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Panama Papers prove bitcoin isn't the problem

Real criminals don't hang out online. They deal in dollars.

Read time 3min 30sec

Ever since the advent of bitcoin in 2008, skeptics, critics and, most importantly, financial authorities, have cautioned that online cryptocurrencies, of which bitcoin is the most prominent example, pose serious risks for tax authorities and law enforcement.

Here's the FBI on the subject: "Bitcoin will likely continue to attract cyber criminals who view it as a means to move or steal funds as well as a means of making donations to illicit groups. ...it will become an increasingly useful tool for various illegal activities. ...bitcoin might also logically attract money launderers and other criminals who avoid traditional financial systems by using the internet to conduct global monetary transfers."

The South African Reserve Bank also weighed in on what it calls 'decentralised convertible virtual currencies', or DCVCs: "New payment mechanisms and innovations can facilitate greater flexibility, efficiency, speed and operational immediacy.

DCVCs, in particular, may reduce the costs associated with the conventional banking system as these are perceived to be expensive. However, such innovations simultaneously provide a platform for, inter alia, money laundering and the financing of terrorism, and introduce a new set of risks to consumers as DCVCs are susceptible to misuse and, at the very worst, have the ability to disrupt the financial system."

Yeah, sure. Every new technology, from the postal system to the motor vehicle, the telegraph to the mobile phone, the VHS tape to the CD-ROM, and the modem to the internet, has been used by criminals for nefarious purposes. They, like anyone else, take advantage of technological progress.

In fact, as pornographers did with credit card payments, the shadier side of business often proves the workability of new technology long before it hits the mainstream.

If criminals use cryptocurrencies, they do so because they are attracted to the very same features that might make it an attractive alternative to any other user of currency. If they do, as they did with dark web marketplaces for drugs and weapons such as Silk Road, that only proves that the technology works well.

Technical wizardry

Fearmongering by the authorities, however, is misleading and misplaced. Mostly, criminals deal in cash. After all, cash doesn't have a public ledger, or blockchain, that can be used to trace transactions. Unless you're robbing banks and getting marked or sequential notes, cash really is anonymous and untraceable, unlike cryptocurrency.

With the release of the Panama Papers recently - a cache of 11.5 million records involving over 200 000 shell companies leaked from the shadowy law firm Mossack Fonseca - we now know that criminals too rich for cash still prefer to do their business using the established financial system. They trade in good old-fashioned dollars and euros. Instead of foiling the authorities with encryption and technical wizardry, all they do is ask a shady lawyer in a foreign country with lax disclosure laws and weak money laundering rules to set up a shell company and move millions around the world tax-free.

Of course, the vast majority of the leaked documents are simply private financial records that do not indicate any wrongdoing at all. This is equally true of the vast majority of bitcoin transactions. But a small fraction of such a vast trove is still a lot more than the entire cryptocurrency ecosystem could dream of handling today.

The early disclosures featured individual cases of money laundering, tax evasion and corruption involving hundreds of millions or even billions of dollars.

To put that in perspective, all the bitcoins in the world, at the time of writing, are only worth $6.5 billion. The real criminals hide their cash in the traditional financial system, not in bitcoin.

This article was first published in the May 2016 edition of ITWeb Brainstorm magazine. To read more, go to the Brainstorm website.

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