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American University National Security Law Brief

Volume 4 | Issue 1

Article 5

2013

Beyond the Silk Road: Unregulated Decentralized
Virtual Currencies Continue to Endanger US
National Security and Welfare
Jared A. Kleiman
American University Washington College of Law

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Recommended Citation
Kleiman, Jared A. "Beyond the Silk Road: Unregulated Decentralized Virtual Currencies Continue to Endanger US National Security
and Welfare." National Security Law Brief 4, no. 1 (2013): 59-78.

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58

NATIONAL SECURITY LAW BRIEF

Vol. 4, No. 1

Vol. 4, No. 1

Beyond the Silk Road

59

BEYOND THE SILK ROAD:
UNREGULATED DECENTRALIZED VIRTUAL
CURRENCIES CONTINUE TO ENDANGER U.S.
NATIONAL SECURITY AND WELFARE
Jared A. Kleiman1
“This isn’t something that’s a flash in the pan. It’s something that’s going to be with us.”
-Senate Homeland Security and Governmental Affairs Committee (HSGAC) Aide2
Introduction
As pseudonymous Bitcoin3 programmer Satosi Nakamoto prepares to celebrate his creation’s
fifth-anniversary in 2014,4 U.S. regulators have made little progress toward developing a comprehensive regulatory framework for virtual currencies. Bitcoin, the first decentralized open-source

1  J.D./M.A. Candidate 2016, American University Washington College of Law/School of International Service; B.A.
2012, Boston University. Former intern, White House Domestic Policy Council; U.S. Deptartment of Commerce,
International Trade Administration; U.S. Deptartment of State, U.S. Embassy London, Office of U.S. Ambassador Louis
Susman; Office of U.S. Senator John Kerry; Massachusetts Executive Office of Labor and Workforce Development,
Deptartment of Labor Standards, Office of the General Counsel; U.K. Parliament, House of Commons, Office of
Right Hononorable Malcolm Wicks, MP; and Europe/Middle East/Africa debt capital markets public finance analyst
at Barclays Investment Bank. Thanks are due to the NSLB Executive Board for helpful discussions during the drafting
process, my family for their support throughout my education, and Malcolm Wicks (1947-2012) for welcoming me on
my first step towards a public service career. The views expressed in this paper do not represent the views of these
individuals or of any organizations with which they are associated.
2  See Zachary Warmbrodt, Congress Starts Looking Into Bitcoin, Politico (Aug. 13, 2013, 12:08 AM), http://www.politico.
com/story/2013/08/congress-starts-looking-into-bitcoin-95464.html.
3  This paper uses “Bitcoin” to refer to the open-source cryptographic platform, and “Bitcoins” to describe the
substitute for real currency. See Some Bitcoin Words You Might Hear, Bitcoin Project 2009–2013, http://bitcoin.org/en/
vocabulary (last visited Oct. 18, 2013).
4  See Maria Santos, Sean’s Outpost Invited You to Celebrate Bitcoin’s Fifth Birthday, Bitcoin Examiner (Oct. 12, 2013), http://
bitcoinexaminer.org/seans-outpost-invites-you-to-celebrate-bitcoins-fifth-birthday/

2013). and is exploring how virtual currency can be properly exchanged while mitigating its attractiveness for criminals. led by the Bitcoin Foundation. Now You Can Buy Guns on the Online Underground Marketplace. however. 19. establishing clear dangers to U. one of the most influential Bitcoin organizations met with leaders in Washington D. 2012. FBI Shuts Down the ‘Silk Road’ Black Market.18 Congress is in the process of acknowledging a new world where decentralized virtual currency has become increasingly popular. in 2 2011 IEEE Int’l Conf. html?page=all (“Today. No.org/blog/?p=152 (“The BSA was never intended to apply this broadly and reach this far into people’s everyday lives. philosophical. http://www. computer hacking. 11  See Matteo Congregalli. 27.S. Int’l Bus. 30. 12  See Amrutha Gayathri. available at http://mercatus. and political reasons). Urbantimes (Oct. 2013.pdf (asserting that people have switch to Bticoin for pragmatic.com/blogs/congress-blog/technology/317875-bitcoin-understated-benefits-and-overstated-risks (explaining that Bitcoin has many benefits.com10 of illegal goods fuelled by Bitcoin transactions. Today. Bitcoin Foundation Meets with the Federal Reserve.”). http://urbantimes. NPR (Aug. see also Patrick Murck. and buyers contributing to an Amazon. 17  See Elizabeth Ploshay. http://bitcoinmagazine.17 Agencies have strained to fit Bitcoin and similar platforms into existing legal buckets that are decades old.com/marijuana-lsd-now-illegal-drugs-delivered-your-doorstep-290021 (describing the effect that Silk Road has on black market trade).C. Network Effects. Risk. on Privacy. . nor has it proposed legislation to mitigate the risks of decentralized digital currencies. Wired (Aug. 4:22PM). §§ 1030.com/ article/2013/09/17/us-bitcoin-currency-idUSBRE98G0X320130917 (describing the Winkelvoss’ plans to launch the Winklevoss Bitcoin Trust.D. as you say. Consumer Fin. 1956). Bitcoin Magazine (Aug. The Onion Router (Tor). Computing 1318. to recipients abroad.N. 2013) (charging Silk Road’s alleged owner.16 In the absence of a distinct legislative path forward. from low-cost international transfers to completely private charitable donations and complex investment trusts.html (explaining that Federal law defines remittance transfers as “certain electronic money transfers from consumers in the United States . 1:45 PM). 18.go. academics. com/6354/bitcoin-shakes-up-congress/ (“The U. finance terrorism. 9  See Kevin Dolak. No. FBI.Y. Silk Road Arrest Shines Light on “Dark Web”. . 1 Beyond the Silk Road 61 guns to hacking tools.7 Bitcoin represents an emerging platform with unprecedented benefits. 21. supra note 2.” including “wire transfers” or “remittances”).C.20 Advocacy groups. npr. and financial reasons. 17. No. http://motherboard. 13  See Ryan Broderick. see also Gerald Smith.Y. 3:31 AM). http://www. You Can Steal Bitcoins. 13-17. Traveling Down the Silk Road to Buy Drugs with Bitcoins. Ross William Ulbright. http://abcnews. 10  Id.com/5879924/now-you-can-buy-guns-on-the-online-underground-marketplace. http://www. including friends. Now Illegal Drugs Delivered on your Doorstep. Reuters (Sept. & IEEE Int’l Conf. see also Svea Herbst-Bayliss. 27. http://www. and finance and technology representatives.org/sites/default/files/Luther_ CryptocurrenciesNetworkEffects_v1. 27. 1318 (2011). We Are All Money Transmitters .. Congress has neither held further hearings. 2013. Sept. 2013). 7:47 PM).2 billion worth of illicit goods ranging from heroin and hand5  Jerry Brito & Andrea Castillo. executive and state agencies. Winklevoss Twins Say Bitcoin Could Become a Country’s Currency. Upstart Bus. 5.com/blog/traveling-down-the-silkroad-to-buy-drugs-with-bitcoins (last visited Oct. 13.N.gov/ askcfpb/1161/what-remittance-transfer.bizjournals. sellers. 2013 WL 5467929 (S. an exchange-traded fund holding Bitcoins as assets and tracking the Bitcoin economy that would allow investors to trade the digital currency like stocks).7 billion as of October 2013. Prot.13 Silk Road facilitated the trade of an estimated $1. 2011. The Hill’s Congress Blog (Aug. 1 peer-to-peer cryptocurrency. 11. Silk Road. 15  See Complaint ¶ 1.21 have welcomed the opportunity to explain decentralized virtual currency’s promise to representatives from the Department of the Treasury (Treasury) and Department of Homeland Security (DHS). . Bitcoin Shakes Up Congress. 6  What is a Remittance Transfer. 2013).org/2013/08/13/211735430/lawmakers-banking-regulators-take-on-bitcoin (“Whenever there’s a new disruptive technology.html (explaining that a dark website is inaccessible through conventional internet browsing methods). 11:00 AM). see also William J. (No. 2013) (explaining that Tor masks a user’s IP address by routing their query through a different IP address and allowing a user to access . 3:54 PM). Bureau (Aug.”). Despite Risks. including the risk of later overregulating). And Bitcoin really doesn’t fit neatly into any of these buckets.11 Launched in February 201112 and accessible only through the anonymizing internet browser. 13. . (Oct. 2. http://upstart. or businesses. 21  See Michael del Castillo. Bitcoin: A Primer for Policymakers 1 (2013). 1. and Switching Costs 3 (Mercatus Center at George Mason Univ.S. and money laundering in violation of 21 U. such as lowering transaction costs). encs. Secret Service.”). regulators look at it and they try to fit it into one of their preexisting buckets. Times (Jun.D.onion sites that make up the “Deep Web”).8 These same qualities allow criminal enterprises to potentially circumvent law enforcement agencies and regulators by using Bitcoins to traffic in illegal goods. Luther. 4.22 but have expressed fears of excessive regulatory measures in the United States 14  See Adrien Chen. national security and welfare. No. org/sites/default/files/Brito_BitcoinPrimer_embargoed. 16  See Warmbrodt. 6:30AM). Senate is now looking to rein in regulators to ensure that Congress has a full understanding of Bitcoin and additional digital cryptocurrencies prior to any further regulation.concordia. http://www. and evade taxes. 2. 1:59 PM). But Good Luck Laundering Them. 2013) (stating that Ross William Ulbright must forfeit his assets pursuant to his criminal case). philosophical. vice. 4:32PM). 26. Ulbricht. see also Michael Mimoso. Threat Post (Oct. 19  See Warmbrodt.com/fbi-takes-down-billion-dollar-silk-road-online-drug-and-hacking-marketplace. Banking Regulators Take on Bitcoin. Reuters (Oct..ca/~clark/biblio/bitcoin/Reid%202011.pdf (defining cryptocurrencies as digital alternatives to traditional governmentissued paper monies).9 exemplifies the regulatory riddle unique to a decentralized virtual currency marketplace made up of administrators. 3.co/magazine/2013/10/the-dread-pirate-sailing-the-dark-net-silk-roads-shipwreck-explained/ (describing how Silk Road’s hidden presence in the “deep web” caused difficulties for the FBI in tracing its operations).reuters.com/ Technology/silk-road-arrest-shines-light-dark-web/story?id=20460774. have led the charge on explaining virtual currencies to the government and to the public.60 NATIONAL SECURITY LAW BRIEF Vol. http:// www. 2013. available at http://mercatus. Arrests Infamous Owner ‘Dread Pirate Roberts’. An Analysis of Anonymity in the Bitcoin System. regulators face vocal proponents of systems like Bitcoin who argue their valid use for political. on Soc.com/2013/10/02/silk-road-fbi_n_4030750. Cryptocurrencies. 13 CIV 6919. From Marijuana to LSD. Gawker (Jan. 18 U. 20  See Fergal Reid & Martin Harrigan. 4. & Trust. http://thehill. 7  See Wanfeng Zhou & Nick Olivari. 2013). J. family members. Sept.C § 846. Motherboard Beta. FBI Takes Down Billion-Dollar Silk Road Online Drug and Hacking Marketplace.com/money/loot/2013/08/26/bitcoin-foundation-meets-federal-reserve. supra note 2 (arguing that regulators need to act soon to control risks imposed by these markets. The Bitcoin Found. 2013.consumerfinance. launder money. Really!).S.ibtimes. 2013. (Aug. Ulbricht. Working Paper No. http://gawker. http:// threatpost. United States v. Sure.S. like Bitcoin. 2. Perhaps a little more guidance is needed”). 2013). . 2013).19 At the same time. 1:55PM). Vol. The Dread Pirate Sailing the Dark New: Silk Road’s Shipwreck Explained. Blog (Mar. The Huffington Post. Security.pdf (asserting that Bitcoin is the first decentralized digital currency). 2013 WL 5460023 (S. ABC News (Oct. Bitcoin Buzz Grows Among Venture Investors.14 The website’s assets and alleged owner clandestinely operated for over two years before a multi-agency task force seized both in October 2013. as well as the judiciary. 8  See Andrea Castillo. 18  See All Things Considered: Lawmakers.5 is a remittance tool6 with a market capitalization of over $1. 2013. 13 MAG 02328.15 Following months of hearings with regulators.huffingtonpost. see also Sealed Verified Complaint ¶ 1. 2013. available at http://users.reuters. https:// bitcoinfoundation. United States v. 22  See Robert McMillan. with conspiracy to commit narcotics trafficking.com/article/2013/10/01/us-markets-forex-bitcoin-idUSBRE9901HA20131001. 2013. The infamous dark website. Bitcoin: Understated benefits and overstated risks.

Perhaps a little more guidance is needed”). and political reasons). supra note 2. Security. Ulbricht.C. Urbantimes (Oct. 2013). Motherboard Beta. Bureau (Aug. see also Sealed Verified Complaint ¶ 1. 1 Beyond the Silk Road 61 guns to hacking tools. Silk Road.pdf (asserting that Bitcoin is the first decentralized digital currency). 6  What is a Remittance Transfer. including the risk of later overregulating). and financial reasons. An Analysis of Anonymity in the Bitcoin System.20 Advocacy groups. or businesses. 2013) (explaining that Tor masks a user’s IP address by routing their query through a different IP address and allowing a user to access . (No. finance terrorism. 15  See Complaint ¶ 1. see also Gerald Smith. such as lowering transaction costs). Int’l Bus.ca/~clark/biblio/bitcoin/Reid%202011. 3. 3:31 AM). 11  See Matteo Congregalli. have led the charge on explaining virtual currencies to the government and to the public. Working Paper No. 13 CIV 6919. com/6354/bitcoin-shakes-up-congress/ (“The U.”). You Can Steal Bitcoins. 2013). Bitcoin Magazine (Aug. as you say.N. http://www. 21. establishing clear dangers to U. Gawker (Jan. computer hacking. Now You Can Buy Guns on the Online Underground Marketplace. Bitcoin: A Primer for Policymakers 1 (2013).22 but have expressed fears of excessive regulatory measures in the United States 14  See Adrien Chen. Bitcoin: Understated benefits and overstated risks. 18 U. and finance and technology representatives. http:// www. from low-cost international transfers to completely private charitable donations and complex investment trusts. and buyers contributing to an Amazon. 16  See Warmbrodt. http://www. http://gawker. 2013.D. 2011. 18  See All Things Considered: Lawmakers.C § 846. http://thehill. philosophical.11 Launched in February 201112 and accessible only through the anonymizing internet browser. see also Svea Herbst-Bayliss.huffingtonpost. The Huffington Post. 2013. 7:47 PM). 2013.”). 2013). npr. html?page=all (“Today.S. Ross William Ulbright.com/blogs/congress-blog/technology/317875-bitcoin-understated-benefits-and-overstated-risks (explaining that Bitcoin has many benefits. 2013) (charging Silk Road’s alleged owner. Computing 1318. Ulbricht. http://www. NPR (Aug. http://abcnews. FBI Shuts Down the ‘Silk Road’ Black Market. academics. philosophical. Risk. & Trust.onion sites that make up the “Deep Web”). Reuters (Sept. 26. 21  See Michael del Castillo. http://urbantimes. regulators face vocal proponents of systems like Bitcoin who argue their valid use for political.5 is a remittance tool6 with a market capitalization of over $1.com/ Technology/silk-road-arrest-shines-light-dark-web/story?id=20460774. executive and state agencies. including friends. Sept. (Oct. https:// bitcoinfoundation. Banking Regulators Take on Bitcoin. 7  See Wanfeng Zhou & Nick Olivari. however.html (explaining that Federal law defines remittance transfers as “certain electronic money transfers from consumers in the United States . 4. 2013.gov/ askcfpb/1161/what-remittance-transfer. The Hill’s Congress Blog (Aug. 2. The Onion Router (Tor). 2013. regulators look at it and they try to fit it into one of their preexisting buckets. and Switching Costs 3 (Mercatus Center at George Mason Univ. 1. Secret Service. Traveling Down the Silk Road to Buy Drugs with Bitcoins. 12  See Amrutha Gayathri. Times (Jun. 4. Luther. family members. available at http://mercatus. an exchange-traded fund holding Bitcoins as assets and tracking the Bitcoin economy that would allow investors to trade the digital currency like stocks). We Are All Money Transmitters . Now Illegal Drugs Delivered on your Doorstep.19 At the same time. No.S. The Bitcoin Found. 27.go.reuters.7 Bitcoin represents an emerging platform with unprecedented benefits. 4:22PM).pdf (defining cryptocurrencies as digital alternatives to traditional governmentissued paper monies). 2013. Today. No.com10 of illegal goods fuelled by Bitcoin transactions. in 2 2011 IEEE Int’l Conf. Network Effects. 3:54 PM). as well as the judiciary. 5. sellers. 13. . http://bitcoinmagazine. 1:55PM). 17  See Elizabeth Ploshay.21 have welcomed the opportunity to explain decentralized virtual currency’s promise to representatives from the Department of the Treasury (Treasury) and Department of Homeland Security (DHS).com/money/loot/2013/08/26/bitcoin-foundation-meets-federal-reserve. 1:59 PM). From Marijuana to LSD. 1956). 4:32PM).14 The website’s assets and alleged owner clandestinely operated for over two years before a multi-agency task force seized both in October 2013.com/2013/10/02/silk-road-fbi_n_4030750.bizjournals. 2. 2013.ibtimes.consumerfinance.15 Following months of hearings with regulators.org/blog/?p=152 (“The BSA was never intended to apply this broadly and reach this far into people’s everyday lives. 2013 WL 5460023 (S. supra note 2 (arguing that regulators need to act soon to control risks imposed by these markets. Congress has neither held further hearings. vice. But Good Luck Laundering Them. see also William J.16 In the absence of a distinct legislative path forward.S. 2012.C.2 billion worth of illicit goods ranging from heroin and hand5  Jerry Brito & Andrea Castillo..concordia. Sept. http://upstart. 27. on Privacy. http://www. 11. launder money. Blog (Mar. 13. available at http://mercatus. United States v. FBI. 22  See Robert McMillan.”).com/fbi-takes-down-billion-dollar-silk-road-online-drug-and-hacking-marketplace. to recipients abroad. with conspiracy to commit narcotics trafficking. The infamous dark website. 19. Sure. 1318 (2011). Prot. Arrests Infamous Owner ‘Dread Pirate Roberts’.S.reuters. like Bitcoin. http:// threatpost. 13 MAG 02328. Senate is now looking to rein in regulators to ensure that Congress has a full understanding of Bitcoin and additional digital cryptocurrencies prior to any further regulation. encs.7 billion as of October 2013. http://motherboard. 1:45 PM). And Bitcoin really doesn’t fit neatly into any of these buckets. . Reuters (Oct. FBI Takes Down Billion-Dollar Silk Road Online Drug and Hacking Marketplace. .org/sites/default/files/Luther_ CryptocurrenciesNetworkEffects_v1. 8  See Andrea Castillo.. 1 peer-to-peer cryptocurrency. see also Patrick Murck. 13  See Ryan Broderick.18 Congress is in the process of acknowledging a new world where decentralized virtual currency has become increasingly popular. §§ 1030.html (explaining that a dark website is inaccessible through conventional internet browsing methods).com/article/2013/10/01/us-markets-forex-bitcoin-idUSBRE9901HA20131001. 10  Id. 6:30AM). 2013).N. Bitcoin Buzz Grows Among Venture Investors. and evade taxes. 2013). Threat Post (Oct.com/marijuana-lsd-now-illegal-drugs-delivered-your-doorstep-290021 (describing the effect that Silk Road has on black market trade). Upstart Bus.Y. J. 27.co/magazine/2013/10/the-dread-pirate-sailing-the-dark-net-silk-roads-shipwreck-explained/ (describing how Silk Road’s hidden presence in the “deep web” caused difficulties for the FBI in tracing its operations). available at http://users. Winklevoss Twins Say Bitcoin Could Become a Country’s Currency. org/sites/default/files/Brito_BitcoinPrimer_embargoed. 11:00 AM). 18. 2. .com/ article/2013/09/17/us-bitcoin-currency-idUSBRE98G0X320130917 (describing the Winkelvoss’ plans to launch the Winklevoss Bitcoin Trust. The Dread Pirate Sailing the Dark New: Silk Road’s Shipwreck Explained. & IEEE Int’l Conf. 30.org/2013/08/13/211735430/lawmakers-banking-regulators-take-on-bitcoin (“Whenever there’s a new disruptive technology. led by the Bitcoin Foundation. http://www. No.60 NATIONAL SECURITY LAW BRIEF Vol.” including “wire transfers” or “remittances”). and is exploring how virtual currency can be properly exchanged while mitigating its attractiveness for criminals. United States v. 2013).13 Silk Road facilitated the trade of an estimated $1. ABC News (Oct.8 These same qualities allow criminal enterprises to potentially circumvent law enforcement agencies and regulators by using Bitcoins to traffic in illegal goods.9 exemplifies the regulatory riddle unique to a decentralized virtual currency marketplace made up of administrators. 2013) (stating that Ross William Ulbright must forfeit his assets pursuant to his criminal case). and money laundering in violation of 21 U. 17. national security and welfare. Bitcoin Shakes Up Congress. (Aug. Consumer Fin. nor has it proposed legislation to mitigate the risks of decentralized digital currencies. Bitcoin Foundation Meets with the Federal Reserve. Wired (Aug. 13-17.com/blog/traveling-down-the-silkroad-to-buy-drugs-with-bitcoins (last visited Oct. 2013. 9  See Kevin Dolak. 2013 WL 5467929 (S.com/5879924/now-you-can-buy-guns-on-the-online-underground-marketplace. on Soc. 19  See Warmbrodt.Y.D. . Really!). one of the most influential Bitcoin organizations met with leaders in Washington D. see also Michael Mimoso. Silk Road Arrest Shines Light on “Dark Web”. 20  See Fergal Reid & Martin Harrigan.pdf (asserting that people have switch to Bticoin for pragmatic. Cryptocurrencies. Vol.17 Agencies have strained to fit Bitcoin and similar platforms into existing legal buckets that are decades old. No. Despite Risks.

