By Tony Moore
I’ve been studying and investigating a new form of digital currency — often referred to as crypto-currency or Bitcoin — since 2011. In that short period of time, crypto-currency has seen a rise in popularity (and acceptance) among merchants and everyday Internet users alike. Recently, a police chief even requested that his entire salary be paid in the form of bitcoins (BTC).
In 2013, the Federal Bureau of Investigation seized more than 170,000 BTC after arresting the alleged mastermind of an online black market website called Silk Road. Often referred to as “the eBay of the deep web,” Silk Road dealt in illicit drugs, weapons, and hacking services. Visitors to the website would purchase these illicit goods using bitcoins. At the time of this writing, one bitcoin was valued at $802, according to various exchanges.
So, what are bitcoins and crypto-currency, and why should the patrol officer and police investigator be concerned? For starters, crypto-currency poses a real threat to conventional ways with which law enforcement detects, prevents and investigates crime involving currency.
So, Why Is Bitcoin Different?
Contrary to at least one financial analyst, I think crypto-currency will continue to increase in popularity and acceptance worldwide.
Because Bitcoin is considered the first form of crypto-currency, I will focus on the development of Bitcoin from this point forward. However, several other crypto-currencies have come into existence using Bitcoin’s proof-of-concept with over 60 different variations. Also, I refer to Bitcoin as a “crypto-currency” and not as a “virtual currency” because virtual currencies don’t involve cryptography.
Examples of virtual currencies might be Linden Dollars used in the online game Second Life, or Amazon Coins, which are used for app purchases via the Kindle Fire and Amazon App Store.
Both of these are controlled by a central authority. Bitcoins are not.
So, What Are Bitcoins?
Bitcoin is the first open-source and decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. It is not backed by any government, nor is it controlled by any regulation. Think of it as a new payment system that operates as a consensus network without the need of someone checking transactions.
For example, if I wanted to send you money using PayPal, I would have to use PayPal’s website or mobile application. That transaction would have to be verified by PayPal and whatever credit card or bank account system you have tied to PayPal, and it would include certain fees.
With Bitcoin and crypto-currency, the middleman is removed from the equation, allowing individuals to be their own bank, operating on a system of trust. The first Bitcoin transaction occurred on or about January 3, 2009, and is referred to as the “Genesis Block.”
Bitcoin was developed in 2008 by Satoshi Nakamoto. Since that time, there has been much speculation as to the identity of Nakamoto. No one knows his true identify, and since Nakamoto left the project in late 2010, early collaborators of Nakamoto continued the development of the platform.
So, How Does Crypto-Currency Work?
Bitcoins are sent using a “Wallet Address,” which is a digital signature consisting of a SHA256 encryption hash called a public key. It would look something like this, or appear in the form of a QR code:
That public key has a corresponding private key that allows the user to sign transactions, transferring money out of their wallet address and into another in the form of a payment or transfer. This transaction takes place and is logged publicly in a ledger called a “blockchain.”
Bitcoin was designed to allow users to send and receive payments anonymously, but because Bitcoin transactions are published in the blockchain, anyone can see what address and amounts were sent. This makes them pseudo-anonymous.
Bitcoins can be obtained with cash through various crypto-currency exchanges such as Mt. Gox or Coinbase, or they can be “mined” by solving algorithms that establish the blockchain.
This is a very brief explanation of how Bitcoin and crypto-currencies work. In future articles I will examine the Bitcoin protocol. I encourage you to check out the companion to today’s article, in which I begin to ask and answer questions like why law enforcement should be concerned.
About the Author
Tony Moore is a deputy sheriff with the Los Angeles County Sheriff’s Department, where he is assigned to the Sheriff’s Headquarters Bureau – Electronic Communications Triage Unit (SHB eComm). His expertise is in public information, emerging Internet trends, social media and Internet investigations. He is a certified POST instructor with the State of California, teaching classes on social media, public information and Internet investigations via the California Peace Officers Association (CPOA). He has been a guest speaker at the International Association Chiefs of Police (IACP) Tech Symposium, Los Angeles Police Department’s (LAPD) Annual Detective Symposium, California Crime Prevention Officers Association (CCPOA) Convention, and CFED West’s Annual Convention on the same topics.