The prosecutions of currency exchanges Helix (here) and Bitcoin Fog (here) show the dark side of virtual currency. As providers of what the Financial Action Task Force terms money or value transfer services, the two accepted a customer’s funds and returned a corresponding sum or product to the customer or third party for a fee.
Helix and Bitcoin both specialized in bitcoin transactions. A customer would buy something on the web and rather than sending the merchant bitcoins directly, the customer sent them through Helix or Bitcoin Fog. That way, the customer did not have to worry about contacting the seller directly, and moreover, if the seller did not accept bitcoins, Helix or Bitcoin Fog would convert the bitcoins into whatever currency the seller accepted.
What caught the U.S. Department of Justice’s eye is that the two exchanges “tumbled” or “mixed” the customer’s bitcoins as part of their service.
Bitcoin transactions are posted to the bitcoin’s publicly accessible block chain. Indeed, the block chain’s public availability is a critical component of bitcoin, for it guarantees the integrity of all bitcoin transactions. (Short explanation here). The public disclosure of all bit coin transactions is also a boon to law enforcement. For once an investigator learns the identify of a person behind one bitcoin transaction, the way transactions are recorded allows the investigator to identify all bitcoin transactions the person conducted (here).
That is where services like Helix and Bitcoin Fog come it. They “tumble” or “mix” their customers’ transactions, making it impossible to know the customer’s identity. While the promotional literature for “tumblers” or “mixers” claims their services simply add another layer of privacy to customers’ transactions, documents unearthed in the Helix and Bitcoin Fog cases show the real reason: to facilitate customers’ purchase of illegal drugs, weapons, and other illegal goods.
Transactions in bitcoin and other virtual currencies already provide buyers and sellers a high degree of privacy. There is no good reason for providing them the additional level “tumblers” and “mixers” sell. Its availability only invites corrupt officials, drug traffickers, and other criminals to hide behind the anonymity it provides. All nations should make tumbling or mixing a virtual currency a crime.
The Helix and Bitcoin cases offer several lessons for nations grappling with how to regulate virtual currencies. One is to be sure that the definition of “money” in the anti-money laundering laws and elsewhere covers virtual currencies. Helix’s operator sought to dismissal of the charges on the grounds that under U.S. law cryptocurrency was not “money.” It took time and the careful parsing of the statutes by a thoughtful jurist to turn his challenge back (here).
Other lessons are contained in the affidavit a U.S. Internal Revenue filed in the Bitcoin Fog case. It’s an excellent primer for investigators new to crypto. Nick Furneaux 2018 Investigating Cryptocurrencies is a fine source too, especially his discussion of the issues involved when law enforcement freezes or seizes virtual currency.
As U.S. Security and Exchange Commission Chair Gary Gensler explains, virtual currency offers promising solutions to many problems the poor in developing countries face, the lack of access to formal banks, the high cost of sending and receiving money to cite two. To ensure that promise is not lost in a backlash against abuses like those “tumblers” further, states need to shut them down.