available at http://fincen. Why You Can’t Blame Bitcoin for Silk Road Shadiness. 12. at 20 (“The acceptance of currency. Virtual Currency Real currency is “legal tender . U. [as] a legal and business imperative. http://www. A. fincen. that circulates and is customarily used and accepted as a medium of exchange. Fin. com/id/100971898.. 34  See Fin. 26.ny. Gizmodo (Oct. 18. 1:20PM). Crimes Enforcement Network. § 1010.S.g. . 33  See Matt Clinch.wired. may [be obtained] by [a person’s] own computing or manufacturing effort. Crimes Enforcement Network. have a unified repository and administrator with whom users exchange real currency for a substitute. Crimes Enforcement Network. Fin. This Part also examines whether Bitcoin and other tools can be adequately retrofitted under current law or if tailored legislation is necessary to mitigate their risks. as amended by Title III of the USA PATRIOT Act of 2001. 29  See What We Do. Fin. 5:18 PM). 32  31 C. Lawsky.”). supra note 33. 23  See.27 FinCEN was founded in 1990 to support all levels of government by monitoring financial trails http://www. 10:25AM). http://www. 2013).pdf. Dep’t of the Treasury. .”32 Bitcoin has no managing authority and is not a legal tender in any nation.S.theguardian. http://www. FinCEN developed federal guidance in March 2013 differentiating virtual currency from real currency and explaining scenarios in which the BSA would regulate parties in a digital transaction. 1 Beyond the Silk Road 63 left behind by criminals.33 As an initial step.31 Its findings on virtual currency provide a good starting point for understanding the basics of Bitcoin.”25 Part I of this article provides an overview of the federal government’s definitions of virtual currency and a background on the Bitcoin platform in particular. Application of FinCEN’s Regulations to Persons Administering. No.wilmerhale. or other value that substitutes for currency from one person and the transmission of currency. 5. 2013. e. Bitcoin Recognized by Germany as ‘Private Money’.23 Proponents of virtual currency claim it represents an “essential privacy-preserving technology. N.gov/law_ enforcement/ (last visited Oct.S. U. No. 36  Id. or Using Virtual Currencies (2013). 18. Vol. . and . Dep’t of the Treasury. State Dep’t of Fin. 27  See Kavya Sukumar. these Acts constitute the current BSA of 1970. Part II considers recent developments regarding the Silk Road as it relates to governmental treatment of virtual currencies.gov/about/press2013/memo1308121. 2013). or accept virtual currency from one source and transmit it to another 28  See Overview. http:// gizmodo. FinTechWebinar Series: Bitcoin and Other Virtual Currencies 7 (2013). Servs.37 To fall under FinCEN’s authority.100(m) (2011).30 Together.com/technology/2013/sep/05/bitcoin-dealers-regulation-downing-street (“Bitcoin companies told officials that big banks are blocking the creation of business accounts for money remittance because of fears over financial crime. a person must either create virtual currency for the purposes of selling it for real currency. should continue setting precedent through the application of the USA PATRIOT Act and Bank Secrecy Act (BSA) and their specialized knowledge of financial crime to prevent the future use of virtual currency in facilitating online crime. market. Crimes Enforcement Network. Charles Arthur. 24  Parker Higgins. Exchanging. available at http://dfs. 2013. Government Eyes Regulation of ‘Bitcoins’.gov/statutes_regs/ guidance/pdf/FIN-2013-G001. Benjamin M. 4. 4. 20. 5:00PM).S. 2013. 30  See FinCEN’s Mandate from Congress. . (Aug. http://www. I: Virtual Currency in Current Government Terms Bitcoin is “the world’s first completely decentralized digital currency. it fails to fit easily into the current BSA framework developed by the Treasury Financial Crimes Enforcement Network (FinCEN).”26 Without a central monetary authority controlling exchanges on and uses of the platform. the “first and most-comprehensive” federal anti-money laundering and counterterrorism financing statute. supra note 29.pdf (explaining that Bitcoin is a financial instrument. CNBC (Aug.fincen.com/wiredenterprise/2013/08/bitocoin_anonymity/ (“The Foundation — the group that oversees development of the core Bitcoin software — wants to see if it can come to an understanding with government authorities.Y.34 Virtual currency is defined by FinCEN as “a medium of exchange that operates like a currency in some environments. but does not have all the attributes of real currency. http://www. 35 Id. . 5.fincen. or other value that substitutes for currency to another location or person by any means. rather than e-money or a foreign currency).”). .”). The Article concludes by finding that federal law enforcement and regulators. 25  See Notice of Inquiry on Virtual Currencies. available at http:// www.cnbc. Dep’t of the Treasury. USA Today (Aug. supra note 5. 31  See What We Do. 2013. at 1.gov/statutes_regs/bsa/ (last visited Oct.”24 This conflict is reflected by a release from the New York Department of Financial Services (DFS) that proclaimed the state’s long history of promoting technological innovation while simultaneously noting that society and the virtual currency industry should share a common need to “[take] steps to root out illegal activity .F. funds.com/uploadedFiles/WilmerHale_Shared_Content/WilmerHale_Files/Events/WH-FinTech-webinarbitcoin-26SEP13.com/why-you-cant-blame-bitcoin-for-silk-road-shadiness-1441572365. .”36 Centralized virtual currencies. according to industry and academic sources.62 NATIONAL SECURITY LAW BRIEF Vol. see also id. Bitcoin Dealers Seek Official Regulation for Digital Tokens. 2013). Part III discusses the implications of virtual decentralized currencies on the national security community and the authorities currently drawn upon by law enforcement.R.gov/about_ fincen/wwd/ (last visited Oct.. Servs.”35 Decentralized virtual currencies including Bitcoin “[have] no central repository and no single administrator.com/story/news/politics/2013/08/26/bitcoin-virtual-currency-regualtions/2702653/. [It] does not have legal tender status in any jurisdiction. http://www. led by the Treasury and Department of Justice (DOJ). 26  See Brito & Castillo.28 FinCEN is tasked with “analyzing and disseminating [financial transactions data] for law enforcement purposes”29 while regulating the nation’s financial system under the Currency and Financial Reporting Act of 1970. 19. usatoday. see also Fin. 37  See WilmerHale. U. The Guardian (Sept. 1 and abroad stifling the currency’s growth. funds. Part IV analyzes how legislators are rethinking unique financial technologies that affect national security and welfare as they become entrenched in the U. Superintendent of Fin. including the Royal Canadian MintChip and Amazon Coins. Crimes Enforcement Network. 2013).PDF.

.S. at 20 (“The acceptance of currency. 24  Parker Higgins.pdf. com/id/100971898. 20. .”35 Decentralized virtual currencies including Bitcoin “[have] no central repository and no single administrator. Dep’t of the Treasury.com/uploadedFiles/WilmerHale_Shared_Content/WilmerHale_Files/Events/WH-FinTech-webinarbitcoin-26SEP13. or other value that substitutes for currency from one person and the transmission of currency. rather than e-money or a foreign currency). 18.100(m) (2011). FinTechWebinar Series: Bitcoin and Other Virtual Currencies 7 (2013). supra note 29. 23  See. http://www. http://www. Charles Arthur.com/wiredenterprise/2013/08/bitocoin_anonymity/ (“The Foundation — the group that oversees development of the core Bitcoin software — wants to see if it can come to an understanding with government authorities.R. . 5:00PM). 2013. USA Today (Aug. U. http://www. or Using Virtual Currencies (2013). I: Virtual Currency in Current Government Terms Bitcoin is “the world’s first completely decentralized digital currency. 12. This Part also examines whether Bitcoin and other tools can be adequately retrofitted under current law or if tailored legislation is necessary to mitigate their risks. Superintendent of Fin. 1 Beyond the Silk Road 63 left behind by criminals. according to industry and academic sources. Dep’t of the Treasury. but does not have all the attributes of real currency.S.S. market. 4.gov/law_ enforcement/ (last visited Oct. Why You Can’t Blame Bitcoin for Silk Road Shadiness. Exchanging.. supra note 33. 2013. 26. Part II considers recent developments regarding the Silk Road as it relates to governmental treatment of virtual currencies.23 Proponents of virtual currency claim it represents an “essential privacy-preserving technology. U. 2013. e. 1:20PM). Bitcoin Recognized by Germany as ‘Private Money’. http://www. CNBC (Aug. 5:18 PM). 27  See Kavya Sukumar.fincen. Vol. at 1. these Acts constitute the current BSA of 1970.F.gov/about/press2013/memo1308121. 37  See WilmerHale. [as] a legal and business imperative.wired. [It] does not have legal tender status in any jurisdiction. fincen. Application of FinCEN’s Regulations to Persons Administering. U. Government Eyes Regulation of ‘Bitcoins’. available at http://dfs.PDF. . supra note 5. Crimes Enforcement Network. usatoday. 29  See What We Do.28 FinCEN is tasked with “analyzing and disseminating [financial transactions data] for law enforcement purposes”29 while regulating the nation’s financial system under the Currency and Financial Reporting Act of 1970.Y. see also Fin.gov/about_ fincen/wwd/ (last visited Oct.”26 Without a central monetary authority controlling exchanges on and uses of the platform.34 Virtual currency is defined by FinCEN as “a medium of exchange that operates like a currency in some environments. that circulates and is customarily used and accepted as a medium of exchange. Crimes Enforcement Network. The Article concludes by finding that federal law enforcement and regulators.33 As an initial step.com/why-you-cant-blame-bitcoin-for-silk-road-shadiness-1441572365. Benjamin M. http://www.27 FinCEN was founded in 1990 to support all levels of government by monitoring financial trails http://www. and . 18. http://www. 33  See Matt Clinch. led by the Treasury and Department of Justice (DOJ). have a unified repository and administrator with whom users exchange real currency for a substitute. Crimes Enforcement Network.31 Its findings on virtual currency provide a good starting point for understanding the basics of Bitcoin.gov/statutes_regs/ guidance/pdf/FIN-2013-G001. the “first and most-comprehensive” federal anti-money laundering and counterterrorism financing statute.ny.”32 Bitcoin has no managing authority and is not a legal tender in any nation.fincen. 30  See FinCEN’s Mandate from Congress.”). 2013).pdf (explaining that Bitcoin is a financial instrument. http:// gizmodo. Bitcoin Dealers Seek Official Regulation for Digital Tokens. Lawsky.”36 Centralized virtual currencies. Part III discusses the implications of virtual decentralized currencies on the national security community and the authorities currently drawn upon by law enforcement.gov/statutes_regs/bsa/ (last visited Oct.”). 5. Gizmodo (Oct. Virtual Currency Real currency is “legal tender . 35 Id. . State Dep’t of Fin.cnbc. Fin. Fin. 34  See Fin. including the Royal Canadian MintChip and Amazon Coins. it fails to fit easily into the current BSA framework developed by the Treasury Financial Crimes Enforcement Network (FinCEN). 2013).”24 This conflict is reflected by a release from the New York Department of Financial Services (DFS) that proclaimed the state’s long history of promoting technological innovation while simultaneously noting that society and the virtual currency industry should share a common need to “[take] steps to root out illegal activity . a person must either create virtual currency for the purposes of selling it for real currency. should continue setting precedent through the application of the USA PATRIOT Act and Bank Secrecy Act (BSA) and their specialized knowledge of financial crime to prevent the future use of virtual currency in facilitating online crime. may [be obtained] by [a person’s] own computing or manufacturing effort. 10:25AM).theguardian.”). Fin. 25  See Notice of Inquiry on Virtual Currencies. Servs.com/story/news/politics/2013/08/26/bitcoin-virtual-currency-regualtions/2702653/. 5. No. 2013). funds. Crimes Enforcement Network. 19. . available at http:// www. (Aug. . available at http://fincen.62 NATIONAL SECURITY LAW BRIEF Vol. 31  See What We Do. No. 2013. 4. The Guardian (Sept. as amended by Title III of the USA PATRIOT Act of 2001. 36  Id. § 1010. or other value that substitutes for currency to another location or person by any means. N. 26  See Brito & Castillo.37 To fall under FinCEN’s authority.30 Together. funds. 32  31 C. 2013). see also id.”25 Part I of this article provides an overview of the federal government’s definitions of virtual currency and a background on the Bitcoin platform in particular. Crimes Enforcement Network. Servs.S. Dep’t of the Treasury.wilmerhale. .com/technology/2013/sep/05/bitcoin-dealers-regulation-downing-street (“Bitcoin companies told officials that big banks are blocking the creation of business accounts for money remittance because of fears over financial crime.g. 1 and abroad stifling the currency’s growth. A. or accept virtual currency from one source and transmit it to another 28  See Overview. Part IV analyzes how legislators are rethinking unique financial technologies that affect national security and welfare as they become entrenched in the U. FinCEN developed federal guidance in March 2013 differentiating virtual currency from real currency and explaining scenarios in which the BSA would regulate parties in a digital transaction.

