In August 2008, the domain name bitcoin.org was registered. In October 2008, a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. This paper described how to use a network of computers to implement “a system for electronic transactions without relying on trust”. The network was first implemented in January 2009, and became the first bitcoin network a Satoshi Nakamoto mined the very first block of bitcoin (block number 0), which had a reward of 50 bitcoins. Each block can hold data and this first block held simple text, namely “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This serves both as a timestamp of the origin of the first block and an insult to the instability caused by traditional, centrally approved, banking.
While interesting, this blog post will not continue to provide a history of Bitcoin itself, but rather focusses on the issue of how Bitcoin flows through our systems – financial, commercial, and transactional – as well as why anyone who buys or sells Bitcoin needs to know where the Bitcoin they have or work with came from. Let’s start with a very simple example: if someone came up to you on the street and offered you two tickets to the World Series for $50 each, and the face value of the tickets was $500 each, you would naturally wonder about their origin and authenticity. Yet, every day people trade or sell Bitcoin for far less than its current market value.
Like it or not, Bitcoin is in fact the commodity and currency of black market and illicit activities. However, in ways completely different from traditional currencies, Bitcoin is the choice of currency for converting money from all types of illegal activities. This is money laundering 101, to say it quite simply.
If a person has currency, large amounts of currency, they wish to hide or convert to untraceable currency of another form, they typically have to pay a price for such conversion. That price typically is a reduction in value they receive for such currency. As untraceable as Bitcoin can be, to participate in a Bitcoin exchange (purchase or sale) a person typically has to register with an exchange such as Coinbase. There are, of course, less rigorous and less regulated exchanges.
Keeping in mind that untraceable means no personally identifiable information is associated with the currency or thing of value. For example, a thing of value might be a gift card because gift cards can easily be purchased for cash in stores worldwide without providing any identification. When a person spends a gift card, they can do so without providing identification as well.
The point of all this is: if you are buying Bitcoin at significantly less than the market value, or selling Bitcoin at far more than the market value, you may well be participating in drug smuggling, human trafficking, or some other black market operation. It may not matter at all if a person has no knowledge of the illegal activities – if a person becomes involved in a transaction which is completely out of market norms – buying a $500 ticket for $50 for example – that person may be considered part of the criminal enterprise.
Just to be clear – there is nothing inherently or even suggestively illegal about transactions made in Bitcoin, or any other cryptocurrency – a person should use the same due diligence they use every day regarding financial and commodity transactions.
If you aren’t sure about a Bitcoin transaction, call an attorney and ask. Better safe than money-laundering sorry.