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Law Enforcement and Regulators Agree: Bitcoin Not Useful for Terrorists, Thoughtful Regulation and Education Needed

In the aftermath of the Paris attack on November 13, the European Union (EU) is looking to crack down on bitcoin   with the hope of preventing the financing of future attacks. Regulators and advocacy groups agree, though, that kneejerk regulation is not what is needed; rather, the need is thoughtful regulation and an increase in education. 

“There’s nothing wrong with Bitcoin, it just means it’s another part of our financial system,” said Dana Syracuse, managing director and a member in the Anti-Money Laundering (AML) and Regulatory Compliance Practice at K2 Intelligence, in an interview with Bitcoin Magazine

K2 Intelligence is an investigative, compliance, and cyber defense services firm. Prior to joining K2 Intelligence, he worked in the New York State Department of Financial Services and was the author of BitLicense.

“As time goes on, Bitcoin’s place is going to grow," Syracuse said. "One of the things that I talk about is, if you look at the story of bitcoin and the kind of enforcement and prosecutorial action, it shows the evolution and growth of the space.”

“Bitcoin is not the problem, and further restrictions on it are not the solution. Criminals and terrorists are using all sorts of technology to try to hide their activities over the Internet, but those who turn to bitcoin as part of that effort are making a big mistake,” said Jason Weinstein, director of the Blockchain Alliance, in an interview with Bitcoin Magazine.

Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network (FinCEN) explained at a Digital Currency Summit held by the Department of Justice that $4 million worth of bitcoin is circulated through regulated entities. Outside the regulated entities, $10 million worth of bitcoin is circulated. At the event, Calvery made clear that her agency didn’t regulate bitcoin; instead, it regulated the financial institutions. 

Perianne Boring, the founder and president of the Chamber of Digital Commerce, echoed those thoughts. In an interview with Bitcoin Magazine , she said, “Virtual currency is already highly regulated, especially within the G7 nations. Despite the high degree of regulation, the majority of bitcoin transactions are taking place outside regulated entities, which are mostly outside the G7 nations.”

“Increasing regulation within the G7 would only increase burdens on the companies that are working hard to comply with the Bank Secrecy Act and related regulations and could potentially push more bitcoin into the unregulated entities,” Boring said. 

“What is needed is rolling out regulations in a rational, thoughtful, and constructive way,” said Syracuse. “When you regulate in the face of a crisis, there is often a temptation to overcorrect, which you want to guard against. We have to be careful on the back end of a travesty like this not to overregulate.”

Regulation is not the problem; it is education

Fundamentally, it is education that is problem, not regulation. Once regulators have sufficient education, they tend to come to the same conclusion that many others do: Bitcoin is not the problem. 

“I’m a little skeptical of what new regulation would exist that would help,” said Vincent D’Agostino, associate managing director in the U.S. Cyber Investigations and Incident Response practice at K2 Intelligence, in an interview with Bitcoin Magazine

Before joining K2 Intelligence, he was the FBI’s trial agent for Silk Road 1 and the case agent for Silk Road 2. 

“If more people on the counter-terrorism side took the time to educate themselves on blockchain technology, so when they did a raid and the first thing they did was take that seized data and identify the public keys so they could start to make links," he said. "They could go, we didn’t know who this linked to, but now we know everything they’ve done. It attaches that person to those wallet files."

“Every financial innovation, every new form of value transfer brings with it its own unique challenges," Syracuse explained. "Bitcoin is not unique in that. Terrorism is a major concern of major financial systems. The use of bitcoin in those kinds of activities is no different than what goes on in the traditional banking system. Education in this space is key, and that is what will lead to rational and productive regulation and communication between the regulators.”

According to a report by the U.K. Treasury, “there is little evidence to indicate that the use of digital currencies has been adopted by criminals involved in terrorist financing, whether as a means by which to raise funds (crowd funding etc.), to pay for infrastructure (e.g. server rental), or to transfer funds.” 