49  Shavers. 47  Id.) fraud prevention (the SEC and security firms). U.gov/statutes_regs/bsa/bsa_faqs.S.C. In SEC v. by a System Administrator Who’s Secretly Growing Them on His School’s Computers. Crimes Enforcement Network.”). Fin. and built in a mechanism to verify each transaction that a Bitcoin goes through. funds. programmers had long-attempted to develop a method to resolve the double-spending problem particularly tied to virtual currencies.56 The platform has a finite limit of supplying twenty-one million Bitcoins over time. 2013) (“You can download the official Bitcoin software and just click a little check box that says ‘generate coins. How to Get Rich on Bitcoin. 4.com/2013/10/16/blockchainsmashers/ (“Bitcoin is a mix of three monetary processes. Bitcoin and the Double-Spending Problem. available at http://www. Client Update: Virtual Currency: Government Scrutiny Continues to Grow 2 (2013). 46  No. 29. Cornell Univ. No.”43 thus providing money transmission services. 7. § 1960. lawmakers on the federal and state level have aligned their focus on virtual 38  Id.50 Since a court deemed Bitcoins to be a security instrument. (Mar. and Congress has begun its own investigation into the digital market.’ From there your computer will try and solve a block. it might take you a year or longer to solve a block. Course Blog for Info 4220. 56  See John Biggs. 54  See Erik Bonadonna. 42  Id.”). § 1010. 45  Answers to Frequently Asked BSA Questions. with more market control.S. you get 50 Bitcoins. http://motherboard. available at http://bitcoin. releasing quantities in a block chain.39 FinCEN distinguishes “users. 18. Vol. http:// www.C. Aug. who noted that regulators are gathering information on virtual currency and remain open to industry input. 2013).38 By operating an unlicensed money transmission service. treasury stock. Tex. http://techcrunch.cornell.57 The first link of the block chain is created by Bitcoin “miners” who race to solve a cryptographic equation by executing an intensive computer task known as a brute force crack. http://blogs. There is a service called ‘pooled mining. 2013) (“One of the purposes of filing [Suspicious Activity Reports] is to identify violations or potential violations of law to the appropriate law enforcement authorities for criminal investigation. 6.edu/info4220/2013/03/29/bitcoin-and-the-double-spending-problem/ (“Satoshi Nakamoto.C. at *2 50  See Perkins Coie. Techcrunch (Oct. 4. 2013). After meeting with Bitcoin representatives. bond.S. § 471 (2006) (stating that the intent to defraud with any false obligation or other security shall be fined or imprisoned.S. at 19 (“If an entity is a Money Services Business (MSB) it must register with FinCEN.R. When real currency is traded. Shavers. Those providing money transmission services must maintain transaction records under the BSA. .com/files/upload/08_21_2013_DVC_Update.55 The Bitcoin monetary supply is created by the amount of users who utilize the platform. funds. security-based swap.”41 Exchangers are “engaged as a business in the exchange of virtual currency for real currency.S. supra note 33.” and “administrators” of virtual currencies in the same guidance.pdf (“It remains to be seen whether virtual currency companies will be forced to mold their businesses to fit within the confines of financial regulations already on the books. Blockchain Smashers.”52 B.” the Securities and Exchange Commission could proceed with its case. supra note 5.”).100(ff) (2011). 1 source for currency. 55  See 18 U.49 Shavers’ political implications for Bitcoin businesses were immediately clear to legal advisers.45 The courts have jurisdiction in the virtual currency realm as well.”). or another substitute for currency.C. everyone involved can physically examine the currency. it handles its own transaction processing (think credit card companies. the program 51  Id. at 7. 44  31 C.fincen. 52  See Warmbrodt.51 It remains unclear how Congress intends to proceed. 2013). any instrument commonly known as a ‘security’”). stock.40 Users “obtain virtual currency to purchase goods or services.”).53 Before this development. 1 Beyond the Silk Road 65 currency issues. “Talk to anyone in Silicon Valley or in New York— we don’t have the best reputation here of being ahead of the curve on a lot of these issues.’ which splits up a bunch of these problems into little tiny problems and then everyone in the mining pool splits the reward based on how much they helped.F. Without a central authority to validate transactions.org/bitcoin. 40  See Fin. 41  Id. But. debenture… or. 16. there is a high risk of spending a unit of currency more than once. a HSGAC aide stated. Dep’t of the Treasury.html (last visited Oct.44 The BSA also obligates exchangers and administrators to file suspicious activity reports for users who appear to be undermining money laundering and terrorist financing laws.) In a real world these things are very complex systems with many moving parts. § 78c(a)(10) (2006) (defining security as “any note. or both).D.54 Double spending occurs when a buyer can transfer his currency to a seller while retaining the original reserve. depending on the speed of your computer. 18. but remain silent on whether current law fits the technology or if they will enact different regulatory schemes in the future. 4:13-CV-416. pdf (last visited Nov. security future.46 the District Court for the Eastern District of Texas held that it had subject matter jurisdiction to determine whether the Securities Act of 1933 applied to a Ponzi scheme case involving Bitcoins. And if it solves the whole block. 2013). at *2 48  15 U. any further currency releases or transactions on the block chain must undergo a cycle of encryption and logging through the Bitcoin software. Bitcoin: A Peer-to-Peer Electronic Cash System. and currency issuance (the treasury.perkinscoie. very powerful cryptographic methods that ensures that each step in the chain verifies the next. The beauty of Bitcoin is that each of these systems are reduced to very simple. Bitcoin Protocol The Bitcoin cryptocurrency launched in late 2008 after Nakamoto released his concept paper. and counterfeiters face serious consequences. or will be subject to an entirely new regulatory scheme designed with the technological complexities of virtual currency in mind. at 23. 43  Id.58 By solving this progressive puzzle. and [have] the authority to redeem such virtual currency.64 NATIONAL SECURITY LAW BRIEF Vol. No. in general. 2013 WL 4028182 (E.” “exchangers. This is accomplished by the filing of a SAR that identifies the activity of concern. 39  Id. Motherboard Beta. First. the designer of the Bitcoin protocol.com/blog/how-to-get-rich-on-bitcoin-by-a-systemadministrator-who-s-secretly-growing-them-on-his-school-s-computers (last visited Oct. or other virtual currency. Crimes Enforcement Network. § 77(b)48 and that “it [was] clear that [Bitcoins] can be used as money. supra note 2.47 Because it found that the defendant’s investments constituted securities under 15 U.”). an exchanger or administrator is subject to fines and criminal prosecution under the racketeering statute 18 U.vice.”42 and administrators are “engaged as a business in issuing virtual currency. had anticipated this problem. 53  See Satoshi Nakamoto. at 1. 57 See Brito & Castillo. 58  Ryan Broderick. 2013 WL 4028182.

or another substitute for currency. 39  Id.edu/info4220/2013/03/29/bitcoin-and-the-double-spending-problem/ (“Satoshi Nakamoto.fincen.”).html (last visited Oct. and built in a mechanism to verify each transaction that a Bitcoin goes through. 54  See Erik Bonadonna. 16. and counterfeiters face serious consequences. it handles its own transaction processing (think credit card companies.”42 and administrators are “engaged as a business in issuing virtual currency. 18. Course Blog for Info 4220. 4. funds. No.R.C.F.45 The courts have jurisdiction in the virtual currency realm as well.”).”52 B. a HSGAC aide stated. debenture… or.perkinscoie.” the Securities and Exchange Commission could proceed with its case. The beauty of Bitcoin is that each of these systems are reduced to very simple. http://motherboard. or both). who noted that regulators are gathering information on virtual currency and remain open to industry input. it might take you a year or longer to solve a block. with more market control.S. Bitcoin and the Double-Spending Problem. or other virtual currency.40 Users “obtain virtual currency to purchase goods or services. 2013). Blockchain Smashers. Those providing money transmission services must maintain transaction records under the BSA. and [have] the authority to redeem such virtual currency. lawmakers on the federal and state level have aligned their focus on virtual 38  Id. There is a service called ‘pooled mining.”41 Exchangers are “engaged as a business in the exchange of virtual currency for real currency. 57 See Brito & Castillo. 55  See 18 U. by a System Administrator Who’s Secretly Growing Them on His School’s Computers. 52  See Warmbrodt. 53  See Satoshi Nakamoto. 40  See Fin. the program 51  Id. funds.pdf (“It remains to be seen whether virtual currency companies will be forced to mold their businesses to fit within the confines of financial regulations already on the books. After meeting with Bitcoin representatives.D. Dep’t of the Treasury. § 1010. bond. security-based swap. 56  See John Biggs. in general. § 1960. Fin. at *2 48  15 U. 2013). § 78c(a)(10) (2006) (defining security as “any note. at 23. stock. § 77(b)48 and that “it [was] clear that [Bitcoins] can be used as money. Bitcoin Protocol The Bitcoin cryptocurrency launched in late 2008 after Nakamoto released his concept paper. security future.) In a real world these things are very complex systems with many moving parts. U. 2013 WL 4028182 (E.’ which splits up a bunch of these problems into little tiny problems and then everyone in the mining pool splits the reward based on how much they helped.47 Because it found that the defendant’s investments constituted securities under 15 U.50 Since a court deemed Bitcoins to be a security instrument.org/bitcoin. 46  No. 1 Beyond the Silk Road 65 currency issues.64 NATIONAL SECURITY LAW BRIEF Vol. “Talk to anyone in Silicon Valley or in New York— we don’t have the best reputation here of being ahead of the curve on a lot of these issues. 2013).”). and Congress has begun its own investigation into the digital market.” “exchangers.38 By operating an unlicensed money transmission service. the designer of the Bitcoin protocol. 2013 WL 4028182. § 471 (2006) (stating that the intent to defraud with any false obligation or other security shall be fined or imprisoned. How to Get Rich on Bitcoin.54 Double spending occurs when a buyer can transfer his currency to a seller while retaining the original reserve.”). at *2 50  See Perkins Coie. supra note 33. at 7.C. Shavers.S.39 FinCEN distinguishes “users.56 The platform has a finite limit of supplying twenty-one million Bitcoins over time. 49  Shavers. Bitcoin: A Peer-to-Peer Electronic Cash System. and currency issuance (the treasury. supra note 5. 41  Id. http://techcrunch. Crimes Enforcement Network. there is a high risk of spending a unit of currency more than once.vice.cornell. When real currency is traded. but remain silent on whether current law fits the technology or if they will enact different regulatory schemes in the future. an exchanger or administrator is subject to fines and criminal prosecution under the racketeering statute 18 U. http://blogs. very powerful cryptographic methods that ensures that each step in the chain verifies the next.51 It remains unclear how Congress intends to proceed. supra note 2. you get 50 Bitcoins. depending on the speed of your computer. 6. 4:13-CV-416. available at http://www. Vol. releasing quantities in a block chain.com/blog/how-to-get-rich-on-bitcoin-by-a-systemadministrator-who-s-secretly-growing-them-on-his-school-s-computers (last visited Oct. 2013) (“You can download the official Bitcoin software and just click a little check box that says ‘generate coins. programmers had long-attempted to develop a method to resolve the double-spending problem particularly tied to virtual currencies.’ From there your computer will try and solve a block. 58  Ryan Broderick. Techcrunch (Oct.) fraud prevention (the SEC and security firms).100(ff) (2011). No. Without a central authority to validate transactions. had anticipated this problem.53 Before this development.com/files/upload/08_21_2013_DVC_Update.S. (Mar. at 1. 2013) (“One of the purposes of filing [Suspicious Activity Reports] is to identify violations or potential violations of law to the appropriate law enforcement authorities for criminal investigation.C.C. 42  Id. 47  Id.49 Shavers’ political implications for Bitcoin businesses were immediately clear to legal advisers. 29. And if it solves the whole block.gov/statutes_regs/bsa/bsa_faqs. or will be subject to an entirely new regulatory scheme designed with the technological complexities of virtual currency in mind. everyone involved can physically examine the currency. any instrument commonly known as a ‘security’”). 45  Answers to Frequently Asked BSA Questions. http:// www. In SEC v. This is accomplished by the filing of a SAR that identifies the activity of concern. 44  31 C. Motherboard Beta.”).46 the District Court for the Eastern District of Texas held that it had subject matter jurisdiction to determine whether the Securities Act of 1933 applied to a Ponzi scheme case involving Bitcoins. Crimes Enforcement Network. available at http://bitcoin. treasury stock. First. at 19 (“If an entity is a Money Services Business (MSB) it must register with FinCEN.S.57 The first link of the block chain is created by Bitcoin “miners” who race to solve a cryptographic equation by executing an intensive computer task known as a brute force crack. But. 4. Cornell Univ.com/2013/10/16/blockchainsmashers/ (“Bitcoin is a mix of three monetary processes.”). any further currency releases or transactions on the block chain must undergo a cycle of encryption and logging through the Bitcoin software. 2013). 7. 18.58 By solving this progressive puzzle. Client Update: Virtual Currency: Government Scrutiny Continues to Grow 2 (2013). Aug.S.” and “administrators” of virtual currencies in the same guidance. 43  Id. 1 source for currency.”43 thus providing money transmission services. .44 The BSA also obligates exchangers and administrators to file suspicious activity reports for users who appear to be undermining money laundering and terrorist financing laws. Tex. pdf (last visited Nov.55 The Bitcoin monetary supply is created by the amount of users who utilize the platform.

24. Or even better. Does IP Address Location (Geolocation) Really Work?. 73  See Roger Dingledine. 60  Id..org/legacy/events/sec04/tech/full_papers/dingledine/dingledine. 2013). 68  See Chamath Palihapitya.64 This time stamp contains only enough user information to prevent fraud. (Aug. 69  See Monika Mueller-Kroll. the U. Foreign Policy (Oct.com/2012/06/14/fbi-tor-child-abuse-investigation/ (“In at least one case. (“The board also has worked with the Tor Solutions Group to develop “several enhancements” to its usability and performance for users subject to censorship. ease. (June 14.eff.en (discussing the inception of Tor at the Naval Research Laboratory).65 Because of the computational power needed to form a new block chain and the public log from each transaction. The server began serving malware that ‘exploited a security hole in Firefox to identify users of the Tor Browser Bundle.”). Elec.73 Tor is currently distributed by the Department of State and the Broadcasting Board of Governors (BBG) Anti-Censorship Division to aid foreign dissidents and journalists. 2011).org/about/overview. The Winklevoss Twins Just Gave a Presentation on Bitcoin to a Room Full of Investors.org/2012/06/01/154140277/berlin-restaurant-experiments-with-virtual-currency (describing the motivation of a coffee shop owner for allowing Bitcoin as a form of payment for customers). 2004).”).washingtonpost. in July.bloomberg. Bus.”).foreignpolicy.79 Since properly-configured relays provide little useful data for investigators. Bd. when a programmer or group of programmers known only as “Satoshi Nakamoto” released an academic paper outlining the design for a new peer-to-peer electronic cash system that removes the need to deal with third parties such as banks. a Bitcoin e-mail address that serves as a bank for people that are underbanked? What about micropayments—‘it’s generally understood that sending under $2 over the Internet is impossible.’ said one of the Twins. 78  See Tor Legal FAQ. About.76 By working with internet service providers after identifying an IP address. Broad. Post (Oct. Everything You Need to Know About the NSA and Tor in One FAQ. Why I Invested in Bitcoin. Insider (Sept. and results in an encrypted wallet that can be used to purchase goods or exchange for real currency through an intermediary. see also Tor: Overview. 3. the peer-to-peer exchange can be confidently verified.. Lisa Vaas. Bloomberg.”). Not Even the NSA Can Crack the State Dept’s Favorite Anonymous Network. e. 18.pdf (last visited Oct.sophos. The BBG’s budget for Internet anti-censorship issues runs a little over $10 million a year”). 9:01 PM). 4.S.eff. a company that provides Tor hidden services.usenix.77 Tor inhibits this ability by cloaking the source of an IP query. http://thecable. 12:06PM). (last visited Nov. The Tor Project.html (“The point is that this fundamental trust [in the financial services industry] no longer exists. in its place. cheap transmission costs. 2013. Post. 80  Id. 18.org/torchallenge/legal-faq/.”71 It anonymizes 59  Id. http://www.75 Tor has also caused headaches for American investigators seeking to seize webhosts of illicit materials and to identify uploaders and downloaders.bbg. http://www. https://www. the US police’s hunt for online child abuse images has been stymied by Tor. 77  See Bradley Mitchell. 4. they suggest. 64 Id.60 After Bitcoins are traded by users.63 The timestamped transfer is recorded on the block chain.org/torchallenge/legal-faq/. Wash. 72  See What is a Tor Relay?. 2013). 2012. law enforcement can determine a user’s physical location. 2013). supra note 5. .70 Vol. http://www. 4. see also Internet Anti-Censorship. The Ticker. No. and human rights.com/winkelvoss-bitcoin-bitcoin-presentation-2013-9 (“In short: There are a lot of possibilities here. NPR (June 1. 79  Id.66 NATIONAL SECURITY LAW BRIEF Vol.”).com/news/2013-05-30/bitcoin-the-perfect-schmuck-insurance. another equation for decryption is added to the block chain.66 At the nadir of the global financial crisis.html (“Bitcoin originated at the height of the financial crisis in November 2008.htm (last visited Oct. Naked Sec. 63  Id. and double-spending is prevented.80 exploiting information transmitted through Tor remains a priority for agencies including the Federal Bureau of Investigation (FBI) and National Security Agency (NSA). et al. available at https://www.businessinsider. 10:04AM). 70  See Linette Lopez. https://www. http:// www. the BBG directly funded Tor through this Division. and security. 1 Beyond the Silk Road 67 users’ internet protocol (IP) addresses by redirecting the original query through exit relays that can be located anywhere in the world.”). 11. 2013) (“The BBG is working with the Tor Solutions Group to significantly increase the number of high-speed Tor exit relays and bridges to improve the speed of the Tor network. Berlin Restaurant Experiments With Virtual Currency.78 Criminals may utilize Tor to attain the same anonymity desired by a human rights activist. (“Transactions are verified.’ That apparently allowed the NSA to identify people who had been browsing a Tor hidden service…”). Tor: The Second-Generation Onion Router (2004) (Aug.72 Originally sponsored by the Naval Research Laboratory. 71  See Tor Legal FAQ.npr. Tor Tor was developed to be a “tool for free expression. Frontier Found.html. 74  See Shane Harris & John Hudson.67 real currency holders were attracted to Bitcoin’s transparency. https://www. http:// nakedsecurity. Oct. at 5.g. 9-13. What about remittances.68 The platform has been implemented in a range of industries from Berlin cafes accepting Bitcoins for a cup of coffee69 to an exchange-traded fund administered by the Winklevoss twins of Facebook fame. 11:36 AM). https://www. Frontier Found.com/posts/2013/10/04/not_even_the_nsa_can_crack_ the_state_departments_online_anonymity_tool (“For years.about.59 Miners are rewarded with Bitcoins after creating a block chain and when further transactions are added to the miner’s block chain. 1 proves each peer-to-peer link is legitimate.61 Bitcoin transactions are verified through a two-part cryptographic process.81 In a recent presentation entitled “Tor Stinks. 2013. 61  Id. through the clever use of public-key cryptography..washingtonpost. http://www. Elec.com.74 Up until October 2012. C.org/torchallenge/what-is-tor (last visited Oct. 2011). 4. http://www. (Aug. Lee. 81  See Timothy B. 2013. of Governors. 66  Id. 2013. so it is statistically likely that Tor facilitates illegal activity.62 A seller creates a virtual message containing a buyer’s public key and signs it with the seller’s private key. 24. FBI Claims that Tor Stymied Child Abuse Investigation.gov/wp-content/ media/2013/05/Anti-Censorship-Fact-Sheet-May-2013.Com (May 30. 2012).com/blogs/the-switch/wp/2013/10/04/everything-you-need-toknow-about-the-nsa-and-tor-in-one-faq/ (“The FBI recently admitted that it had taken control of Freedom Hosting. http://compnetworking. The Switch.”). Elec. Frontier Found. rises Bitcoin.eff. privacy.pdf (implying that the Naval Research Laboratory was instrumental in developing Tor). a Freedom of Information Act (FOI) request has revealed. No. Washin. government has offered tools and training to help foreign dissidents and journalists circumvent detection by repressive governments. 2013. 17.” NSA authors wrote “[the NSA] will never be able to de-anonymize all Tor users all the time.torproject. 3:36PM). 76  See. 65  Id. Virtual Money Men Ante Up for the Digital Currency. 18. 62  See Brito & Castillo. com/od/traceipaddresses/f/ip_location. 75  Id. 67  See As Regulators Circle Bitcoin.com/business/as-regulators-circle-bitcoin-virtual-money-men-ante-up-for-the-digitalcurrency/2013/10/10/76519964-2d50-11e3-97a3-ff2758228523_story.

