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Tracking bitcoin criminals is tough, but not impossible

James Langford, The Washington Examiner
0 Comments| February 20, 2018

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It's true that what makes cryptocurrencies alluring in the underworld is their anonymity. But that coin, whether it’s bitcoin, ethereum, or litecoin, has another side.

Each of them is mined (or minted, if you will) through blockchain, a type of secure cyber ledger accessible to multiple parties across an array of networks.

Blocks, or transactions, are added to the chain only after confirmation by multiple parties, who are rewarded with cryptocurrencies deposited in digital wallets. The confirmation coding that protects each block in the chain from manipulation is then algorithmically linked to the blocks after it.

The wallets, of course, are anonymous, but it’s the nature of the platform that they nonetheless have unique digital identities. And that design is something law enforcement and regulators can exploit to identify people using cryptocurrencies to hide illegal activity.

“Unlike traditional currency, where we can’t tell you where that money was before it was in your wallet unless we watched it happen, in the cryptocurrency space, the advantage to law enforcement and regulators is that transparency does exist,” Lance Morginn, the CEO of Vancouver-based Blockchain Intelligence Group, told the Washington Examiner.

“You can follow that coin not only to that wallet but see where it was in previous wallets back to the very first day it was minted,” added Morginn, whose $62 million company developed tools that enable such tracking and works with clients including the U.S. Justice Department.

Uncovering the data trail can enable regulators to link a digital wallet with a real-world person, if and when a cryptocurrency holder tries to convert ill-gotten gains to traditional currency, Morginn explained.

It also would allow financial institutions taking bitcoin deposits to show regulators they performed due diligence under a U.S. law that can yield criminal charges against companies that fail to monitor and report suspicious activity.

“We’re trying to bring cryptocurrencies mainstream,” Morginn said. “To do that, we’ve got to remove the criminal element as best we can.”

The initiative is particularly timely now, as cryptocurrencies undergo heightened scrutiny by regulators from the U.S. to China, and as prominent business leaders point out the risks of investing in, and trading with, them.

China banned trading in cryptocurrencies last year, pointing to concerns about maintaining “economic and financial order,” and JPMorgan Chase CEO Jamie Dimon has said other countries are likely to do the same.

Establishing a sovereign currency is one of the first actions governments undertake when they're formed, and none is likely to stand by while a competitive money supply they don't control grows large enough to become a threat, he said.

While the U.S. didn’t block the creation of bitcoin-linked futures contracts last year, regulators highlighted potential risks surrounding cryptocurrencies to the Senate Banking Committee this month and said they may need new laws to adequately oversee the markets.

A patchwork of existing federal and state laws covers pieces of them, "but there's not a comprehensive structure," Commodity Futures Trading Commission Chair J. Christopher Giancarlo, an appointee of President Trump, told the panel.

The so-called spot markets for cryptocurrencies are unregulated, Giancarlo said, although his agency has oversight of futures contracts based on them.

The Securities and Exchange Commission’s authority, meanwhile, covers "initial coin offerings" that introduce new forms of virtual currency, and the agency won a court order in late January halting one it claimed was fraudulent.

Giancarlo’s assessment, and that of SEC Chair Jay Clayton, followed testimony from Treasury Secretary Steve Mnuchin, who told senators in late January that it's important to ensure consumers tempted by run-ups in prices — bitcoin surged 14-fold last year — are aware of the risks.

“Like anything else that people speculate in, it goes up, and it comes down,” Steven Shore, a founding partner at New York law firm Ganfer & Shore, told the WashingtonExaminer.

“There’s a real potential for the people who got into it last getting hurt,” added Shore, a former staff attorney with the SEC’s enforcement division. “I absolutely believe there should be some form of redress so if you’re the guy who gets clobbered, sort of like in a Ponzi scheme, you have the ability to go up against the folks who are pushing up prices or doing the offering.

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