Bitcoin: Funding the criminal enterprise?

One of the applications of Bitcoin is for payment of illegal transactions.   The purchase of illegal drugs, hacking or assassination services, for instance, have featured prominently in the uses of Bitcoin and other crypto-currencies.  Indeed, such illegal transactions may have motivated some of the developers of these currencies, and certainly motivated many of the early adopters of them.  There is no doubt that such applications have given these currencies a certain aura - either a prestigious mystique or an anti-social criminality, depending on your point of view. 

What feature or features of crypto-currencies lend them to such illegal uses?  Perhaps the key feature is anonymity of ownership.  At least in theory, one may own Bitcoin without anyone else knowing who owns them, or being able to trace their past or present ownership.  In this, Bitcoin is like holding national banknotes in cash under your mattress.  As soon as a national currently is deposited in a regulated bank, its connection to its owner is known and may be reported to relevant authorities.  In most Western jurisdictions, large deposits or transfers (eg, those over GBP 10,000 in the UK), are required by law to be reported to anti-money-laundering agencies.   Someone having large amounts of money and not wishing to have transactions reported needs to keep it under their bed (as this suspected criminal did [link]) or else deposit it in un-regulated "banks", for example, those run by criminal gangs such as the Chinese triads or the Sicilian Mafia.  Depositing money with unregulated banks run by criminal gangs, of course, brings its own risks, not to mention the low rates of interest such organizations usually offer. 

Another feature that may have attracted people engaged in illegal transactions to use crypto-currency is that these currencies are beyond the reach of national Governments.  Some governments, such as those of modern Italy, are notorious for imposing sudden taxes on bank deposits, sometimes, even retrospectively.   For that reason, many Italian residents maintain bank accounts abroad (often in Switzerland), and are careful not to leave large sums of money in their Italian bank accounts.  A currency outside any national jurisdiction may attract people keen not to hold money in a form readily subject to government taxes, or to fiat and confiscation.   Some of these people may generate their savings from engaging in criminal activities, but not necessarily all.  

Given this history for the uses of Bitcoin, we may wonder whether such currencies will ever attract legal applications in large numbers.  The widespread perception of illegality, even if a mis-perception, may deter legal citizens and companies from using Bitcoin.  We will explore legal applications and benefits in a future post. 

Peter M - 2014