of Governors. FBI Claims that Tor Stymied Child Abuse Investigation. 75  Id. (“Transactions are verified.”). another equation for decryption is added to the block chain. ease. they suggest. 4. the BBG directly funded Tor through this Division. 61  Id.org/2012/06/01/154140277/berlin-restaurant-experiments-with-virtual-currency (describing the motivation of a coffee shop owner for allowing Bitcoin as a form of payment for customers).org/torchallenge/what-is-tor (last visited Oct. Wash.g. Everything You Need to Know About the NSA and Tor in One FAQ. 80  Id. Frontier Found. No. e. What about remittances. https://www.gov/wp-content/ media/2013/05/Anti-Censorship-Fact-Sheet-May-2013. 72  See What is a Tor Relay?.com/2012/06/14/fbi-tor-child-abuse-investigation/ (“In at least one case. so it is statistically likely that Tor facilitates illegal activity. a company that provides Tor hidden services. 2013.64 This time stamp contains only enough user information to prevent fraud. 1 proves each peer-to-peer link is legitimate.63 The timestamped transfer is recorded on the block chain. 68  See Chamath Palihapitya. 73  See Roger Dingledine.org/torchallenge/legal-faq/.bloomberg. Bus. cheap transmission costs. http://www. Berlin Restaurant Experiments With Virtual Currency. The BBG’s budget for Internet anti-censorship issues runs a little over $10 million a year”). Does IP Address Location (Geolocation) Really Work?. 18. The Winklevoss Twins Just Gave a Presentation on Bitcoin to a Room Full of Investors.bbg. Why I Invested in Bitcoin.eff. Elec. 3:36PM). (“The board also has worked with the Tor Solutions Group to develop “several enhancements” to its usability and performance for users subject to censorship.” NSA authors wrote “[the NSA] will never be able to de-anonymize all Tor users all the time. 1 Beyond the Silk Road 67 users’ internet protocol (IP) addresses by redirecting the original query through exit relays that can be located anywhere in the world. com/od/traceipaddresses/f/ip_location.”)..62 A seller creates a virtual message containing a buyer’s public key and signs it with the seller’s private key. About.”). 9-13. through the clever use of public-key cryptography. 24. 65  Id.htm (last visited Oct. 2012). Elec. (Aug. C.org/about/overview.foreignpolicy. NPR (June 1. 2013.. when a programmer or group of programmers known only as “Satoshi Nakamoto” released an academic paper outlining the design for a new peer-to-peer electronic cash system that removes the need to deal with third parties such as banks. 4. https://www. Bloomberg.77 Tor inhibits this ability by cloaking the source of an IP query. Foreign Policy (Oct. and results in an encrypted wallet that can be used to purchase goods or exchange for real currency through an intermediary. in July. 67  See As Regulators Circle Bitcoin. 2011). The Tor Project. a Bitcoin e-mail address that serves as a bank for people that are underbanked? What about micropayments—‘it’s generally understood that sending under $2 over the Internet is impossible. available at https://www. The Switch.’ That apparently allowed the NSA to identify people who had been browsing a Tor hidden service…”). in its place. 3.businessinsider.com/business/as-regulators-circle-bitcoin-virtual-money-men-ante-up-for-the-digitalcurrency/2013/10/10/76519964-2d50-11e3-97a3-ff2758228523_story.65 Because of the computational power needed to form a new block chain and the public log from each transaction. 17. law enforcement can determine a user’s physical location. the U. 2011). 79  Id. Post (Oct. privacy. https://www.81 In a recent presentation entitled “Tor Stinks. Naked Sec. http:// nakedsecurity. No. see also Internet Anti-Censorship. (last visited Nov. and double-spending is prevented.washingtonpost. Insider (Sept. http://www. Broad. 2012. Lee. Tor: The Second-Generation Onion Router (2004) (Aug.”). 60  Id. see also Tor: Overview. 63  Id. Not Even the NSA Can Crack the State Dept’s Favorite Anonymous Network.’ said one of the Twins.Com (May 30.79 Since properly-configured relays provide little useful data for investigators. Oct.org/torchallenge/legal-faq/.html (“Bitcoin originated at the height of the financial crisis in November 2008.com/blogs/the-switch/wp/2013/10/04/everything-you-need-toknow-about-the-nsa-and-tor-in-one-faq/ (“The FBI recently admitted that it had taken control of Freedom Hosting.”).com/winkelvoss-bitcoin-bitcoin-presentation-2013-9 (“In short: There are a lot of possibilities here. 10:04AM). 76  See.eff. rises Bitcoin. Tor Tor was developed to be a “tool for free expression. a Freedom of Information Act (FOI) request has revealed. 71  See Tor Legal FAQ. http://thecable. .sophos. 11. Or even better. 69  See Monika Mueller-Kroll.com/posts/2013/10/04/not_even_the_nsa_can_crack_ the_state_departments_online_anonymity_tool (“For years.”).usenix. http://www.”71 It anonymizes 59  Id. 78  See Tor Legal FAQ. Lisa Vaas. 2013).74 Up until October 2012.59 Miners are rewarded with Bitcoins after creating a block chain and when further transactions are added to the miner’s block chain.org/legacy/events/sec04/tech/full_papers/dingledine/dingledine.npr. 2013. https://www. http://www.67 real currency holders were attracted to Bitcoin’s transparency. Washin. the peer-to-peer exchange can be confidently verified. http://www. 64 Id.torproject.pdf (implying that the Naval Research Laboratory was instrumental in developing Tor). 74  See Shane Harris & John Hudson.about. 2013).68 The platform has been implemented in a range of industries from Berlin cafes accepting Bitcoins for a cup of coffee69 to an exchange-traded fund administered by the Winklevoss twins of Facebook fame. 2013.66 At the nadir of the global financial crisis. and security. http://compnetworking. 4. 2004). 4. 77  See Bradley Mitchell. Frontier Found.76 By working with internet service providers after identifying an IP address. government has offered tools and training to help foreign dissidents and journalists circumvent detection by repressive governments. (Aug.html (“The point is that this fundamental trust [in the financial services industry] no longer exists.70 Vol. 66  Id.”). et al.75 Tor has also caused headaches for American investigators seeking to seize webhosts of illicit materials and to identify uploaders and downloaders.eff.washingtonpost. and human rights. Frontier Found. The server began serving malware that ‘exploited a security hole in Firefox to identify users of the Tor Browser Bundle. 11:36 AM). the US police’s hunt for online child abuse images has been stymied by Tor.. 18.60 After Bitcoins are traded by users. The Ticker.73 Tor is currently distributed by the Department of State and the Broadcasting Board of Governors (BBG) Anti-Censorship Division to aid foreign dissidents and journalists.80 exploiting information transmitted through Tor remains a priority for agencies including the Federal Bureau of Investigation (FBI) and National Security Agency (NSA). Bd.com. 70  See Linette Lopez. 24.72 Originally sponsored by the Naval Research Laboratory.com/news/2013-05-30/bitcoin-the-perfect-schmuck-insurance. 2013. 12:06PM). Virtual Money Men Ante Up for the Digital Currency. Elec. (June 14.pdf (last visited Oct. 2013) (“The BBG is working with the Tor Solutions Group to significantly increase the number of high-speed Tor exit relays and bridges to improve the speed of the Tor network. supra note 5. 9:01 PM). Post. 2013).S. 62  See Brito & Castillo. at 5.78 Criminals may utilize Tor to attain the same anonymity desired by a human rights activist.en (discussing the inception of Tor at the Naval Research Laboratory). http:// www.61 Bitcoin transactions are verified through a two-part cryptographic process. 18.html. 81  See Timothy B.66 NATIONAL SECURITY LAW BRIEF Vol.

DHS Homeland Security Investigations. Gizmodo (Oct. newrepublic. (June 6. 13 MAG 02328). 5. 2013 WL 5460023 (No. users are instructed to disguise shipments and vacuum seal drugs that may be detected by odor.com/ Technology/silk-road-arrest-shines-light-dark-web/story?id=20460774 (“The FBI’s takedown of a billion-dollar black market website that allowed users to sell and purchase illegal items has shined a spotlight on the ‘dark Web.com/web/torsearch-tor-network-hidden-services/ (“One of the things that keeps Tor’s “hidden services” websites hidden is that they are often difficult to find through normal avenues. operated for two and half years. 2013 WL 5460023 (No. however. and Treasury Internal Revenue Service (IRS) Criminal Investigation to confiscate Silk Road and to identify and arrest the website’s owner for federal money laundering. ‘the only function served by such ‘tumblers’ is to assist with the laundering of criminal proceeds.com/article/115086/tor-snowden-and-battle-over-bitcoin. exclusively using Bitcoins. blogger Adrian Chen posted an article about a new hidden website called Silk Road.. §§ 1030 and 1956.93 Silk Road’s servers were also hosted in several foreign countries.S. U. Senator Joe Manchin. 96  Complaint ¶ 16. Ulbricht.C. 2013). Kotaku (June 1.75 million Bitcoins in existence. 2013). http://www. 9. 2013 WL 5460023 (No. 86  Ryan Haight Online Pharmacy Consumer Protection Act of 2008. Ulbricht. which was recently seized by the FBI. 98  See Joseph Goldstein.nytimes. 27.com/security/encryption/tor-anonymity-cracked-fbi-porninvestiga/240159424 (discussion how the Tor service hides services by using randomly generated domain names). http:// gizmodo. a dark website hidden from the typical internet browser.C. 5:00PM).informationweek. United States v. theguardian. Silk Road was able to generate an estimated $1. Accordingly.99 Separately. The Underground Website Lets You Buy Any Drug Imaginable.gov/j/inl/rls/nrcrpt/2012/vol2/184110. 83  See Lisa Vaas.88 To put Silk Road’s extensiveness in perspective of the total Bitcoin market. 2013. 18 U. semi-random series of dummy transactions. Ulbricht. 11. provided an anonymous marketplace for buyers of illegal drugs. Silk Road Arrest Shines Light on ‘Dark Web’.S. but not isolate the correct IP address.”) 89  See Raddaela Wakeman. . 2. 5. 4:20 PM). Week Sec.83 II: Silk Road’s Effect on Regulation of Virtual Currencies On June 1. 90  See 18 U. computer hacking. ¶ 28.S. 2012).92 An internet user could find the current Tor ad82  See ‘Tor Stinks’ Presentation – Read the Full Document. U.”97 It took over two years for law enforcement agents from the DOJ. (Aug.”). 7.com/2013/10/03/nyregion/operator-of-online-market-for-illegal-drugs-is-charged-fbi-says. 2013 WL 5460023 (S. http:// kotaku. No. N. § 982(a)(1) (2006) (allowing for the forfeiture to the U. see also 18 U. Schwartz.90 Silk Road.state. 87  See Kevin Dolak. 13 MAG 02328) (stating that Silk Road uses a tumbler to process Bitcoin transactions in a “manner designed to frustrate the tracking of individual transactions through the [block chain]. Shuts Down a Black Market for Narcotics. 110-425. 2013). 95  Parker Higgins. Info. Senator Joe Manchin.5 million Bitcoins.com/world/interactive/2013/oct/04/tor-stinks-nsa-presentation-document. sophos. 2013 WL 5460023(No. of any real or personal property involved in or traceable to certain financial crimes).86 Silk Road.Y. 85  Press Release. 99  See Complaint ¶ 24. which adds randomly generated characters91 to the actual domain name. 13 MAG 02328). Tor Anonymity Cracked. 4. http://abcnews. § 2. http://nakedsecurity. operated on the Tor network.100 Important details regarding law enforcement’s methodology used to seize Silk Road remain unclear.digitaltrends. Ulbricht.S. New Republic (Oct. and Silk Road‘s revenues approached 9.html.”). 2013. 13 MAG 02328.S. 88  See Press Release.com/2012/06/14/fbi-tor-child-abuse-investigation/ 84  See Adrien Chen.gov/public/index. TorSearch Makes Finding the Next Silk Road a Lot Easier. No. 2011).94 By employing a “tumbler”95 to further obfuscate Bitcoin transactions and protect users and administrators. there are approximately 11.”). 122 Stat.C. Ulbricht. 2013 WL 5460023 (No. 2013. 2011.89 The Senators’ letter recommended that the DOJ request a court to order the seizure of the website’s domain name.”82 Investigations can grind to a halt if law enforcement can monitor traffic. 2011. 2013 WL 5460023 (No. No. It was beneath this veil that online drug supermarket Silk Road.D. 100 See id. http:// www. 93  See Andrew Couts.”). Sept. http://www. http://www. where users “can buy any drug imaginable. and narcotics trafficking conspiracies under 21 U. Take the Drugs. 102 Complaint ¶ 22. Arrest in U. Manchin Urges Federal Law Enforcement to Shut Down Online Black Market for Illegal Drugs. the purpose of a tumbler is to attempt to make a bitcoin transaction as anonymous and private as cash. see also Complaint. Why You Can’t Blame Bitcoin for Silk Road Shadiness. DEA. a random package search by DHS that discovered forged identification documents allegedly addressed to the defendant arriving from Canada resulted in a positive photo identification of the suspect and a separate charge. Digital Trends (Oct. 2013 11:25 AM). 3. http://www.manchin. Ulbricht. Mathew J. And it’s where the illegal drug sites that have risen in prominence since Silk Road’s fall currently exist. 13 MAG 02328). FBI Porn Investigation Role Questioned. 4. making it nearly impossible to link your payment with any coins leaving the site. Naked Sec.htm. Ulbricht. The Guardian (Oct. ).. weapons. http://www.N. 97  Id. Times (Oct. e. authorities and their confiscation of a server and three (claiming that defendant added a Bitcoin tumbler to Silk Road to make the illegal transactions untraceable).cfm/press-releases?ID=284ae54a-acf14258-be1c-7acee1f7e8b3. the special agent in charge of the investigation claimed the marketplace “emerged as the most sophisticated and extensive criminal marketplace on the Internet today. 2012). According to the criminal complaint.68 NATIONAL SECURITY LAW BRIEF Vol.S. 10:49PM).go.2 billion in sales and $80 million in commissions. much of the global Bitcoin supply was being spent on illicit activities available through the website. sending all payments through a complex. FBI Claims that Tor Stymied Child Abuse Investigation. Pub. 13 MAG 02328).Y.”84 Five days later. 13 MAG 02328). 1 Beyond the Silk Road 69 dress posted by Silk Road users on forums. ABC News (Oct. 4280 (2008).96 According to the criminal complaint of Silk Road’s alleged owner.com/why-you-cant-blame-bitcoin-for-silk-road-shadiness-1441572365 (“According to the complaint. a mutual legal assistance treaty (MLAT)101 request to an unconfirmed sovereign allowed the FBI to copy a Silk Road server on July 23. Dep’t of State Bureau of Int’l Narcotics and Law Enforcement Affairs (Mar. 1 but with manual analysis we can de-anonymize a very small fraction [of users].S.98 It was the improper implementation of Tor by the site’s contended owner that granted the task force the opportunity to match his IP address to old forum posts and execute an arrest...85 The Attorney General is authorized to confiscate entities involved in the illegal online delivery and distribution of controlled substances under the Ryan Haight Online Pharmacy Consumer Protection Act. 101 2012 INCSR: Treaties and Agreements.g.com/the-underground-website-where-you-can-buy-any-drug-imag-30818160. http:// www.’ Really. FBI. and malware.102 Icelandic enforcement confirmed their assistance to U. 91  See. supra note 88 (“After completing online purchases. see also Complaint ¶ 21. 2013) Vol. Law No. Senators Charles Schumer and Joe Manchin III “urged” Attorney General Eric Holder and Drug Enforcement Administration (DEA) Administrator Michelle Leonhart to immediately seize the Silk Road network. 2013.87 The website further advised sellers on shipping methods to avoid detection.senate. § 1028 (2006) (describing the crime and penalties related to false identification possession and trafficking). 4. But Don’t Take the People’s Bitcoins. 92  See Complaint ¶ 12(b).C § 846.S. (June 14. 94  See Complaint ¶ 22.’ which masks users’ online identities while providing a shield for everyone from hackers to journalists and the police.S.

