, Bitcoin ATMs are popping up in Seattle.

"It's hard to say one way or another where exactly this is going to go but I think its gained traction," Pohdradsky said.

Bitcoin: the new virtual currency for illegal activity -- or the future of online payments.

This article has been revised to reflect the following correction:
This article misidentified a Bitcoin exchange founder who was arrested for drug charges and money laundering as a Bitcoin founder. The man arrested was not a founder of Bitcoin, but an exchange website known as BitInstant.

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