The report also explains, “The money laundering risk associated with digital currencies is low, though if the use of digital currencies was to become more prevalent in the U.K. this risk could rise.”

That is because bitcoin is actually an inefficient method for transferring value for illicit purposes since it is a completely public ledger. 

“It would be far easier to launder euros or dollars than it would be to launder a decentralized, blockchain-based currency like bitcoin,” said David Long, the principal and senior consultant at the Northern California Fraud Prevention Solutions, in an interview with Bitcoin Magazine . “Though from an initial investigative standpoint, bitcoin might present more of a challenge due to the necessity of uncovering who is actually responsible for a given transaction or transactions. However, once the actor's identity is uncovered, the blockchain makes it possible to uncover most, if not all, of a person's transactions.  This capability is without parallel when the subject is dealing in euros or dollars.”

Weinstein further confirmed that point, saying, “Reports of bitcoin’s anonymity are greatly exaggerated.  Criminals or terrorists who use bitcoin to facilitate their activities are foolish, because bitcoin is traceable in a way that other payment methods, including cash, are not.”

Bitcoin is pseudonymous in that all that is shown is on the public ledger is a public address. However, once a law enforcement officer is able to identify who owns that public address, he would then be able to track every transaction that went to and from that address. If the Islamic State of Iraq and the Levant (ISIL) were to transfer bitcoin, and a law enforcement officer knew that it was their address, he could track each transaction and start building a case accordingly. 

Cash, on the other hand, is completely anonymous. An individual in ISIL could take envelopes of cash across state borders and easily pay for the necessary assets for committing an act of terror. A law enforcement official would have no way of verifying how the funds were used. Long gave an example where a trade-based money-laundering scheme using dollars or euros conducted by professionals could be virtually undetectable. 

The problem with this is that more people don’t realize it. 

“They [law enforcement] are not using existing bitcoin investigative techniques as much as they should,” D’Agostino said. “There is no doubt that when done correctly, using bitcoin can be extremely anonymous but as long as there are human beings involved in the transfer of bitcoin, the creation and maintenance of those wallets, and the movement of that digital currency, they are going to make a mistake at some point. Those mistakes are typically catastrophic from an anonymity perspective. If it’s a group of people within a terror network moving a high volume of bitcoin both directions, they’re going to make a mistake eventually. They’ll forget to encrypt their wallets or leave their abandoned keys on a piece of discarded or seized digital device. That’ll give you an opening, a crack in the door, to give law enforcement you a chance to exploit that information and connect the subject with a set of address and transactions. So what may have started as completely anonymous set of transactions now has ends up having the opposite desired affect”

The key is educating law enforcement and national security authorities about how the technology works, so they can enhance their ability to use it to follow the money and protect public safety, Weinstein said. "We need more education, not more regulation.” 

Jerry Brito, the executive director of Coin Center, explained in a recent blog post why more education is needed: “Overreaction by jittery policymakers in the wake of a crisis is always a concern, which is why education before such crises is so important. We’ve been engaged in just such education for over a year, and we’re hopeful policymakers understand that an overreaction would be counterproductive, whatever the headlines may say."

Brito echoed the point made clear by Boring and Weinstein: "The fact is that regulators understand that digital currencies do not pose the greatest risk for terrorist financing, and to the extent digital currencies pose some risk, a 'crack down' on their use would likely only serve to drive out legitimate players, which in turn would only serve to limit governments’ visibility into illicit uses.”

Bitcoin financial institutions already follow many of the same money transmitter laws that traditional institutions have to follow. Creating further regulation over them will not help prevent further acts of terrorism. Instead, educating law enforcement on the ways in which it can use the blockchain to seek and capture terrorists is one way to prevent future catastrophes. 

Photo StockMonkeys.com / Flickr(CC)

Jacob Donnelly is a freelance journalist and a consultant in the bitcoin/blockchain space. He runs a weekly digital currency and blockchain newsletter called Crypto Brief.

Jacob Donnelly

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