but not isolate the correct IP address. which was recently seized by the FBI. Ulbricht. U. 2012). 2013 WL 5460023(No. 13 MAG 02328).2 billion in sales and $80 million in commissions. 94  See Complaint ¶ 22.85 The Attorney General is authorized to confiscate entities involved in the illegal online delivery and distribution of controlled substances under the Ryan Haight Online Pharmacy Consumer Protection Act. FBI. It was beneath this veil that online drug supermarket Silk Road. ).. provided an anonymous marketplace for buyers of illegal drugs. Why You Can’t Blame Bitcoin for Silk Road Shadiness.83 II: Silk Road’s Effect on Regulation of Virtual Currencies On June 1. and Silk Road‘s revenues approached 9. see also Complaint ¶ 21. 13 MAG 02328). 4:20 PM). Info. http://www. a mutual legal assistance treaty (MLAT)101 request to an unconfirmed sovereign allowed the FBI to copy a Silk Road server on July 23.com/web/torsearch-tor-network-hidden-services/ (“One of the things that keeps Tor’s “hidden services” websites hidden is that they are often difficult to find through normal avenues. Tor Anonymity Cracked. 2011). 91  See. 13 MAG 02328.htm. DEA. 2013)..gov/public/index. §§ 1030 and 1956. sending all payments through a complex. Pub. Dep’t of State Bureau of Int’l Narcotics and Law Enforcement Affairs (Mar. ¶ 28.C. 2013 WL 5460023 (No. exclusively using Bitcoins.S. The Underground Website Lets You Buy Any Drug Imaginable. 3. 101 2012 INCSR: Treaties and Agreements.”). 13 MAG 02328). Times (Oct. ‘the only function served by such ‘tumblers’ is to assist with the laundering of criminal proceeds. 102 Complaint ¶ 22. ABC News (Oct. weapons.S.’ Really. Senator Joe Manchin. Ulbricht. http://www.. 1 but with manual analysis we can de-anonymize a very small fraction [of users]. Ulbricht. § 1028 (2006) (describing the crime and penalties related to false identification possession and trafficking). much of the global Bitcoin supply was being spent on illicit activities available through the website. (Aug. a dark website hidden from the typical internet browser. Kotaku (June 1. 2013 WL 5460023 (S. Week Sec.com/the-underground-website-where-you-can-buy-any-drug-imag-30818160. The Guardian (Oct.5 million Bitcoins. Senator Joe Manchin. Silk Road Arrest Shines Light on ‘Dark Web’. Ulbricht. newrepublic.Y. users are instructed to disguise shipments and vacuum seal drugs that may be detected by odor. http:// www.C. Schwartz. http://abcnews. theguardian. 2013 11:25 AM). e.gov/j/inl/rls/nrcrpt/2012/vol2/184110. 90  See 18 U. 2011. Take the Drugs. Manchin Urges Federal Law Enforcement to Shut Down Online Black Market for Illegal Drugs. 4. According to the criminal complaint. 4280 (2008). 9. making it nearly impossible to link your payment with any coins leaving the site. Ulbricht. 99  See Complaint ¶ 24. 93  See Andrew Couts. No.com/2012/06/14/fbi-tor-child-abuse-investigation/ 84  See Adrien Chen. New Republic (Oct.93 Silk Road’s servers were also hosted in several foreign countries. there are approximately 11. 100 See id.98 It was the improper implementation of Tor by the site’s contended owner that granted the task force the opportunity to match his IP address to old forum posts and execute an arrest. 110-425.S. No.nytimes.102 Icelandic enforcement confirmed their assistance to U.68 NATIONAL SECURITY LAW BRIEF Vol. Mathew J. 95  Parker Higgins. semi-random series of dummy transactions.”). the purpose of a tumbler is to attempt to make a bitcoin transaction as anonymous and private as cash. United States v. 5. Sept.senate. 85  Press Release. 11.99 Separately. DHS Homeland Security Investigations.’ which masks users’ online identities while providing a shield for everyone from hackers to journalists and the police. http://www.go. 98  See Joseph Goldstein.C § 846. computer hacking.com/why-you-cant-blame-bitcoin-for-silk-road-shadiness-1441572365 (“According to the complaint.88 To put Silk Road’s extensiveness in perspective of the total Bitcoin market.com/ Technology/silk-road-arrest-shines-light-dark-web/story?id=20460774 (“The FBI’s takedown of a billion-dollar black market website that allowed users to sell and purchase illegal items has shined a spotlight on the ‘dark Web. operated for two and half years.”84 Five days later. 27. http:// kotaku. § 2. (June 6. 2011. Senators Charles Schumer and Joe Manchin III “urged” Attorney General Eric Holder and Drug Enforcement Administration (DEA) Administrator Michelle Leonhart to immediately seize the Silk Road network. 2013). Law No. and Treasury Internal Revenue Service (IRS) Criminal Investigation to confiscate Silk Road and to identify and arrest the website’s owner for federal money laundering.html. Digital Trends (Oct. operated on the Tor network. a random package search by DHS that discovered forged identification documents allegedly addressed to the defendant arriving from Canada resulted in a positive photo identification of the suspect and a separate charge. 2013 WL 5460023 (No. the special agent in charge of the investigation claimed the marketplace “emerged as the most sophisticated and extensive criminal marketplace on the Internet today. U. 2013 WL 5460023 (No. 1 Beyond the Silk Road 69 dress posted by Silk Road users on forums.com/2013/10/03/nyregion/operator-of-online-market-for-illegal-drugs-is-charged-fbi-says. 2013. blogger Adrian Chen posted an article about a new hidden website called Silk Road. 2013 WL 5460023 (No.86 Silk Road. FBI Porn Investigation Role Questioned.90 Silk Road. http://www. No.state. http:// gizmodo.Y. 4. see also Complaint. Naked Sec. . 2013. of any real or personal property involved in or traceable to certain financial crimes).94 By employing a “tumbler”95 to further obfuscate Bitcoin transactions and protect users and administrators. N. Ulbricht.”) 89  See Raddaela Wakeman. Arrest in U. 7. 2013) Vol. http:// www. sophos.75 million Bitcoins in existence. supra note 88 (“After completing online purchases. 4.S. 2.89 The Senators’ letter recommended that the DOJ request a court to order the seizure of the website’s domain name.manchin. http://www. 2013. 13 MAG 02328) (stating that Silk Road uses a tumbler to process Bitcoin transactions in a “manner designed to frustrate the tracking of individual transactions through the [block chain]. But Don’t Take the People’s Bitcoins. where users “can buy any drug imaginable.com/world/interactive/2013/oct/04/tor-stinks-nsa-presentation-document. 2013 WL 5460023 (No.S. 88  See Press Release. see also 18 U.S.”). TorSearch Makes Finding the Next Silk Road a Lot Easier.S. 87  See Kevin Dolak. 5. 18 U.”82 Investigations can grind to a halt if law enforcement can monitor traffic.g. 92  See Complaint ¶ 12(b). authorities and their confiscation of a server and three (claiming that defendant added a Bitcoin tumbler to Silk Road to make the illegal transactions untraceable).S.”). Silk Road was able to generate an estimated $1.cfm/press-releases?ID=284ae54a-acf14258-be1c-7acee1f7e8b3.N. 2012).C. Gizmodo (Oct.com/article/115086/tor-snowden-and-battle-over-bitcoin. And it’s where the illegal drug sites that have risen in prominence since Silk Road’s fall currently exist. Ulbricht. 122 Stat. Shuts Down a Black Market for Narcotics. which adds randomly generated characters91 to the actual domain name.92 An internet user could find the current Tor ad82  See ‘Tor Stinks’ Presentation – Read the Full Document.96 According to the criminal complaint of Silk Road’s alleged owner. FBI Claims that Tor Stymied Child Abuse Investigation.informationweek. 5:00PM).”97 It took over two years for law enforcement agents from the DOJ. 13 MAG 02328). 10:49PM). Accordingly. and malware.digitaltrends. § 982(a)(1) (2006) (allowing for the forfeiture to the U. (June 14.. 86  Ryan Haight Online Pharmacy Consumer Protection Act of 2008. 13 MAG 02328). 96  Complaint ¶ 16. http://nakedsecurity. 2013.87 The website further advised sellers on shipping methods to avoid detection. 97  Id.D. and narcotics trafficking conspiracies under 21 U. 2013).100 Important details regarding law enforcement’s methodology used to seize Silk Road remain unclear. however.S. 83  See Lisa Vaas.com/security/encryption/tor-anonymity-cracked-fbi-porninvestiga/240159424 (discussion how the Tor service hides services by using randomly generated domain names).

II: Money Laundering and Financial Crimes.02 Bitcoins. .pdf. 2013 WL 5460023.14 (2011). the Bitcoin transactions it and the suspect’s wallet contain remain difficult for law enforcement to decrypt due to the tumbler used. http://readwrite.cnbc.103 but Iceland is not a signatory to any MLAT. national security. accepted the Bitcoin transfer. Bitcoin After Silk Road. financial system). Drug Trafficking. the DEA published an Official Notification announcing that for the first time the federal government had seized and transferred into its possession 11. and arrested the alleged dealer at a later point. 3:50AM). This law has proven to be a useful tool for the Treasury and DOJ in setting precedent for disconnecting illegally-operated virtual currency exchangers from the U. The Verge (Oct. 119  See Nathan Mattise.com/2013/10/14/4836994/dont-host-your-virtual-illegal-drug-bazaar-iniceland-silk-road.com/dpp/news/local_news/investigations/silk-road-website-calledthe-amazon-ebay-of-heroin-cocaine-drug-trafficking (“The DEA wouldn’t confirm to ABC Action News whether or not they’re investigating Silk Road. CNBC (Mar. The New York Department of Financial Services110 declared that unregulated virtual currencies are a “Wild West for narcotraffickers and other criminals.com/drug-enforcement-agency-seizes-first-bitcoins-from-silk-595189571. 2012) (to be codified at 21 C. . 8.113 Having already created a Bitcoin wallet. or more likely. U.118 dropping twenty percent in only three hours after Silk Road shut down a few weeks after the DEA operation.F.state. Bitcoins are subject to extreme fluctuations in value. 104  International Narcotics Control Strategy Report Vol. 111  Notice.115 It is possible either that the suspect’s computer with an unencrypted wallet was forensically analyzed. 2013. Tumblers hide the true origin of your money by replacing your Bitcoins with a mixture of random Bitcoins with different transaction histories. . Lessons from Silk Road: Don’t Host Your Virtual Illegal Drug Bazaar in Iceland. 3. Manchin. 4. 2013).pcworld. No.S.”). 2013). http://www. and that the money was seized through a sting operation.119 The USA PATRIOT Act § 311 allows FinCEN to designate an institution a money launderer of primary concern. if the user’s private key was unknown. Readwrite (Aug. banks from maintaining relationships with foreign institutions. Mt. 2013). pt. PCWorld (May 16. prohibiting U. Captain Robert Alfonso of the Pinellas County Sheriff ’s Office says the law on websites like Silk Road is still vague.S. Drug Enforcement Agency Seizes First Bitcoins from Silk Road Dealer. After Liberty Reserve Shutdown.”111 Realizing the urgent threat to communities an easily-accessible anonymous drug trade presents. 118  See Lauren Orsini. 121  See Jeremy Kirk.theverge. Gox’s U. authorities gained access to private messages between Silk Road’s administrators and users that may be used to identify specific transactions of illicit goods if matched to “Blockchain” public logs.105 Even though the Silk Road server has been captured. supra note 88.F. people often run Bitcoins through Bitcoin tumblers. (No. 56. 11:47AM). rather than directrly from a user’s wallet). 2013. 105  See Jeffries. 77 Fed. 2012). the DEA made the earliest confirmed federal arrest of an alleged Silk Road dealer of Adderall. DHS Immigration and Customs Enforcement issued a seizure warrant on May 14. Bitcoin Value Drops Over 20% in 3 Hours. is Bitcoin Next?. . . http://www.F.gov/documents/ organization/204280. § 8. The Stanford Daily (Oct. http://www.com/information-technology/2013/10/amid-silk-road-uncertainty-bitcoin-value-dropsover-20-in-3-hours/ (noting that Bitcoin was “experiencing a period of extreme volatility” in the wake of the Silk Road shutdown). 2013. 109  See Brito & Castillo. at 8 (“To increase the chances of remaining pseudonymous. the DOJ and DEA consolidated regulations for seizures. ‘Silk Road’ Website Called the Amazon.S. 1 million Bitcoins.22. com/2013/10/12/bitcoin-after-silk-road/ (“In order to obscure the flow of Bitcoin. Bitcoin Bonanza: Cyprus Crisis Boosts Digital Dollars. supra note 25. Gox would disburse Bitcoins to users and register transactions in 112  Press Release.S. http://gizmodo. see also Complaint ¶ 19. it’s not harboring the recently busted illegal drug bazaar Silk Road. Lawsky. com/id/100597242. Gox’s failure to comply with federal regulations).”).121 In exchange for depositing dollars with a payment processor based in Iowa. Forbes (May 29.com/article/2038858/mt-gox-accused-of-violating-us-money-transfer-regulations. 107  See The Internet Poses Unique Challenges for Drug Prohibition. 8-9) (publishing the final rule consolidating seizure and forfeiture regulations from DOJ Drug Enforcement Agency). .R. 7:14 AM). 114  Brian Cohen & Adam B. . 4. Arstechnica (Oct. 2013. delaying the identification of buyers and sellers of illegal materials and liquidation of criminal proceeds. whether it’s an online black market or in . No. 115  Id. 5.”). 2013 to Japan-based Mt.120 Building upon FinCEN guidance. and take care never to transact with Bitcoin addresses that could be tied back to one’s identity.S.com/users-bitcoins-seized-by-dea/#. Amid Silk Road Uncertainty. Gox Accused of Violating US Money Transfer Regulations. http://www. using virtual currency can be the online equivalent of strangers trading cash for illicit goods on the street: untraceable.093 (Sept. 113  See Jamie Condliffe. 2011).”). and Suboxone in August 2013. 120  See Peter Cohan.03PM). eBay of Heroin. threaten . 106  See Omar Dieb. http://www.114 The Bitcoin public log let observers view the exact time of the seizure and the transfer recipients.R. Users Bitcoins Seized by DEA.”) 110  See Jeff Cox. Vol. com/the-internet-poses-unique-challenges-for-drug-prohibition-6262 (“It’s unclear whether any policy responses to control Silk Road have been effective. Levine.109 If fully anonymous. 1 Beyond the Silk Road 71 “[narcotics] scourge . including the pre-forfeiture disposition of property liable to to be greatly reduced in value”117 under 28 C. 27. 7:55AM). 2013. 1316 and 28 C. the DEA became a lead agency in confronting what Senator Manchin III described as a constant 103  See Adrianne Jeffries. Reg. http:// letstalkbitcoin. 116  See id. ABC ACTION News (June 10. 117  See Consolidation of Seizures and Forfeiture Regulations. . Cocaine. Dexedrine. Let’s Talk Bitcoin (July 9. pts.”112 Under the auspices of the Controlled Substances Act.R. Vyvanse. Ulbricht. 2.Ul4HBFDEoYM. combining Bitcoin’s peer-to-peer technology with Tor can increase users’ chances of remaining anonymous.106 III. one would have to employ anonymizing software like Tor. 12. 2013). http://theconversation. Dep’t of State Bureau for Int’l Narcotics and Law Enforcement Affairs (Mar.70 NATIONAL SECURITY LAW BRIEF Vol. or $814.116 In 2012. economy. http://www.forbes. Mt.abcactionnews. What’s Bitcoin Worth in the Real World?. that the DEA created its own Silk Road account.stanforddaily.html (ascribing the subsequent seizure to Mt. http://www. 14. Gizmodo (June 27. . com/2013/08/08/whats-bitcoin-worth-in-the-real-world#awesm=~ompVJzergXj9Xd (proffering that Bitcoin’s value is its scarcity). that . supra note 5. supra note 103 (“While the country may have protected WikiLeaks from the Americans. com/sites/petercohan/2013/05/29/after-liberty-reserve-shut-down-is-bitcoin-next/ (noting the Treasury Department’s efforts to sever Liberty Reserve’s access to the U. National Security Implications of Decentralized Virtual Currencies and Current Federal Authority As the Silk Road saga demonstrated to frustrated policymakers107 and law enforcement agents108 from the local level up to the international. Klonopin. subsidiary for allegedly failing to register with FinCEN as a money transmitting business dealing in Bitcoins. http://arstechnica. 2013. 12:53PM). (indicating that Bitcoin protocol was not violated. 12. 13 MAG 02328) (describing that the “Blockchain” was a public ledger stored on peer-to-peer networks). 108  See Michael George.104 By copying the server. pill mills. The Conversation (Apr.

