Future Fraud Trends: Schemes on the horizonThis new column will describe new directions that will broaden our anti-fraud knowledge. — ed.
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.
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. A DIFFERENT ANIMALBitcoin
(“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.”
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 bitcoin.org, bitcoins aren’t supported by
gold. They’re created and transferred between parties though
cryptographic protocol. Transactions aren’t reversible.
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
bitcoinmining.com. Miners use special software to solve math problems
and then are issued bitcoins in exchange. Really.)
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). NOT LEGAL TENDER YET
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.
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:
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- Currency dealer or exchanger.
- Check casher.
- Issuer of traveler’s checks, money orders or stored value.
- Seller or redeemer of traveler’s checks, money orders or stored value.
- Money transmitter.
- U.S. Postal Service.