Bitcoin creating virtual Wild West

Anonymous cyber world spawning enterprising fraudsters

By Ali Said, D.B.A., CFE
ali-said-80x80   Future Fraud Trends: Schemes on the horizon

This new column will describe new directions that will broaden our anti-fraud knowledge. — ed.

On Oct. 2, 2013, the FBI shut down the Silk Road website and charged its 29-year-old operator, “Dread Pirate Roberts,” with drug trafficking conspiracy, computer-related fraud and conspiracy to launder money. The FBI, in its complaint, called Silk Road “the most sophisticated and extensive criminal marketplace on the Internet today,” used by several thousand drug dealers, with revenue of more than 9.5 million bitcoins, which the FBI approximated as worth $1.2 billion in sales. (See “Feds Say They’ve Arrested ‘Dread Pirate Roberts,’ Shut Down His Black Market ‘The Silk Road,’ ” by Alex Konrad, Oct., 2, 2013, Forbes.)

However, as in the classic movie, “The Princess Bride,” another Dread Pirate Roberts stepped up online and designed The Silk Road 2.0 (only can be reachable via a “Tor browser,” which hides users’ IP addresses). The new marketplace had the same logo and layout and many active vendors, according to “Just a month after shutdown, Silk Road 2.0 emerges,” by Cyrus Farivar, Nov. 6, 2013, ars technica. 

Bitcoin, which many use to pay for legitimate services online and at some brick-and-mortar businesses, still allows criminals to flagrantly break the law. Fraud examiners should keep up with the latest on this interesting phenomenon. 


Bitcoin (“Bitcoin” is capitalized and “bitcoins” isn’t) “is a consensus network that enables a new payment system and a completely digital money. It’s the first decentralized peer-to-peer payment network … powered by its users with no central authority or middlemen. … Bitcoin is pretty much like cash for the Internet. Bitcoin can also be seen as the most prominent triple entry bookkeeping system in existence.”

Bitcoins mysteriously emerged around 2008 as a type of payment that one party can send online to another without processing through a financial institution. According to, bitcoins aren’t supported by gold. They’re created and transferred between parties though cryptographic protocol. Transactions aren’t reversible.

Users acquire bitcoins by purchasing them at a Bitcoin exchange, exchanging them with someone geographically near them, as payment for goods and services or by earning them through competitive mining. (See Miners use special software to solve math problems and then are issued bitcoins in exchange. Really.)

Delivering a Bitcoin payment is as easy as sending an email. A user accesses bitcoins through a “client,” such as BitcoinID and sends the payment to another person’s “wallet.” It’s an easy process without the interference of regulatory bodies (but also without fraud protection). 


The U.S. Financial Crimes Enforcement Network (FinCEN) has classified Bitcoin as a virtual currency that doesn’t have to be considered legal tender under sovereign jurisdiction. Therefore, a user of this type of currency isn’t a Money Services Business (MSB) under FinCEN’s regulations and therefore not subject to MSB registration, reporting and recordkeeping regulations. 

According to FinCEN, an MSB includes any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the following capacities:

  1. Currency dealer or exchanger.
  2. Check casher.
  3. Issuer of traveler’s checks, money orders or stored value.
  4. Seller or redeemer of traveler’s checks, money orders or stored value.
  5. Money transmitter.
  6. U.S. Postal Service.

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