(indicating that Bitcoin protocol was not violated.theverge. 2. using virtual currency can be the online equivalent of strangers trading cash for illicit goods on the street: untraceable.113 Having already created a Bitcoin wallet. II: Money Laundering and Financial Crimes. 2013.stanforddaily. supra note 103 (“While the country may have protected WikiLeaks from the Americans. . 12. No. authorities gained access to private messages between Silk Road’s administrators and users that may be used to identify specific transactions of illicit goods if matched to “Blockchain” public logs.103 but Iceland is not a signatory to any MLAT. . Amid Silk Road Uncertainty. pill mills.S. Bitcoin Value Drops Over 20% in 3 Hours. 1 million Bitcoins. National Security Implications of Decentralized Virtual Currencies and Current Federal Authority As the Silk Road saga demonstrated to frustrated policymakers107 and law enforcement agents108 from the local level up to the international. 114  Brian Cohen & Adam B. 107  See The Internet Poses Unique Challenges for Drug Prohibition.”112 Under the auspices of the Controlled Substances Act. http://www. 2013 to Japan-based Mt. 4.F. 4.pdf. 106  See Omar Dieb. Reg. whether it’s an online black market or in . Bitcoin After Silk Road.R. and take care never to transact with Bitcoin addresses that could be tied back to one’s identity. What’s Bitcoin Worth in the Real World?.22. com/id/100597242.com/users-bitcoins-seized-by-dea/#. http://theconversation. After Liberty Reserve Shutdown.118 dropping twenty percent in only three hours after Silk Road shut down a few weeks after the DEA operation. Gox would disburse Bitcoins to users and register transactions in 112  Press Release. 118  See Lauren Orsini. 117  See Consolidation of Seizures and Forfeiture Regulations. 2013. the DOJ and DEA consolidated regulations for seizures. Drug Trafficking. accepted the Bitcoin transfer. pt. http://readwrite. http://www. Bitcoin Bonanza: Cyprus Crisis Boosts Digital Dollars.pcworld. or $814. .104 By copying the server. com/the-internet-poses-unique-challenges-for-drug-prohibition-6262 (“It’s unclear whether any policy responses to control Silk Road have been effective. Bitcoins are subject to extreme fluctuations in value.com/drug-enforcement-agency-seizes-first-bitcoins-from-silk-595189571.cnbc. This law has proven to be a useful tool for the Treasury and DOJ in setting precedent for disconnecting illegally-operated virtual currency exchangers from the U. The Conversation (Apr. 12:53PM). one would have to employ anonymizing software like Tor. 2013. Drug Enforcement Agency Seizes First Bitcoins from Silk Road Dealer. http://arstechnica. Tumblers hide the true origin of your money by replacing your Bitcoins with a mixture of random Bitcoins with different transaction histories. . the DEA became a lead agency in confronting what Senator Manchin III described as a constant 103  See Adrianne Jeffries. 115  Id. or more likely. banks from maintaining relationships with foreign institutions. 116  See id. at 8 (“To increase the chances of remaining pseudonymous.forbes. 2013). 77 Fed. Captain Robert Alfonso of the Pinellas County Sheriff ’s Office says the law on websites like Silk Road is still vague. 2012) (to be codified at 21 C. 2013).com/2013/10/14/4836994/dont-host-your-virtual-illegal-drug-bazaar-iniceland-silk-road. see also Complaint ¶ 19. Gizmodo (June 27. 108  See Michael George. 8. 2013. 2013). supra note 5. financial system). The Verge (Oct. The New York Department of Financial Services110 declared that unregulated virtual currencies are a “Wild West for narcotraffickers and other criminals. the DEA made the earliest confirmed federal arrest of an alleged Silk Road dealer of Adderall. Readwrite (Aug. 14.S. 2012).121 In exchange for depositing dollars with a payment processor based in Iowa. economy. it’s not harboring the recently busted illegal drug bazaar Silk Road.R. 8-9) (publishing the final rule consolidating seizure and forfeiture regulations from DOJ Drug Enforcement Agency). and that the money was seized through a sting operation.com/dpp/news/local_news/investigations/silk-road-website-calledthe-amazon-ebay-of-heroin-cocaine-drug-trafficking (“The DEA wouldn’t confirm to ABC Action News whether or not they’re investigating Silk Road.02 Bitcoins.com/article/2038858/mt-gox-accused-of-violating-us-money-transfer-regulations. Gox’s U. 2013.”111 Realizing the urgent threat to communities an easily-accessible anonymous drug trade presents. com/2013/08/08/whats-bitcoin-worth-in-the-real-world#awesm=~ompVJzergXj9Xd (proffering that Bitcoin’s value is its scarcity). No. 119  See Nathan Mattise. . CNBC (Mar. . § 8.”). U. 2013 WL 5460023. 11:47AM). threaten .”) 110  See Jeff Cox.S.093 (Sept. ‘Silk Road’ Website Called the Amazon.com/information-technology/2013/10/amid-silk-road-uncertainty-bitcoin-value-dropsover-20-in-3-hours/ (noting that Bitcoin was “experiencing a period of extreme volatility” in the wake of the Silk Road shutdown). rather than directrly from a user’s wallet). 12. 3:50AM).105 Even though the Silk Road server has been captured. pts.14 (2011). and arrested the alleged dealer at a later point. 3. and Suboxone in August 2013.state. 27. 120  See Peter Cohan. Let’s Talk Bitcoin (July 9. Vol.115 It is possible either that the suspect’s computer with an unencrypted wallet was forensically analyzed. the DEA published an Official Notification announcing that for the first time the federal government had seized and transferred into its possession 11.70 NATIONAL SECURITY LAW BRIEF Vol. 2013). supra note 88. people often run Bitcoins through Bitcoin tumblers.120 Building upon FinCEN guidance. http://www. national security. Mt. Vyvanse. is Bitcoin Next?.109 If fully anonymous. Forbes (May 29. Manchin. (No. that the DEA created its own Silk Road account. the Bitcoin transactions it and the suspect’s wallet contain remain difficult for law enforcement to decrypt due to the tumbler used. ABC ACTION News (June 10. 105  See Jeffries. Klonopin.106 III. 7:14 AM).119 The USA PATRIOT Act § 311 allows FinCEN to designate an institution a money launderer of primary concern. eBay of Heroin. . http://gizmodo. Arstechnica (Oct. Gox’s failure to comply with federal regulations). The Stanford Daily (Oct. Users Bitcoins Seized by DEA.Ul4HBFDEoYM. Gox Accused of Violating US Money Transfer Regulations. http://www.abcactionnews. 111  Notice. . 104  International Narcotics Control Strategy Report Vol.”). delaying the identification of buyers and sellers of illegal materials and liquidation of criminal proceeds. http://www. 56. 2013. Dexedrine. 5.S. if the user’s private key was unknown. 121  See Jeremy Kirk. DHS Immigration and Customs Enforcement issued a seizure warrant on May 14. Ulbricht. subsidiary for allegedly failing to register with FinCEN as a money transmitting business dealing in Bitcoins.”). 1316 and 28 C. 7:55AM). that .F. com/sites/petercohan/2013/05/29/after-liberty-reserve-shut-down-is-bitcoin-next/ (noting the Treasury Department’s efforts to sever Liberty Reserve’s access to the U. Mt. http:// letstalkbitcoin.114 The Bitcoin public log let observers view the exact time of the seizure and the transfer recipients. Levine. http://www.F. Dep’t of State Bureau for Int’l Narcotics and Law Enforcement Affairs (Mar. Cocaine. supra note 25. 2011). 1 Beyond the Silk Road 71 “[narcotics] scourge . 109  See Brito & Castillo.gov/documents/ organization/204280. including the pre-forfeiture disposition of property liable to to be greatly reduced in value”117 under 28 C.R.”). 113  See Jamie Condliffe. 13 MAG 02328) (describing that the “Blockchain” was a public ledger stored on peer-to-peer networks).116 In 2012. http://www.03PM). com/2013/10/12/bitcoin-after-silk-road/ (“In order to obscure the flow of Bitcoin. Lawsky. PCWorld (May 16. .S.html (ascribing the subsequent seizure to Mt. Lessons from Silk Road: Don’t Host Your Virtual Illegal Drug Bazaar in Iceland. prohibiting U. combining Bitcoin’s peer-to-peer technology with Tor can increase users’ chances of remaining anonymous.

D. completing fifty-five million suspected criminal transactions while it acted as an unlicensed money transmitting business. Online Currency Exchange Accused of Laundering $6 Billion. The seventeen countries involved included Costa Rica. Security (Sept..”). Times (May 28. 130  Id.com/blog/2013/07/26/how-the-irs-can-share-your-bank-info-wit (“Title 26. 4.”). 19. http://www. http://reason. Ctr.Y. http://bsmlegal. the United Kingdom. One of World’s Largest Digital Currency Companies.documentcloud. 2013 the federal government went a step further when U.gov/press-center/press-releases/Pages/jl1956. 2012). 2013. FATCA May Identify Tax Cheats. Some buyers.gov/usao/nys/pressreleases/ May13/LibertyReservePR. 137  See Brian Kindle. 445-46 (1976) (holding that the BSA does not violate Fourth Amendment rights. U.aspx (using § 311 of the PATRIOT Act to list Liberty Reserve as an “financial institution of primary money laundering concern”).%20Indictment%20-%20Redacted. which actively hid its register of users’ activities.%20et%20 al. 1 Beyond the Silk Road 73 evasion.Y. Id. subsidiary Mutum Sigillum LLC).S. which are then sent to a central account.Y. Section 6103 of the tax .” The Supreme Court has held that bank customers do not have a privacy interest in personal records maintained by a bank. Gox. which are in fact the institution’s business records. it is difficult to determine how significant virtual economy and currency markets may be or how much tax revenue is at risk through their usage. U.122 On May 28.”). Notice 2011-34: Implementing the Foreign Account Tax Compliance Act (Jan.pdf. 128  Id. 2013) (“This legislation is a direct result of the focus by the United States (and other industrialized and developing countries) on combating offshore tax evasion and recouping much needed tax revenues. supra note 123.136 By doing so. IDG News Service. Sweden. and the United States. 129  Press Release. Pub. U.127 Criminals had opened accounts under patently false names such as “Russia Hackers” or simply “cocaine. Attorney’s Office S. and traffickers” after an investigation spanning seventeen countries. allowing “traffickers . http://www. Attorney Preet Bharara announced the indictment123 of the then-popular virtual currency exchange Liberty Reserve. 127  See Cohan. Morocco.129 DOJ charged the firm with a $6 billion money laundering scheme.’”). Ass’n of Certified Fin. it is possible that criminals along with tax evaders137 can slip through the cracks of FATCA. 2013). N. http://www. U.org/fatca-may-identify-tax-cheatsbut-its-dragnet-for-financial-criminals-may-produce-an-even-bigger-yield/ (“The Act gives the IRS unprecedented new power to catch tax evaders worldwide.treasury.org/sites/pirg/files/reports/Picking_ Up_the_Tab_2013_USPIRG.S.” and Liberty Reserve would charge a commission and privacy fee to hide users’ account numbers on each transaction.nytimes. But Its Dragnet for Financial Criminals May Produce an Even Bigger Yield. 136  See Lauren French & Zachary Warmbrodt. 19. Shulman. 424 U.dlapiper. 13 Crim 368 (S. Canada. National Security. May 23. Attorney Announces Charges Against Liberty Reserve.72 NATIONAL SECURITY LAW BRIEF Vol. 1. 10. supra note 120 (“The Treasury Department set a precedent in using the 2001 Patriot Act against a virtual currency to sever the link between Liberty Reserve and the U..justice. No. 2013) (explaining that Dwolla is the payment processor for Mt. not only preventing the IRS from generating revenue138 but also depriving security agencies of a valuable source of intelligence on crime and terror activity. Dep’t of the Treasury. Liberty Reserve would exchange users’ dollars for LR.”).126 a first for a virtual currency exchange case. Miller. 2013). William K. it did not however sign mandatory FinCEN forms declaring the subsidiary to be an exchanger.N.acfcs.pdf (last visited Oct. 134  United States v. but its concurrent dragnet for financial criminals may be an equally desirable endgame. FinCEN Director Jennifer Calvery invoked § 311 of the PATRIOT Act.) 135  See Letter from Senator Carl Levin to the Honorable Douglass H.. Reason (July 26.133 FATCA § 6103 permits “disclosure of [income tax] return information to apprise appropriate officials of criminal or terrorist activities or emergency circumstances.N.com/2013/05/29/nyregion/liberty-reserve-operators-accused-ofmoney-laundering.S. Treasury Identifies Virtual Currency Provider Liberty Reserve as a Financial Institution of Primary Money Laundering Concern under USA Patriot Act Section 311. U. another virtual currency. 125  Sealed Indictment ¶ 20. . terrorism and insurgency are interwoven in new and dangerous ways that threaten not just the welfare but also the security of societies in the Western Hemisphere. Gov’t Accountability Office. 2012).”).pdf (“Finally. Dep’t of the Treasury. (Apr.A. computer hackers for hire . (May 28. Bitcoin: Tax Haven of the Future.html (“[T]he Bitcoin economy is already seeing signs that the currency is being used to hide wealth. https://www. 2013). long-standing law enforcement technique by insuring records are available when needed. DLA Piper.130 Threats to the national welfare are deeply entwined with threats to national security. Cartels and U.S.”).gov/usao/nys/pressreleases/May13/LibertyReserveetalDocuments/Liberty%20Reserve.html (last visited Oct. Gox and its U.134 A letter written to IRS Commissioner Douglas Shulman by Senator Carl Levin in January 2012 relies on this reasoning to demonstrate the validity of a subpoena for customers’ documents in the investigation of a financial or terrorist crime. hackers.justice. financial system. Commissioner of the Internal revenue Service. . Acting Assistant Secretary for Tax Policy. 123  Press Release. 4. .128 Bharara called the company a “hub for fraudsters.139 Combating terrorism by interpreting bank documents remains a priority for 132  See The Foreign Account Tax Compliance Act (FATCA). China.135 There is evidence that Bitcoin has been used by those avoiding taxes and unwanted attention by exchanging small amounts of dollars from multiple bank accounts to a single Bitcoin wallet offshore. 133  See Phineas Baxandall & Dan Smith.132 which is estimated to account for $150 billion of lost revenue each year.html?pagewanted=1&_r=3&hpw& (proffering that Liberty Reserve allowed members’ to conduct their activities with virtual anonymity).php. Manhattan U. one additional issue is critical to successful implementation of FATCA’s disclosure obligations: treating FATCA offshore account information as non-tax return information to ensure its accessibility to law enforcement and national security communities combating crimes other than tax evasion. Crime Wars: Gangs.124 Unlike Mt. 139  See Matt Welch. and is intended to facilitate the use of a proper. available at http://gao. How the IRS Can Share Your Bank Info with Security Agencies. Ffor a new Am. http://uspirg. the Netherlands.cnas.S.com/PDFs/CarlLevin. Latvia. http://www.N. 2013. No. 2010).131 The Foreign Account Tax Compliance Act of 2010 (“FATCA”) is intended to combat offshore tax 122  See Jeremy Kirk. 2013).S.com/files/Uploads/ Documents/FATCA-Alert.politico. United States v. Rashbaum & Nicole Perloth. 435. unregulated gambling enterprises. Interest Research Grp. And Seven of its Principals and Employees for Allegedly Running a $6 Billion Money Laundering Scheme (May 28.com/story/2013/08/bitcoin-tax-haven-95420. 126  See Press Release. 10:02 AM). Norway.pdf (“Because of the limited reliable data available on their size. Australia. Spain.gov/ assets/660/654620. for example. 1 a central database. an activity typical of those attempting to hide their wealth.org/files/documents/publications/CNAS_CrimeWars_KillebrewBernal_3.S. 2013). Picking Up the Tab 2013: Average Citizens and Small Businesses Pay the Price for Offshore Tax Havens. 124  See Marc Santora. available at http://www. 131  See Bob Killebrew & Jennifer Bernal.S. Luxembourg. Liberty Reserve S. ‘These are characteristics of individuals who want to avoid paying taxes. Attorney’s Office S. http://www.D. Switzerland. 11.D.S.. Document Cloud: In the Matter of the Seizure of the Contents of One Dwolla Account. http://www. Vol. Politico (Aug. Some experts with whom we spoke indicated a potential for growth in the use of virtual currencies. Cyprus. . will use multiple bank accounts to buy trivial amounts of the coins.S. Crime Specialists (Mar.S.org/documents/701175-mt-gox-dwolla-warrant-idg-news-service.S.Y. and underground drug-dealing websites”125 to send LR to third-parties for transfer back into real currency without a financial trail. 6:45PM). 138  See U. Russia. GAO-13-516: Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks Highlights of GAO-13-516 (2013).pdf. and Emily McMahon.pdf (“Crime. http://www.

.justice.documentcloud.’”).gov/press-center/press-releases/Pages/jl1956. 435. 2013.nytimes. but its concurrent dragnet for financial criminals may be an equally desirable endgame. 1 Beyond the Silk Road 73 evasion. http://www.131 The Foreign Account Tax Compliance Act of 2010 (“FATCA”) is intended to combat offshore tax 122  See Jeremy Kirk. Cyprus. Liberty Reserve S. U.aspx (using § 311 of the PATRIOT Act to list Liberty Reserve as an “financial institution of primary money laundering concern”). it is possible that criminals along with tax evaders137 can slip through the cracks of FATCA. Times (May 28. and underground drug-dealing websites”125 to send LR to third-parties for transfer back into real currency without a financial trail. Treasury Identifies Virtual Currency Provider Liberty Reserve as a Financial Institution of Primary Money Laundering Concern under USA Patriot Act Section 311. 4. and traffickers” after an investigation spanning seventeen countries. 19. 2013) (explaining that Dwolla is the payment processor for Mt. 137  See Brian Kindle.%20Indictment%20-%20Redacted. the Netherlands.127 Criminals had opened accounts under patently false names such as “Russia Hackers” or simply “cocaine. http://www.D. terrorism and insurgency are interwoven in new and dangerous ways that threaten not just the welfare but also the security of societies in the Western Hemisphere. Id.acfcs. U.pdf (“Finally. Commissioner of the Internal revenue Service.N. supra note 123. available at http://www. Gox and its U. Some experts with whom we spoke indicated a potential for growth in the use of virtual currencies. subsidiary Mutum Sigillum LLC). U. 1.S. FATCA May Identify Tax Cheats.S.”).. Crime Specialists (Mar. IDG News Service. Section 6103 of the tax . William K. Reason (July 26.html (last visited Oct. completing fifty-five million suspected criminal transactions while it acted as an unlicensed money transmitting business.S. 11. unregulated gambling enterprises.134 A letter written to IRS Commissioner Douglas Shulman by Senator Carl Levin in January 2012 relies on this reasoning to demonstrate the validity of a subpoena for customers’ documents in the investigation of a financial or terrorist crime. which are in fact the institution’s business records. 13 Crim 368 (S. http://www. Interest Research Grp. and is intended to facilitate the use of a proper. Vol. (Apr.A. Picking Up the Tab 2013: Average Citizens and Small Businesses Pay the Price for Offshore Tax Havens. GAO-13-516: Virtual Economies and Currencies: Additional IRS Guidance Could Reduce Tax Compliance Risks Highlights of GAO-13-516 (2013). 2012). National Security. will use multiple bank accounts to buy trivial amounts of the coins.) 135  See Letter from Senator Carl Levin to the Honorable Douglass H. No. 2013). 6:45PM). May 23. .Y.132 which is estimated to account for $150 billion of lost revenue each year. And Seven of its Principals and Employees for Allegedly Running a $6 Billion Money Laundering Scheme (May 28. 4. an activity typical of those attempting to hide their wealth. U. But Its Dragnet for Financial Criminals May Produce an Even Bigger Yield.”).html?pagewanted=1&_r=3&hpw& (proffering that Liberty Reserve allowed members’ to conduct their activities with virtual anonymity).130 Threats to the national welfare are deeply entwined with threats to national security.org/sites/pirg/files/reports/Picking_ Up_the_Tab_2013_USPIRG.php. Gov’t Accountability Office.com/PDFs/CarlLevin. Shulman.justice. 125  Sealed Indictment ¶ 20. Dep’t of the Treasury. 10.S. Norway. Acting Assistant Secretary for Tax Policy. 136  See Lauren French & Zachary Warmbrodt.S. http://www. Notice 2011-34: Implementing the Foreign Account Tax Compliance Act (Jan. 2013).Y. .S. http://bsmlegal. which are then sent to a central account.treasury. 126  See Press Release.S.133 FATCA § 6103 permits “disclosure of [income tax] return information to apprise appropriate officials of criminal or terrorist activities or emergency circumstances. Ctr. N. Luxembourg. long-standing law enforcement technique by insuring records are available when needed. 134  United States v.com/files/Uploads/ Documents/FATCA-Alert.Y.”). 424 U.. for example.pdf. (May 28. Liberty Reserve would exchange users’ dollars for LR.html (“[T]he Bitcoin economy is already seeing signs that the currency is being used to hide wealth. Politico (Aug.129 DOJ charged the firm with a $6 billion money laundering scheme.dlapiper. 2013).com/2013/05/29/nyregion/liberty-reserve-operators-accused-ofmoney-laundering. Canada. 124  See Marc Santora.139 Combating terrorism by interpreting bank documents remains a priority for 132  See The Foreign Account Tax Compliance Act (FATCA). Latvia.org/documents/701175-mt-gox-dwolla-warrant-idg-news-service. 2013) (“This legislation is a direct result of the focus by the United States (and other industrialized and developing countries) on combating offshore tax evasion and recouping much needed tax revenues. 445-46 (1976) (holding that the BSA does not violate Fourth Amendment rights. How the IRS Can Share Your Bank Info with Security Agencies. 123  Press Release. Miller. China.” and Liberty Reserve would charge a commission and privacy fee to hide users’ account numbers on each transaction.gov/usao/nys/pressreleases/ May13/LibertyReservePR. Security (Sept. 129  Press Release. . ‘These are characteristics of individuals who want to avoid paying taxes. http://www.” The Supreme Court has held that bank customers do not have a privacy interest in personal records maintained by a bank.124 Unlike Mt.”).S.N. 10:02 AM).pdf (“Crime.D. computer hackers for hire . Manhattan U. United States v. Spain.”).122 On May 28. No.com/story/2013/08/bitcoin-tax-haven-95420. 127  See Cohan. it is difficult to determine how significant virtual economy and currency markets may be or how much tax revenue is at risk through their usage. http://reason. Australia. Morocco.D.com/blog/2013/07/26/how-the-irs-can-share-your-bank-info-wit (“Title 26. 131  See Bob Killebrew & Jennifer Bernal. Pub.pdf. 130  Id.126 a first for a virtual currency exchange case.pdf (last visited Oct. Dep’t of the Treasury.S.politico.. http://www. Ffor a new Am. https://www.gov/ assets/660/654620. Sweden. Attorney’s Office S. and Emily McMahon.Y.136 By doing so. allowing “traffickers .”). FinCEN Director Jennifer Calvery invoked § 311 of the PATRIOT Act. 2013). one additional issue is critical to successful implementation of FATCA’s disclosure obligations: treating FATCA offshore account information as non-tax return information to ensure its accessibility to law enforcement and national security communities combating crimes other than tax evasion. 1 a central database. Switzerland. http://uspirg. which actively hid its register of users’ activities. 2013. hackers. 2013 the federal government went a step further when U.72 NATIONAL SECURITY LAW BRIEF Vol. 128  Id. not only preventing the IRS from generating revenue138 but also depriving security agencies of a valuable source of intelligence on crime and terror activity. Russia. DLA Piper.%20et%20 al. 138  See U.S. Bitcoin: Tax Haven of the Future.pdf (“Because of the limited reliable data available on their size. 19. Rashbaum & Nicole Perloth. 139  See Matt Welch. Attorney Announces Charges Against Liberty Reserve. available at http://gao. One of World’s Largest Digital Currency Companies.org/fatca-may-identify-tax-cheatsbut-its-dragnet-for-financial-criminals-may-produce-an-even-bigger-yield/ (“The Act gives the IRS unprecedented new power to catch tax evaders worldwide. 2012).gov/usao/nys/pressreleases/May13/LibertyReserveetalDocuments/Liberty%20Reserve. . Ass’n of Certified Fin. 133  See Phineas Baxandall & Dan Smith. Attorney’s Office S. supra note 120 (“The Treasury Department set a precedent in using the 2001 Patriot Act against a virtual currency to sever the link between Liberty Reserve and the U. it did not however sign mandatory FinCEN forms declaring the subsidiary to be an exchanger. Some buyers. Online Currency Exchange Accused of Laundering $6 Billion. the United Kingdom.128 Bharara called the company a “hub for fraudsters. financial system. Cartels and U. U. The seventeen countries involved included Costa Rica.135 There is evidence that Bitcoin has been used by those avoiding taxes and unwanted attention by exchanging small amounts of dollars from multiple bank accounts to a single Bitcoin wallet offshore. http://www.S. Gox. Attorney Preet Bharara announced the indictment123 of the then-popular virtual currency exchange Liberty Reserve. 2010).org/files/documents/publications/CNAS_CrimeWars_KillebrewBernal_3.S. 2013). Document Cloud: In the Matter of the Seizure of the Contents of One Dwolla Account. and the United States. Crime Wars: Gangs.cnas.N. another virtual currency.

