While most people don’t know how to purchase bitcoin, they’ve definitely heard about it. News stories abound about how the cryptocurrency’s value recently surged above the $17,000 mark, creating a feeding frenzy by investors. Before this, conversations about bitcoin usually centered around how its anonymous nature makes it perfect for illegal activities. Cybercriminals who perpetrate large-scale ransomware attacks, like WannaCry and Petya, often demand that their victims pay using bitcoins, for example.
Bitcoin is a form of cryptocurrency – a digital asset that can act as money. To understand bitcoin and cryptocurrencies, you have to know a little bit about why it exists in the first place. With traditional currency transactions, there is a cost to conduct a transaction. In other words, there is a middle man – be it a bank processing a check or a credit card company – that takes a fee to process payments. Digital currencies like bitcoin seek to remove that middleman. Bitcoin also reduces the risk of identity theft because it is not tied to a person’s identity.
The only way to take the middleman out of transactions was to develop an alternative way to keep up with the ledgers that banks would generally keep. In normal banking, a ledger tells where money is, where it came from, and where it has gone. This ensures people can only spend what they have – assets they own or have borrowed.
Cryptocurrencies like bitcoin take the middleman out by using a digital ledger known as a blockchain. All users record all transactions at the same time in what is called the blockchain. This means that every transaction is verified without a middleman and there is no central authority that can restrict or block the flow of currency. Bitcoin also allows money to go any place in the world instantaneously.
Let’s say you want to pay someone using bitcoins in your possession. Since multiple computers hold the ledger record, they can all work together to confirm that you have enough funds for the exchange. Once the validity of your transaction has been verified, these computers record it into the ledger using complex math.
In aftermath of the financial crisis of 2008, someone using the alias Satoshi Nakamoto dropped a whitepaper which became the basis for bitcoin. Unlike the central bank system used by countries across the world, the supply of bitcoin is regulated in a way that is meant to prevent too much supply or too little demand. Bitcoins are generated by computers that solve very complex algorithms. The quicker algorithms are solved, the more difficult the algorithms become. The limited supply has also helped bitcoin maintain its value over time.
Bitcoin is pseudonymous. That is, you are essentially conducting transactions under a pseudonym. Your pseudonym is the bitcoin address. Your bitcoin address is associated with every transaction you make. If your bitcoin address becomes associated with your identity, anyone can view the public blockchain to see the transaction associated with your bitcoin address. Tips on remaining anonymous include using a new address for each transaction, using multiple wallets, and creating new change addresses.
The process of converting bitcoin into fungible currency can involve exchange rates and transaction fees. For example, a bitcoin can be purchased through dedicated machines that will allow for the purchase of a bitcoin with American currency through a debit card. However, the machine indicates the exchange rate, or the price of a bitcoin. Also, there may be associated “mining fees.” Ultimately, while trading bitcoins does not involve transaction fees, the conversion of bitcoins into currency can be expensive and inconvenient.
While bitcoins are not legal tender currency issued by the United States, using bitcoin will not insulate you from the consequences of criminal activity. In fact, if the prosecution believes you were using cryptocurrency to conceal your activities, you may be exposed to more serious charges and punishment ranges.
Imagine a foreign drug dealer hides drugs inside electronic merchandise to ship them to a buyer in Texas who paid in bitcoins. Although this would represent an overt act in an illegal drug conspiracy under 21 USC 846, it would also fall under the definition of concealment money laundering in 18 USC 1956. In addition to any drug charge penalties, the buyer might face fines as high as $500,000 or twice the value of the transaction. They could also be imprisoned for up to 20 years.
Courts might also conclude that bitcoin’s automatic anonymity mechanism constitutes the concealment of unlawful activity. Some other examples might include using bitcoin in the following ways.
All of these charges are serious enough on their own. Adding bitcoins into the mix can result in harsher penalties through money laundering charges.
Further, bitcoin conversion can also subject offenders to a criminal conspiracy. What’s more, for many offenses, the conspiracy to commit that offense can be punished as harshly as actually committing the act itself.
Let’s say that after the Texas buyer paid bitcoins to purchase narcotics in the drug case example above, the foreign dealer directs his nephew to go to a bitcoin converter to turn the bitcoins into pesos. The nephew, if he does so (or if he agrees to do so and drives towards the bitcoin converter) he could also be a defendant in the drug conspiracy as well as the money laundering transaction. While the nephew never touched, possessed, distributed, or delivered narcotics, he would easily be prosecutable for a Title 21 federal drug offense.
There is nothing illegal about the use of bitcoins. However, using bitcoin in an attempt to conceal your identity or transactions relating to criminal activity can result in additional charges and severe punishment ranges.
If you or a loved one is facing criminal charges associated with the use of bitcoin, call us at (817) 203-2220 for a complimentary strategy session. Our team of former prosecutors and Board Certified Criminal Lawyers are here to help. During this call we will:
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