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Crime & Courts

Law enforcement cracking Bitcoin black markets

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Published:   |   Updated: February 2, 2014 at 09:19 AM

TAMPA — When Daniel Brian Springer III purchased the illegal drug Ecstasy from China, the Pasco County man used an underground website and Bitcoin, a virtual currency.

As new web-based technologies change the way the world does business, criminals are finding ways to exploit them to avoid law enforcement.

“Criminals are nearly always early adopters of new technologies and financial systems, and virtual currency is no exception,” said Tampa FBI spokesman Dave Couvertier. “Locally, we’re starting to see activity that’s involving our area as people become aware of this particular virtual currency and some of the benefits of being anonymous.”

After the Drug Enforcement Administration intercepted a package from China in July, Springer told agents he ordered the drug from the underground website Black Market Reloaded using bitcoins worth the equivalent of more than $2,000 in U.S. currency. He said he hoped to make money by selling the drug, according to court documents.

Springer and his father, Daniel Brian Springer II, recently pleaded guilty to a federal drug conspiracy charge. Springer’s father helped arrange the address where the drug would be sent.

Their plea documents disclosed what is thought to be the first prosecution in Tampa of a crime committed with Bitcoin, a currency that has garnered headlines around the world as some users are targeted by law enforcement for illegal activities.

Acting U.S. Attorney Lee Bentley said the Middle District of Florida, which includes Tampa, is beginning to see criminal activity associated with Bitcoin.

“I believe we will be seeing more and more criminal cases in which the offenders will be using Bitcoin to commit the crime,” he said. “We have a number of criminal investigations throughout the district and in Tampa in which the subjects have used Bitcoin.”

Justice Department official Mythili Raman told a Senate committee in November that, “There are now public examples of virtual currency being used by nearly every type of criminal imaginable.”

“We have seen that many players in the cyber underground rely on virtual currency to conduct financial transactions,” Raman told senators. “Early users of virtual currency also included criminals involved in the trafficking of child pornography, credit card fraud, identity theft, and high-yield investment schemes.”

“I think it is something that is going to be happening more, and that’s why we’re trying to stay on top of this,” said DEA spokeswoman Mia Ro.

Other central Florida cases have included:

♦  Robert Faiella, of Cape Coral, was arrested last week on a federal indictment charging he was an underground Bitcoin exchanger who conspired with Charlie Shrem, the chief executive officer of a Bitcoin exchange company and vice chairman of the Bitcoin Foundation. The indictment said Faiella and Shrem conspired to sell more than $1 million in bitcoins to users of Silk Road, an underground website shut down last year by federal authorities who said it enabled users to buy and sell illegal drugs.

♦  Jesse William Korff, of Labelle, was charged Jan. 21 by the FBI with selling the toxin abrin for bitcoins through Black Market Reloaded. He is being investigated by agents in New Jersey who conducted an undercover operation with an agent posing as a killer who wanted to use the poison.

♦  Olivia Louise Bolles, a Delaware physician, was arrested in November by DEA agents in Orlando who said they purchased illegal drugs from her using the underground Silk Road website.

“Digital or virtual currencies are a form of online payment service that involves the transferring of value from one person to another through the Internet,” Justice Department official Jennifer Shasky Calvery told Congress two years ago. “These currencies may be backed by gold, silver, platinum or palladium, such as the digital currencies offered by Liberty Reserve or Webmoney, or, as in the case of Bitcoin, they may be backed by nothing at all. Criminals use these currencies because they often allow anonymous accounts with no limit on either the account or the value of the transaction.”

Couvertier said Bitcoin is attractive for criminals who want to make quick, secure, illicit purchases “with a perceived higher level of anonymity than that afforded by traditional financial services.”

But the currency, which exists only in cyberspace and is not controlled by a central authority, also has legitimate uses that an expert says far outweigh any crime potential.

While Bitcoin transactions are often viewed as anonymous, George Mason University research fellow Jerry Brito said it’s more accurately described as pseudonymous. That’s because users are assigned identities — pseudonyms — similar to account numbers, consisting of random strings of numbers and letters. Those identities stay with the users, who also have passwords, which enable them to engage in Bitcoin transactions.

“In reality, it is very difficult to stay anonymous in the Bitcoin network,” Brito said.

All Bitcoin transactions are publicly viewable on the Internet in a log known as Blockchain. Brito, who coauthored a Bitcoin primer for policymakers, told The Tampa Tribune that law enforcement can exploit that transparency, using Blockchain to trace transactions of Bitcoin users in a way they never could with cash.

Viewing Blockchain transactions wouldn’t require search warrants, such as those needed for law enforcement examinations of bank and credit card records. Investigators also could use the public ledger and pattern analysis to determine the identities of a significant number of Bitcoin users, Brito said.

Brito said Bitcoin is different from other virtual currencies, such as Liberty Reserve, which are issued by companies that charge users a premium to maintain their privacy. “Bitcoin is none of that,” he said. “Bitcoin is not a company.”

That makes Bitcoin different from other forms of digital currency.

“Bitcoin is new in that you now have a payment system that allows for payments between just two people online,” Brito said. “Before, that was not possible.”

Payments made from one party to another traditionally involve a trusted, third party, whether it be credit card or a financial institution or Pay Pal.

Because Bitcoin doesn’t involve a third party, the transactions can be conducted at little or no cost, allowing for very small transactions to be conducted and providing an option for citizens of poor countries with limited financial systems, Brito said.

Bitcoin, Brito said, is not backed by anything of value, “much like the U.S. dollar. The dollar was once backed by gold, but the U.S. went off the gold standard in 1971. In the past you could turn your dollars in for gold; today you can’t turn them in for anything. So why do dollars have value? They have value because people think they have value.”

Brito said law enforcement will have to go through a learning curve to deal with the potential illegal uses of Bitcoin.

“Its something new that they have to learn,” he said. “I don’t think it’s something that is going to leave them powerless to do their jobs, but they’re going to have to learn it.”

 

esilvestrini@tampatrib.com

(813) 259-7837

Twitter: @ElaineTBO

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