a virtual currency firm. http://www. DOJ. U. 146  See Eyden. U.142 If Bitcoins become a tool for bypassing FACTA. it will become increasingly prevalent in illegal uses throughout the internet. or steal funds as well as a means of making donations to groups participating in illegal activities. who noted that Bitcoin “compiles against” the OpenSSL library). Although these worries are currently more theoretical than evidential. resulting in several groups claiming jurisdiction. 2013). SEC. stated that “regulatory uncertainty right now is the bottleneck for innovation in this space. supra note 5 at 21 (“Another concern is that Bitcoin can be used to launder money for financing terrorism and trafficking in illegal goods. finding that decentralized virtual currencies may be used as a discrete method for financing terror groups. For instance. 148  See Max Raskin. 143  See Brito & Castillo. 154  See Virtual Currency Letter (Redacted). see also ‘Follow the Money’: NSA Spies on International Payments. (highlighting that Iranians can use Bitcoins to buy music at an online store). Treasury. gov/resource-center/tax-policy/treaties/Pages/FATCA.152 IV: Fitting Twenty-First Century Crimes Into Old Laws The federal government has become increasingly aware that virtual currencies like Bitcoin represent a promising technology. and Governmental Affairs (Aug.6 million British banking transactions).paymentsjournal. but they also deserve increased scrutiny due to possible risks to national security. 19. 20. 140  See Alexi Mostrous & Ian Cobain.aspx (last visited on Oct. out of the reach of the authorities) 153  See Margo Tank. supra note 148.com/article/2013/05/06/net-us-bitcoin-regulation-idUSBRE9450Y520130506. CIA’s Secret UK Bank Trawl May Be Illegal. 2013). in no concrete action.147 but sanctioned nationals have discovered methods to obtain the virtual currency through e-commerce.hsgac. 1 Beyond the Silk Road 75 their holdings outside of the country. and to provide a practical framework for their regulation. Senate Committee on Homeland Sec. the Chief Scientist for the Bitcoin Foundation. 1 the U.theguardian. http://www. 149  Id. ACFCS notes. Bloomberg Businessweek (Nov. Regulatory Alert: Emerging Payment Providers Can Learn from Liberty Reserve and Mt. http://www. Federal Bureau of Investigation Directorate of Intelligence (Apr.com/uk/2006/aug/21/business. 141  See Resource Center: Foreign Account Tax Compliance Act (FATCA). http:// www.”144 The same assessment warns that as Bitcoin develops into a mainstream means of exchange.148 Iranians. a program that was initiated after September 11. 2012. § 742. http:// www. Multiple Executive agencies are instead “mulling”160 over whether Bitcoin and other currencies should fall under their rules. to gain access to information obtained through FATCA. 12.treasury. Dollar-Less Iranians Discover Virtual Currency.S.”). http:// www.gov/download/letter-to-secretary-napolitano-on-virtual-currencies. http:// www. dollars and keeping code opens doors that allow US government agencies. Bitcoin Software Not Available. important bank secrets may remain unrevealed.accountingweb.bitcoingg. 161  Id. Section 6103 ‘permits disclosure of “return information” to certain Federal officers and employees and law enforcement agencies for purposes of combating terrorism. 29. Accounting Web (Aug. 20. 2013). Federal Reserve.S. 3:01PM). supra note 142 (stating law enforcement’s interests in detecting illicit financing). 24. 2006). so far. Commodity Futures Trading Commission (CFTC).com/sites/jonmatonis/2012/10/09/as-inflation-rages-in-iran-bitcoin-software-not-available/ (referencing Andresen. 144  See Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Illicit Activity.forbes. it is unclear to the public and other regulators what responsibilities and options for enforcement exist. 160  See Douwe Miedema. see also 15 C. 152  See Tav Pavel.reuters. No.”159 This interest has resulted.149 for example. 16. Certain Regulations for Bitcoins in the U. 2013.R. the HSGAC began an inquiry154 into emerging virtual currency technology seeking a whole-government approach to understand the market. 2013).businessweek.pdf.S.155 Regulators and law enforcement are reportedly “worried virtual currency markets could be used for money laundering and tax avoidance. 2012). 2012). and even Congress.74 NATIONAL SECURITY LAW BRIEF Vol.S.org/2012/05/fbi-bitcoin. Regulator Mulls Setting Rules for Digital Currency Bitcoin. http://www. 30. Dep’t of the Treasury Office of Foreign Assets Control. Dep’t of the Treasury.com/pulse/ originals/2013/09/israel-bitcoin-currency-banks-terror-drug. Concerns about the government’s ability to detect terrorist group financing have also been raised. 2013). http://www. http://www. The Guardian (Aug. including intelligence agencies. The CFTC Board is determining whether there is a federal role in the virtual currency market.”156 even though block chain transactions are publicly available. 155  Id.161 Vice Chairwoman Janet Yellen 151 Raskin.140 which FACTA Intergovernmental Agreements141 abroad intend to remedy at lower risk and cost to the public than covert action. Without central guidance. Vol. launder. Bitcoins: Currency for Criminals?. 158 Id.”158 The Chief Executive of Coinsetter. No.F. 147  See Jon Matonis. and had included details of an estimated 4. Forbes (Oct.html (recognizing that virtual currency can be used by criminals and terrorists as currency to fund their activities anonymously. http://www.153 In August 2013. As Inflation Rages in Iran. FATCA: United States and Switzerland Issue Joint Statement Re: Tax Evasion Investigations.com/article/fatca-united-states-and-switzerland-issue-joint-statementre-tax-evasion-investigations. Der Spiegel (Sep.treasury.145 These anonymous financial transfers hinder the government’s ability to detect illicit financing.senate. 156  See Warmbrodt. Al-Monitor (Sept.pdf (last visited on Oct. . intelligence community. 150  See What You Need to Know About U.15 (2012). but Commissioner Bart Chilton stated that the CFTC could regulate Bitcoin if the Board wanted. http://cryptome. 9. 2013) 142  See Terri Eyden. on Focus.com/Content/Blogs/Industry_Blog/16892/ (commenting that financial regulators are looking at Bitcoins to determine whether it undermines the current protections on the financial system).S. 6:32PM).com/articles/2012-11-29/dollar-less-iranians-discover-virtual-currency. 2013). Bitcoin could indeed be an option for those who wish to discreetly move ill-gotten money. with letters sent to the DHS. 157  Id. U. supra note 2. 19. Economic Sanctions. com/certain-regulations-for-bitcoins-in-the-u-s-on-focus/ (last visited Oct. 2013) (describing the NSA’s “own financial databank” called Tracfin. Payments Journal (July 2. and White House Office of Management and Budget. Reuters (May 6.currentaccounts (acknowledging that the agency has received financial records from the Belgium co-operative that processes money transfers from banks around the word. 19.al-monitor.gov/resource-center/sanctions/Programs/Documents/iran. 4. 4. 159  See Chris Evans.S. 145 Id.151 Israel and other foreign governments are taking the threat of untraceable online transactions seriously.143 A FBI intelligence assessment specifically pinpointed Bitcoin as “likely [to] continue to attract cybercriminals who view it as a means to transfer. Bitcoin Gambling Guide. The Committee’s inquiry represents the most substantial Congressional interest since Bitcoin’s inception.146 Bitcoin mining software exportation is restricted by the Department of Commerce Bureau of Industry and Security due to its encryption capabilities.157 Some officials who have spoken to HSGAC claim that agencies have made comments that “seem not to be sort of in line with what another department said.S.). Gox. have avoided Treasury Office of Foreign Assets Control sanctions150 and the effects of inflation by swapping Bitcoins for normally unobtainable U. 2011.’”).

gov/resource-center/tax-policy/treaties/Pages/FATCA. Reuters (May 6.pdf. 2013). in no concrete action. http://www. Federal Reserve. see also 15 C. the HSGAC began an inquiry154 into emerging virtual currency technology seeking a whole-government approach to understand the market.S. 2012. and to provide a practical framework for their regulation. 1 the U. a program that was initiated after September 11.157 Some officials who have spoken to HSGAC claim that agencies have made comments that “seem not to be sort of in line with what another department said. 161  Id. 157  Id. it is unclear to the public and other regulators what responsibilities and options for enforcement exist.com/articles/2012-11-29/dollar-less-iranians-discover-virtual-currency.html (recognizing that virtual currency can be used by criminals and terrorists as currency to fund their activities anonymously.145 These anonymous financial transfers hinder the government’s ability to detect illicit financing. on Focus.com/pulse/ originals/2013/09/israel-bitcoin-currency-banks-terror-drug. http:// www.”156 even though block chain transactions are publicly available.). 155  Id. Regulator Mulls Setting Rules for Digital Currency Bitcoin. . com/certain-regulations-for-bitcoins-in-the-u-s-on-focus/ (last visited Oct.org/2012/05/fbi-bitcoin.149 for example. 140  See Alexi Mostrous & Ian Cobain. 2012).com/article/2013/05/06/net-us-bitcoin-regulation-idUSBRE9450Y520130506. launder.6 million British banking transactions). Commodity Futures Trading Commission (CFTC). § 742. 2013). and even Congress. but Commissioner Bart Chilton stated that the CFTC could regulate Bitcoin if the Board wanted. supra note 148. 2013) (describing the NSA’s “own financial databank” called Tracfin. 148  See Max Raskin. important bank secrets may remain unrevealed. Dep’t of the Treasury Office of Foreign Assets Control.143 A FBI intelligence assessment specifically pinpointed Bitcoin as “likely [to] continue to attract cybercriminals who view it as a means to transfer.74 NATIONAL SECURITY LAW BRIEF Vol.currentaccounts (acknowledging that the agency has received financial records from the Belgium co-operative that processes money transfers from banks around the word. No. 154  See Virtual Currency Letter (Redacted). supra note 142 (stating law enforcement’s interests in detecting illicit financing). out of the reach of the authorities) 153  See Margo Tank. 2013).businessweek.”144 The same assessment warns that as Bitcoin develops into a mainstream means of exchange. 20. and had included details of an estimated 4. Bitcoin could indeed be an option for those who wish to discreetly move ill-gotten money. have avoided Treasury Office of Foreign Assets Control sanctions150 and the effects of inflation by swapping Bitcoins for normally unobtainable U.com/uk/2006/aug/21/business.S.senate.com/Content/Blogs/Industry_Blog/16892/ (commenting that financial regulators are looking at Bitcoins to determine whether it undermines the current protections on the financial system). 159  See Chris Evans.com/article/fatca-united-states-and-switzerland-issue-joint-statementre-tax-evasion-investigations. resulting in several groups claiming jurisdiction. see also ‘Follow the Money’: NSA Spies on International Payments. 29. Payments Journal (July 2. FATCA: United States and Switzerland Issue Joint Statement Re: Tax Evasion Investigations. 3:01PM). http:// www.reuters. the Chief Scientist for the Bitcoin Foundation.bitcoingg. U. http://www. including intelligence agencies. CIA’s Secret UK Bank Trawl May Be Illegal. who noted that Bitcoin “compiles against” the OpenSSL library). DOJ. Federal Bureau of Investigation Directorate of Intelligence (Apr. 20. 19. Without central guidance. (highlighting that Iranians can use Bitcoins to buy music at an online store). SEC. Al-Monitor (Sept. The Committee’s inquiry represents the most substantial Congressional interest since Bitcoin’s inception.F. finding that decentralized virtual currencies may be used as a discrete method for financing terror groups. 160  See Douwe Miedema.155 Regulators and law enforcement are reportedly “worried virtual currency markets could be used for money laundering and tax avoidance. 158 Id. Bloomberg Businessweek (Nov.theguardian. 2006). 4.153 In August 2013.forbes. 2013). a virtual currency firm.treasury.148 Iranians. U. Although these worries are currently more theoretical than evidential. 141  See Resource Center: Foreign Account Tax Compliance Act (FATCA). 2013) 142  See Terri Eyden. Section 6103 ‘permits disclosure of “return information” to certain Federal officers and employees and law enforcement agencies for purposes of combating terrorism.15 (2012). http://www. 30. Dep’t of the Treasury. 4.’”). to gain access to information obtained through FATCA.142 If Bitcoins become a tool for bypassing FACTA. 145 Id. Bitcoin Software Not Available. 12.S. 150  See What You Need to Know About U. Bitcoin Gambling Guide. As Inflation Rages in Iran. stated that “regulatory uncertainty right now is the bottleneck for innovation in this space. Vol. 146  See Eyden.gov/download/letter-to-secretary-napolitano-on-virtual-currencies. http:// www.hsgac. Forbes (Oct. 2013). 19.146 Bitcoin mining software exportation is restricted by the Department of Commerce Bureau of Industry and Security due to its encryption capabilities. 143  See Brito & Castillo.com/sites/jonmatonis/2012/10/09/as-inflation-rages-in-iran-bitcoin-software-not-available/ (referencing Andresen.147 but sanctioned nationals have discovered methods to obtain the virtual currency through e-commerce. 2011. 2012). http:// www. 6:32PM). 147  See Jon Matonis. For instance. 9. supra note 5 at 21 (“Another concern is that Bitcoin can be used to launder money for financing terrorism and trafficking in illegal goods.al-monitor.152 IV: Fitting Twenty-First Century Crimes Into Old Laws The federal government has become increasingly aware that virtual currencies like Bitcoin represent a promising technology. 149  Id. supra note 2. The Guardian (Aug.”159 This interest has resulted.R. intelligence community. Der Spiegel (Sep.aspx (last visited on Oct. 1 Beyond the Silk Road 75 their holdings outside of the country. but they also deserve increased scrutiny due to possible risks to national security. it will become increasingly prevalent in illegal uses throughout the internet. Gox. or steal funds as well as a means of making donations to groups participating in illegal activities. Regulatory Alert: Emerging Payment Providers Can Learn from Liberty Reserve and Mt.140 which FACTA Intergovernmental Agreements141 abroad intend to remedy at lower risk and cost to the public than covert action.treasury. 152  See Tav Pavel.S.161 Vice Chairwoman Janet Yellen 151 Raskin.paymentsjournal.S. with letters sent to the DHS. http://www. 156  See Warmbrodt.accountingweb. and White House Office of Management and Budget. Accounting Web (Aug.”158 The Chief Executive of Coinsetter. Concerns about the government’s ability to detect terrorist group financing have also been raised. 2013. 16.151 Israel and other foreign governments are taking the threat of untraceable online transactions seriously. Bitcoins: Currency for Criminals?. http://www. Senate Committee on Homeland Sec. 144  See Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Illicit Activity.S. 24.gov/resource-center/sanctions/Programs/Documents/iran. dollars and keeping code opens doors that allow US government agencies. Treasury. U. 19. Dollar-Less Iranians Discover Virtual Currency.pdf (last visited on Oct. Economic Sanctions. http://www. ACFCS notes. Certain Regulations for Bitcoins in the U. and Governmental Affairs (Aug. Multiple Executive agencies are instead “mulling”160 over whether Bitcoin and other currencies should fall under their rules. so far. http://www. 2013).”).S. http://cryptome. No. The CFTC Board is determining whether there is a federal role in the virtual currency market.

