Financial Transparency Coalition

Happy Cyber Monday! In case you are from a country that doesn’t observe holidays devoted to consumerism: “Cyber Monday” is a marketing term for the Monday after Thanksgiving, created to persuade people to shop online.

To those of us interested in banking and financial transactions – Cyber Monday is a fitting symbol for the emergence of online shopping and digital transactions. Over the last few years, e-commerce sales have grown by a stunning 20% annually around the world, and in the United States, e-commerce sales have increased by a steady 5% per year since 2005.

Meanwhile, recent massive data breaches in major retailers like Target and Home Depot have left many shoppers feeling uneasy. After the holiday season last year, Target experienced a data breach that affected about 70 million customers and 40 million credit and debit cards. Earlier this year, about 2,000 of Home Depot’s stores came under attack, affecting about 56 million customers.

These breaches have a real impact on customer confidence. According to a recent survey, nearly one third of shoppers will avoid Home Depot and Target because of these data breaches and 16% said they would “definitely” never shop at these stores again.

Analysts have suggested that the cure for these ills is Bitcoin – the world’s biggest digital currency. In short, retailers are attractive targets for hackers because they consolidate millions of transactions and targets into one system. Consumers and retailers can respond to this fundamental problem by improving the security of credit cards. However, hackers will likely respond to any new security measures by developing more sophisticated subversive techniques.

Proponents argue that, instead, the best option for retailers is digital currency, such as bitcoin, which decentralize these transactions. If customers use bitcoin, hackers can go after the merchant’s wallet if security is lax, or they can go after individuals’ wallets. But hacking individuals is not nearly as profitable as hacking an entire system of their transactions and hackers are less likely to take that on.

The reason this argument concerns me is not because bitcoin could solve a problem for consumers and retailers (arguably this is a good thing), but rather because it creates potential legitimate demand for bitcoin. In the scheme of things, this is not so good.

As a reminder, Bitcoin is a problem because it’s secretive. Bitcion is money, but complex computer algorithms, rather than governments, issue its units. Bitcoin exist completely online, using peer-to-peer networks rather than a centralized system. As with offshore financial centers and tax havens, the characteristic of Bitcoin that lends itself to illicit activity is secrecy. Bitcoin transactions can be anonymous or public, depending on the actions of each individual user. Users do not need to present any form of identification to receive a Bitcoin address—or key—so they are not necessarily tied directly to a person, which makes Bitcoin transactions unidentifiable as long as the user takes care to anonymize his or her IP address.

Bitcoin is not yet a major threat. It only becomes a major threat to its uses for criminals, terrorists, and tax evaders if its legitimate uses become substantial. Some digital currencies, like the now extinct Liberty Reserve, are vulnerable to law enforcement officials because they serve virtually no legitimate purposes. In those cases, identifying an ocean of wrongdoers occupying a single space is much easier than identifying a single wrongdoer in an ocean of legitimate users.

As e-commerce continues to expand – and shoppers look for alternative methods to make their holiday purchases – bitcoin will surely become more a more attractive alternative. And as those legitimate uses increase, the digital currency will continue to become bigger, more stable, and more legitimate. While this is surely not a problem for everyone, this dynamic is undoubtedly a problem for law enforcement.