According to the UN, 2.1 trillion dollars, or 3.6% of the worlds GDP is generated by crime. Such large criminal networks cost innocent people in a multitude of ways, including spending additional tax dollars on law enforcement, unfair financial regulations imposed on everyone in an attempt to deter crime, loss of tax revenue for your governing body, and many more. Any effort to combat such criminal activity has been limited in success because law enforcement has not had adequate tools at their disposal to infiltrate these underground financial networks, until now...
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For too long now, innocent civilians have been collectively punished for the actions of criminals and other fringe radicals, and often with unforeseen consequences. Take the issue of crime, for example. Crime is a fact of life throughout the world, and comes in a variety of different forms. Government’s response to criminal activity, however, tends to manifest in only one way: further restrictions on liberty. All too often, government reacts to criminal activity – or the threat of criminal activity – by imposing measures that limit the freedoms of the very people whose liberty it exists to safeguard.
Politicians, law enforcement officials, and others routinely explain away such broad-brush tactics as necessary evils, and remind us that they often lack the type of tools and methods that would enable them to more directly target actual criminals without interfering with the liberty of law-abiding citizens. In most instances, a large portion of the population simply accepts this argument, without ever seriously questioning the government’s inability to actually address crime with a scalpel rather than a bulldozer.
Where digital currency is concerned, however, those old government tropes are beginning to show their age. No matter how often some central government official trots out to a microphone to decry cryptocurrency’s perceived anonymity and untraceability, simply saying it doesn’t make it so. The fact is that currencies like Bitcoin are eminently more conducive to targeted law enforcement than physical cash could ever hope to be.
In 2013 Forbes tested the Bitcoin-based drug buying process on the most well known online black markets - including Silk Road - by buying a small amount of marijuana. Since it is illegal under federal US law to possess, buy, sell, or cultivate marijuana, Forbes destroyed the marijuana immediately upon arrival. After those purchases, a Bitcoin focused computer science researcher, Sarah Meiklejohn, put the privacy of black market transactions to the test by tracing the digital trail that Bitcoin leaves behind.
Every transaction that occurs in the entire Bitcoin network is recorded on the blockchain. These transactions are merely recorded as addresses, which aren't necessarily tied to anyone's identity, hence the appeal to criminals who wish to keep their identity hidden. Meiklejohn and her colleagues have found that by following the trail left on Bitcoin's blockchain, they can often reveal who owns the bitcoin. By making just four deposits and seven withdrawals into accounts held on Silk Road, Meiklejohn says the researchers identified 295,435 addresses as belonging to that drug market.
If you find yourself wondering why any of that matters, it’s simple. Governments around the world are engaged in an ongoing debate about how they should respond to the digital currency revolution. Many of the officials involved in those debates are terrified at the thought that the people of the world might have an opportunity to determine their own economic future. Others are so accustomed to seeing doom in every unfamiliar thing that they instinctively react as they have always done: threaten new and ever more oppressive restrictions on liberty. Still others are so deeply attached to vested financial interests that they dare not allow their patrons’ business models to be threatened by potentially disruptive technologies.
So what do they do? They focus on the tiny minority of crypto users who use it as a tool for their criminal activities, insinuating that digital currency is somehow the perfect means for terrorist financing, and cast about for any excuse to channel public opinion against this new technological innovation. And then they do what they have always done: call for new laws. After all, they tell us, only new laws can prevent criminals from doing what they seek to do.
But additional laws will not deter committed criminals, as they have no respect for the law to begin with. Moreover, there are unintended consequences when overly broad laws are enacted to deal with any societal problem. Innocent citizens – law abiding citizens – end up seeing their liberties curtailed when government overreacts in this manner.
In this case, restrictive laws designed to deal with cryptocurrencies like Bitcoin and DNotes can negatively impact industry growth among legitimate entrepreneurs. Left alone, the digital currency revolution could serve as a catalyst in the shift toward environmentally friendly economies, and stimulate massive job, business, and wealth creation. Draconian laws could crush those lofty aspirations before they take flight.
Carefully-crafted large scale sting operations, utilizing new tactics and technology, should be more than enough to make the bad guys think twice. More importantly, targeted efforts to catch actual criminals can be effective when law enforcement is willing to focus on the right problems and learn to use the right tools and methods.
A recent UK National Risk Assessment on money laundering found digital currency to be low risk whereas cash was rated as high risk of being used in money laundering and terrorist activity. Any regulation that comes into force should protect innocent people by targeting those that pursue illegal activities, regardless of whether they use cash, credit cards, or bitcoin in their crimes. As is almost always the case, Ben had it right: there is no need to trade essential liberty just to purchase the illusion of added security.