The SEC Shows Why Bitcoin is Doomed. Dep’t of Justice (Aug. 2013). 2013).europa. Subpoenas Bitcoin Firms in Probe on Criminal Risk. http://www. http://www. Attorneys to develop specific guidelines for determining when federal charges should be filed. however.S. http://www. Federal Bureau of Investigation Directorate of Intelligence (Apr. Ulbricht. It is also difficult to see how U. Forbes (Aug. Business Insider/Agence France Presse (June 4.forbes. The Guardian (Oct.”). which is a decentralised peer-topeer virtual currency scheme.th/ . 164  See U. 8.S. 2012). 2013. Ulbricht. 27. 177  See supra notes 28–31 and accompanying text (noting that FinCEN was founded in 1990 to monitor the financial trails left behind by criminals). completely isolating a virtual currency exchange from the global market and allowing for the seizure of its criminal proceeds. verifiable exchange that can also be taxed.com/news/2013-08-08/did-the-sec-just-validate-bitcoin-no-. The classification means that some commercial profits on Bitcoin related endeavors may be taxable. DOJ. the IRS. 166  See Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Illicit Activity. Virtual Currency Schemes 43 ( 2012). Pacific Standard (Sept. undermining this regulatory path. No. U. 2013.S.com/the-federal-reserve-is-officially-studying-the-risks-of-bitcoin-2013-6. 2:27 PM). 1 disclosed that the Federal Reserve is researching the potential negative effects of Bitcoin on the U.businessinsider. https://bitcoin.171 Attorney General Holder announced that after a lengthy review of its law enforcement policies DOJ is focusing on efforts to maximize diminishing resources by focusing on protecting national security and fighting against financial crime. The peer-to-peer nature of decentralized cryptocurrency bypasses third-parties completely. legalizing its use for the trade of commodities and stocks in the market. Dep’t of the Treasury. 4. there is no server that could be shut down if the authorities deemed it necessary. 12. i. and SEC are already in the midst of financial crime and narcotrafficking probes related to Bitcoin usage. Bloomberg (Aug. 172  Attorney General Eric Holder Delivers Remarks at the Annual Meeting of the American Bar Association’s House of Delegates. 13 MAG 02328).180 On the other side of the spectrum. N. http://www. has proposed166 that third-party Bitcoin exchangers already subject to FinCEN guidance should further require valid identification or bank information to complete transactions so law enforcement can quickly identify malicious actors. 180  See Germany Recognizes Bitcoin as ‘Private Money’.174 The FBI and DEA have proven that thorough coordination within DOJ can protect the public from ongoing internet threats by applying new and old investigatory techniques despite the anonymity provided by Bitcoin and Tor.Y. 2013). bloomberg. 2013. 173  Alex Hern. and DHS in this investigation). FinCEN’s actions will widen the gap between legitimate uses and illegal applications of Bitcoin. and New York’s financial regulator announced an interest in regulating it. which in turn may lead legislators to appreciate the promises of decentralized virtual currencies. Attorneys have additionally raised the stakes for suspected illegal dark website owners and users by pressing strict charges against identifiable criminals. Other agencies are questioning whether their current laws can be adapted to virtual currency. DFS Superintendent Benjamin Lawsky has already sent subpoenas to twenty-two of the leading virtual currency companies168 as DFS weighs the implementation of “guardrails”to protect consumers and national security. 163  See Timothy Lavin.”). 168  See Greg Farrell. http://rt. 2013. 2013. 2013). 12.N.Y. 6:24 AM). at 17 (noting that low-cost steps might be available to mitigate tax avoidance). supra note 126 (noting that the indictment fell under the umbrella of the PATRIOT Act). would be an inadequate solution. No. 4. 175  See Complaint ¶ 13. 6:13PM).justice. who can face massive fines and jail time for trafficking.psmag.com/technology/2013/oct/18/silk-road-black-market-reloaded-closed 174  Samuel Gibbs. regulations on foreign third-party exchangers could be properly enforced without similar measures being adopted abroad. Why Bitcoin Regulation Isn’t a Crackdown. Third-party Bitcoin services may require customers to submit valid identification or bank information to complete transactions. there is not even a central point of access.” according to German newspaper Die Welt.S. Requiring domestic exchangers to add verification measures to transactions may help weed out illegal users of virtual currencies.D. http://www. for example. 13 MAG 02328. Relying on further regulation of third-party exchangers as seen in FinCEN guidance.com/sites/kashmirhill/2013/08/12/every-important-person-in-bitcoin-just-gotsubpoenaed-by-new-yorks-financial-regulator/ (“Things are getting serious for Bitcoin this month: a federal judge declared it real money.html.”).S.com/news/2013-08-12/n-y-regulator-subpoenas-firms-over-bitcoin-crime-risks.178 In the long-run. The Guardian (Oct. 169  Notice. supra note 25.org/2012/05/fbi-bitcoin. Silk Road Underground Market Closed – But Others Will Replace It.177 FinCEN took the unprecedented step of applying USA PATRIOT Act § 311 to a flagrant violator of money laundering laws. if the actors convert their Bitcoins into a fiat currency.S. http://www. 1 NATIONAL SECURITY LAW BRIEF 77 tailored regulatory guidelines are needed for virtual currencies170 rather than attempting to apply existing money transmission guidelines to new technology. Silk Road Replacement Black Market Reloaded Briefly Closed. No. 2013) (attesting that the FBI worked closely with DEA. the Central Bank of Thailand has entirely banned the trade of Bitcoins based on the reasoning that no existing Thai laws allow for the regulation of virtual currency181 and cryptocurrencies “straddle mul170  Id. malicious actors. New York is one of the first states167 to test the waters on decentralized virtual currency regulations with a forward-thinking mindset toward this new technology.175 U.co. 179  See Kyle Chaka. or if new measures are needed. Russia Today (Aug. supra note 138. 176  See Press Release. Vol. On the international stage. Lawsky. 10:24 AM). 11:11 AM). Gov’t Accountability Office. 18. but personal use of the currency will remain tax-free.pdf (“Although Bitcoin does not have a centralized authority. 165  See European Cent.ecb. 2013. 2013 WL 5460023 (No.162 The IRS is rumored163 to be deploying additional guidance on the use of virtual currencies after a Government Accountability Office report recommended low-cost methods to introduce tax-reporting requirements. 3.com/news/ bitcoin-germany-recognize-currency-641/ (“Berlin has acknowledged the virtual tender as a “currency unit” and “private money. com/business-economics/bitcoin-regulation-isnt-crackdown-66570/. money laundering.e. and directing U.bloomberg.165 The FBI.179 This results in a traceable. Sept.76 NATIONAL SECURITY LAW BRIEF Vol. 11:35 AM). http://cryptome. available at http://www. 167  See Kashmir Hill. 12.html. United States v.gov/iso/opa/ag/speeches/2013/ag-speech-130812. the German Ministry of Finance classified Bitcoin as a financial instrument. Bloomberg (Aug.theguardian. Bank. U. http://www. (July 29. 178  See supra notes 125–135 and accompanying text.eu/pub/ pdf/other/virtualcurrencyschemes201210en. Bitcoin Co. and even terrorist financing.164 The DHS. 181  See Trading Suspended Due to Bank of Thailand Advisement.172 New black marketplaces173 on the dark web are being launched in place of Silk Road on a regular basis. Bloomberg gave it an experimental ticker (XBT). Every Important Person in Bitcoin Just Got Subpoenaed by New York’s Financial Regulator. the paper reported.S. tax evasion.pdf (“In the particular case of Bitcoin. Ltd.”169 This information-gathering will enable DFS to determine whether newly162  See The Fed is Studying the Risks of Bitcoin.176 Treasury laid the groundwork for DOJ by issuing the first federal guidance for decentralized virtual currencies. financial system.html. the FBI assesses with medium confidence that law enforcement can discover more information about. see also Complaint ¶¶ 1-45.”). and in some cases identify. 171  Id. 2013 WL 5460023 (S. 20. 18. 24.

the paper reported.180 On the other side of the spectrum. Vol. 24.”). http://www.165 The FBI.com/news/ bitcoin-germany-recognize-currency-641/ (“Berlin has acknowledged the virtual tender as a “currency unit” and “private money. 4.Y. Silk Road Replacement Black Market Reloaded Briefly Closed. money laundering. Lawsky.eu/pub/ pdf/other/virtualcurrencyschemes201210en.com/technology/2013/oct/18/silk-road-black-market-reloaded-closed 174  Samuel Gibbs. which is a decentralised peer-topeer virtual currency scheme. if the actors convert their Bitcoins into a fiat currency. 176  See Press Release. DOJ. The SEC Shows Why Bitcoin is Doomed. tax evasion. 11:11 AM). Sept. 10:24 AM). 2013 WL 5460023 (S. Ulbricht. would be an inadequate solution. however. Federal Bureau of Investigation Directorate of Intelligence (Apr. 175  See Complaint ¶ 13.com/news/2013-08-12/n-y-regulator-subpoenas-firms-over-bitcoin-crime-risks. Why Bitcoin Regulation Isn’t a Crackdown. there is not even a central point of access. financial system.th/ . 178  See supra notes 125–135 and accompanying text. U. http://www. 2013).D. No.177 FinCEN took the unprecedented step of applying USA PATRIOT Act § 311 to a flagrant violator of money laundering laws. 177  See supra notes 28–31 and accompanying text (noting that FinCEN was founded in 1990 to monitor the financial trails left behind by criminals). Bitcoin Co.html. supra note 25. at 17 (noting that low-cost steps might be available to mitigate tax avoidance). 163  See Timothy Lavin.psmag.pdf (“Although Bitcoin does not have a centralized authority. 168  See Greg Farrell. 2013).171 Attorney General Holder announced that after a lengthy review of its law enforcement policies DOJ is focusing on efforts to maximize diminishing resources by focusing on protecting national security and fighting against financial crime.S. com/business-economics/bitcoin-regulation-isnt-crackdown-66570/.gov/iso/opa/ag/speeches/2013/ag-speech-130812. 2013) (attesting that the FBI worked closely with DEA.forbes. 6:24 AM).S. 2013. FinCEN’s actions will widen the gap between legitimate uses and illegal applications of Bitcoin. 2013). undermining this regulatory path. The Guardian (Oct.ecb. 180  See Germany Recognizes Bitcoin as ‘Private Money’. but personal use of the currency will remain tax-free. the IRS. who can face massive fines and jail time for trafficking. 3. 172  Attorney General Eric Holder Delivers Remarks at the Annual Meeting of the American Bar Association’s House of Delegates. the FBI assesses with medium confidence that law enforcement can discover more information about.html.S. the German Ministry of Finance classified Bitcoin as a financial instrument. 4. Attorneys to develop specific guidelines for determining when federal charges should be filed. 13 MAG 02328.com/sites/kashmirhill/2013/08/12/every-important-person-in-bitcoin-just-gotsubpoenaed-by-new-yorks-financial-regulator/ (“Things are getting serious for Bitcoin this month: a federal judge declared it real money. Ulbricht. i. 2013).178 In the long-run. 13 MAG 02328). DFS Superintendent Benjamin Lawsky has already sent subpoenas to twenty-two of the leading virtual currency companies168 as DFS weighs the implementation of “guardrails”to protect consumers and national security. Every Important Person in Bitcoin Just Got Subpoenaed by New York’s Financial Regulator.S. or if new measures are needed. 2013. 12. http://cryptome.S.co. No. Subpoenas Bitcoin Firms in Probe on Criminal Risk.html.pdf (“In the particular case of Bitcoin. 165  See European Cent.europa. 179  See Kyle Chaka. Relying on further regulation of third-party exchangers as seen in FinCEN guidance. Business Insider/Agence France Presse (June 4.172 New black marketplaces173 on the dark web are being launched in place of Silk Road on a regular basis.164 The DHS. 2013. supra note 126 (noting that the indictment fell under the umbrella of the PATRIOT Act). 2013.theguardian. Other agencies are questioning whether their current laws can be adapted to virtual currency. Bloomberg (Aug. for example.”). http://www.174 The FBI and DEA have proven that thorough coordination within DOJ can protect the public from ongoing internet threats by applying new and old investigatory techniques despite the anonymity provided by Bitcoin and Tor.162 The IRS is rumored163 to be deploying additional guidance on the use of virtual currencies after a Government Accountability Office report recommended low-cost methods to introduce tax-reporting requirements.Y. Bloomberg gave it an experimental ticker (XBT).176 Treasury laid the groundwork for DOJ by issuing the first federal guidance for decentralized virtual currencies.com/the-federal-reserve-is-officially-studying-the-risks-of-bitcoin-2013-6. and DHS in this investigation). Bank. It is also difficult to see how U. and directing U. completely isolating a virtual currency exchange from the global market and allowing for the seizure of its criminal proceeds. the Central Bank of Thailand has entirely banned the trade of Bitcoins based on the reasoning that no existing Thai laws allow for the regulation of virtual currency181 and cryptocurrencies “straddle mul170  Id. No. supra note 138. 164  See U. Dep’t of Justice (Aug.175 U. http://www.”). Third-party Bitcoin services may require customers to submit valid identification or bank information to complete transactions. 181  See Trading Suspended Due to Bank of Thailand Advisement. 166  See Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Illicit Activity. 6:13PM). The peer-to-peer nature of decentralized cryptocurrency bypasses third-parties completely.e. N. regulations on foreign third-party exchangers could be properly enforced without similar measures being adopted abroad. United States v. Gov’t Accountability Office. malicious actors. Requiring domestic exchangers to add verification measures to transactions may help weed out illegal users of virtual currencies. 11:35 AM). 173  Alex Hern.N. http://www.justice. 2013. which in turn may lead legislators to appreciate the promises of decentralized virtual currencies. 20. 1 NATIONAL SECURITY LAW BRIEF 77 tailored regulatory guidelines are needed for virtual currencies170 rather than attempting to apply existing money transmission guidelines to new technology.bloomberg. and even terrorist financing. http://www. Attorneys have additionally raised the stakes for suspected illegal dark website owners and users by pressing strict charges against identifiable criminals. has proposed166 that third-party Bitcoin exchangers already subject to FinCEN guidance should further require valid identification or bank information to complete transactions so law enforcement can quickly identify malicious actors.com/news/2013-08-08/did-the-sec-just-validate-bitcoin-no-. 2012). Bloomberg (Aug. New York is one of the first states167 to test the waters on decentralized virtual currency regulations with a forward-thinking mindset toward this new technology. and SEC are already in the midst of financial crime and narcotrafficking probes related to Bitcoin usage. 171  Id. 18. and in some cases identify. The Guardian (Oct. available at http://www. Virtual Currency Schemes 43 ( 2012).”). 2013. 2:27 PM). On the international stage. The classification means that some commercial profits on Bitcoin related endeavors may be taxable. bloomberg. 12. 8.179 This results in a traceable.businessinsider. verifiable exchange that can also be taxed. Dep’t of the Treasury. Silk Road Underground Market Closed – But Others Will Replace It. https://bitcoin. 169  Notice. http://rt. Pacific Standard (Sept.S. (July 29. 12. 167  See Kashmir Hill. Russia Today (Aug. Forbes (Aug.76 NATIONAL SECURITY LAW BRIEF Vol. 18. U. there is no server that could be shut down if the authorities deemed it necessary. 27. legalizing its use for the trade of commodities and stocks in the market.”169 This information-gathering will enable DFS to determine whether newly162  See The Fed is Studying the Risks of Bitcoin. Ltd.” according to German newspaper Die Welt.S. 1 disclosed that the Federal Reserve is researching the potential negative effects of Bitcoin on the U. 2013 WL 5460023 (No. http://www. see also Complaint ¶¶ 1-45.org/2012/05/fbi-bitcoin. and New York’s financial regulator announced an interest in regulating it.

122 and accompanying text (demonstrating DOJ.78 NATIONAL SECURITY LAW BRIEF Vol. and taxing.186 Until regulators and law enforcement determine their legal powers in monitoring the use of virtual currencies. Conclusion The key to establishing a balance between the risks and benefits of decentralized virtual currency use is further interagency cooperation on combating digital crime and simultaneously establishing clear jurisdictional lines and guidance for the virtual currency industry. Vol. V. 186  See supra Part III (explaining that millions of illicit virtual currency transactions in a variety of criminal activities can quickly become a national security and welfare threat if left unchecked without regulation. 183  See Chaka.wired. 1 NATIONAL SECURITY LAW BRIEF 79 . The Bank of Thailand has said they will further consider the issue. and DHS’ particular effectiveness in taking down the websites and seizing the assets of illegal users.183 If Treasury and Congress can determine an effective method of applying the BSA to Bitcoin without over-relying on third-party verification. 184  See supra notes 116–147 and accompanying text (describing how DOJ and Treasury can and do work hand-in-hand to combat new cyber.187 trading-suspended-due-to-bank-of-thailand-advisement/ (“Based on such a broad and encompassing advisement. Ltd. although progress has been signified by hearings from industry. academic. 49. 4. as demonstrated by Silk Road’s allegedly extensive use in the Bitcoin market).184 The time may be ripe for further congressional consideration of legislating this issue in HSGAC and relevant committees. national security agencies will also gain a source of intelligence to prevent financial crime as is part of FATCA’s legislative intent. therefore has no choice but to suspend operations until such as time that the laws in Thailand are updated to account for the existance of Bitcoin. it is critical that agencies with specialized knowledge of the market step up to the task of protecting the nation’s security and promoting its economic interests. No.co. administrators. Wired UK (July 28. and exchangers of decentralized virtual currencies). Bitcoins). Thai Central Bank Rules Bitcoin to be Illegal. 2013). and law enforcement leaders held in the summer of 2013). 185  See supra Part IV (stating that Congress has yet to take concrete legislative steps towards instituting a clear regulatory framework for decentralized virtual currencies. 1 tiple financial facets. No.uk/ news/archive/2013-07/29/bitcoin-illegal-in-thailand. supra note 179 (recognizing the benefits that Germany reaps by allowing. 187  See supra notes 15.”).and financial crime threats using their specialized knowledge of the virtual currency market). http://www. Treasury. 182  See Olivia Solon. and will likely not prevent the use of Bitcoin by individuals as seen in Iran. Treasury could follow Germany’s lead by creating an environment where virtual transactions are taxed and traced to law-abiding users. but did not give any specific timeline.”182 Unlike Germany.185 The infamous Silk Road case should serve as a reminder to both legislators and regulators of what occurs when a new technology is not quickly realized as a potential national security and economic threat to the American people. Bitcoin Co. Thai authorities’ refusal to legislate this emerging technology may deprive their economy of taxable revenue. 4.

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