Bitcoins; The Silk Road and Doing Laundry

A government crackdown was imminent as evidence multiplied that Bitcoin and other digital crypto-currencies have become a popular means of illegal transactions involving sex, drugs, weapons and fake passports, through the online underground site the Silk Road. The Silk Road is a market place where you can purchase anything using Bitcoins as payment. Bitcoins are virtual currency, so untraceable.

Although your purchases on Silk Roadcan only be made with Bitcoins, sellers on the site have the option to peg their prices to the dollar, automatically adjusting them based on Bitcoin’s current exchange rate as defined by the central Bitcoin exchange, MT.Gox. To insure those sellers against Bitcoin fluctuations, the drug site also offers a hedging service. Silk Road itself covering losses or taking gains from Bitcoin’s swings in value that happen while the drugs are in the midst of delivery, via mail. 
Bitcoin users seem to think that the coins offer enough privacy for illegal purchases. It’s accepted by drug sites like Silk Road, as well as criminal hackers, but for a Bitcoin user to prevent their transactions from being tied to their identity, and more importantly when you turn Bitcoins back into dollars, yen or euros, they need to take extra steps such as sending Bitcoins through a laundry service that mixes their dirty Bitcoins with lots of other users coins and issues them random clean ones. Using these laundry services, such as Bitlaundry, Bitmix or Bitcoinlaundry, means you have to trust the service to randomly reissue the coins they’re giving out, and not to track the coins or steal them.
Mt.Gox the world’s biggest Bitcoin exchange, announced that it would begin requiring verification for all accounts seeking to deposit or withdraw currencies other than Bitcoin, that means users would need to submit identification in order to trade Bitcoins for real cash, ending the anonymous use of the service. 
The new restrictions from Mt. Gox which controls over half of all Bitcoin trades, stems from the recent indictment against Liberty Reserve, another digital currency service, alleged that it engaged in $6 billion worth of money launderingthrough its payment system. Money laundering has long been a problem for countries trying to track illegal transactions, either proceeds from drug cartels, online gambling, arms sales, human trafficking and the like. This practice has been in use for decades, wash, rinse, repeat.
Although every Bitcoin transaction can be traced and verified in the payment records that the system uses to prevent fraud and forgery, Bitcoins can be used without a bank account or any online registration, allowing total anonymity. That’s led to Bitcoin becoming the currency of choice for sites like the Silk Road.
UPDATE

On 2 May 2013 CoinLab announced that it was suing Mt. Gox for $75 million for breach of contract.

On 15 May 2013 the US authorities seized accounts associated with Mt. Gox after discovering that it had not registered as a money transmitter with FinCEN in the US. FinCEN; The Financial Crimes Enforcement Network issued this guidance on virtual currency.
Before Liberty Reserve’s takedown by the U.S., Mt.Gox handled nearly 69% of all Bitcoin transactions. Technocash, Australia’s transfer service, accounts were closed for users of Mt.Gox. “The account was closed as Technocash was receiving an extremely high number of fraud complaints from Australian customers. It appears that a number of criminal elements were using Technocash as a means of laundering funds obtained through credit card and identity theft through various Bitcoin exchanges and then converting any stolen funds into USD for withdrawal internationally.” As of April 2013, prior to Mt.Gox’s takedown, they dealt with 80% of all Bitcoins.
Enter Zerocoin. Many users of the virtul-currency Bitcoin see it as the first anonymous and untraceable currency. It’s not. But with the addition of a code called Zerocoin, it could still fulfill the dream of private payments. Zerocoin, the work of a group of cryptographers at John Hopkins University who presented their system at the IEEE Security and Privacy conference in San Francisco, offers an extension to Bitcoin that would make the task of identifying Bitcoin users or tracing their transactions impossible. If adopted by enough of the Bitcoin network, Zerocoin’s inventors believe it could become a necessary upgrade to Bitcoin’s code, integrating itself into the currency and solving what many see as serious privacy flaws in Bitcoin’s current system.
The Johns Hopkins’ team’s system works by allowing any Bitcoin user to convert a Bitcoin into an anonymous coin, a Zerocoin. Zerocoins would mesh within the Bitcoin network and could be traded and spent in the same way as Bitcoins and could be redeemed for a Bitcoin at any time. Through a mathematical equation, Zerocoin can’t be forged or duplicated and would also be impossible for anyone to identify as the same Zerocoin, between when it is substituted for a Bitcoin and when it was traded back for one. This would mean that Bitcoin would essentially have its own built in laundry system.
Next Bitcoin article: The Economics of Bitcoin, the bubble and is it really a Ponzi scheme.

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