Bitcoins: The Dangerous Alternative to Offshore

April 4th, 2013

flickr / Adam Crowe

Move over, Cayman. Step aside, Switzerland. The world’s next offshore powerhouse won’t be in the Caribbean or the Alps. It won’t be an island surrounded by water, a peninsula in Asia, or a tiny nation barely larger than a city. It won’t be in New York, Delaware, or London. Because it won’t be anywhere. It will all be a figment of our imaginations—and of course the internet.

I’m talking about internet currencies, and specifically, the largest of them all: Bitcoins. And I firmly believe they will pose the next great challenge for stemming money laundering, corruption, and illicit financial flows.

Bitcion is money, but Bitcoins are issued by complex computer algorithms rather than a government. They exist completely online, using peer-to-peer networks rather than a centralized system. And they serve, like all other forms of money, as a medium of exchange. Like the U.S. dollar or the euro, you can buy and sell them on markets. You can also use them buy things like an upgrade on Reddit, blog services in’s store, and pizza deliveries from Domino’s through You can use them to transfer money to a friend overseas or you can use them to buy drugs, sell illegal arms, and launder money. I’ll get to those in a second.

Until now, I would have said the challenges that Bitcoins face overwhelmed its potential to replace other currencies as criminals medium of exchange in the future. That’s because it faced three very real impediments: its size, its stability, and its security. Like I said, until now.

This week Bitcoin hit the $1 billion value mark. Compared to the value of the world’s financial transactions, this is barely a drop in a bucket—or a tanker, really. But there is compelling evidence that Bitcoins will continue to gain traction. First of all, in the face of financial turmoil, investors are beginning to see them as a safer alternative to other currencies. For example, there is evidence that the simultaneous rise of Bitcoins and fall of Cyprus’ banks is more than correlation. The crisis in Cyprus has led to a very real fear about the risk in government-run currencies, especially in nations with shady financial histories. Bitcoins seem to offer an alternative. If, as Max Keiser, the host of RT’s Keiser Report, predicts, Bitcoins capture between 1 and 10 percent of the global foreign exchange market, they will represent a real (and massive) powerhouse on this scene.

Second, is stability—and highly related to that—security. Stability is essential to all currencies. Until as early as last year, it looked like Bitcoins’ volatility might render them useless. This happened for two reasons: first, money is a lot easier to steal when it exists on your laptop than when it’s stored in a vault or HSBC’s servers. In October of 2011, hackers stole hundreds of thousands of dollars from a variety of users, sending the currency into a tailspin of bad press. Losing public confidence, the value of Bitcoins fell by more than 90 percent against the dollar. The second reason Bitcoins have been so unstable is speculation—its exchange market is dominated by speculators which of course sends its value berserk. But in the last year, both of these factors have improved. Security for Bitcoins is getting better and as the market gains size, stability will naturally follow.

Bitcoins won’t replace conventional currencies (although some serious financial analysts have predicted it), but it could replace some functions of currency. The most obvious, and important to our discussion, is wire transfers. Bitcoins, as they are not tied to banks which charge fees, do not carry any transaction fees. Wire transfer fees, for example from Western Union, are often extravagantly high. And oversight over these transactions is pretty intense: the U.S. government, for example, takes a close look at international transactions to stem terrorism, tax evasion, and trafficking. Unlike Western Union, Bitcoins are decentralized, which make them almost impossible to scrutinize. This feature makes them cheap, but also an ideal fit for tax evaders, money launderers, drug traffickers, and corrupt politicians.

There are other features of Bitcoins that make them appealing to our usual suspects. Bitcoin transactions are identified by a Bitcoin address, which is anonymous as long as the user takes care to anonymize his or her IP address. Bitcoin users can also create and use new addresses for each transaction, destroying the old ones after use, creating additional secrecy.

Users can also use the currency hawala-style to transfer money abroad. For example, an Indian could send money to America by finding someone in the willing to trade rupees for Bitcoins. They anonymously transfer the money and the Indian’s counterpart in the States trades the Bitcoins to dollars.

It’s easily transportable and exists outside the confines of traditional nations. Users can store this money anywhere in the world, on any laptop, in any country. With normal currency, transfers add complexity and scrutiny. With Bitcoins, transfers create secrecy: users can transfer their money as often as they want, each time further obscuring its source. It’s as anonymous as moving cash across a border in a suitcase, but without the bulk and inconvenience of border security.

You won’t detect this with trade data or banking transactions or video cameras. None of this would show up in Global Financial Integrity’s model of illicit financial flows.

I think the scariest part of all this, though, is the fact that we aren’t dealing with Cayman Islands and Switzerland anymore. With nations, we have (albeit shaky) political and, sometimes, legal frameworks by which to negotiate and come to terms of agreement. Secrecy jurisdictions are notoriously uncooperative, but we’ve made strides in recent years. We’re making progress on county by country reporting, automatic tax information exchange, trade mispricing, and beneficial ownership.

But if Bitcoins became the preferred medium of exchange for money launderers and tax evaders, none of that will be relevant. None of those rules apply to internet currency because Bitcoins aren’t under the jurisdiction of even a single government.

The U.S. government isn’t oblivious to this problem. An FBI report leaked last year, Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity, details all of the ways criminals can anonymously use Bitcoins to move money. And the U.S. very recently imposed money laundering controls on Bitcoins usually reserved for traditional wire transfer services like Western Union. These controls include new bookkeeping requirements and mandatory reporting for transactions of more than $10,000.

But these rules will be nearly impossible to enforce since Bitcoin transactions are so easy to disguise. The U.S. government could try prohibiting the conversion of funds between local currencies and Bitcoins, but as others have pointed out, this will merely push the currency underground, not eliminate it altogether.

The last stand governments have the face of Bitcoins is making it illegal for merchants to receive Bitcoins for payment. As Cullen Roche, a contributor to Business Insider, points out the U.S. government could do this and then “100 FBI agents get a few thousand Bitcoins each, buy something from U.S. based Bitcoin merchants and parade them out on national TV for the entire nation to see why Bitcoin acceptance results in a $250,000 fine and 5 years in prison.”

But if Bitcoins truly become that large of a market, their legitimate users and stakeholders would like have enough political clout to defend themselves in traditional arenas. Bitcoin millionaires and billioniaires would use their economic and political influence the same way other traditional banks do—rendering such a drastic legal move politically complicated and maybe even impossible.

Frankly there are few outs at this point. There is a very real possibility that Bitcoins will become a viable and sizeable alternative to offshore accounts. And the scariest part is that they’re even more dangerous.

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Written by Ann Hollingshead

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