Barry Silbert, CEO of SecondMarket has been talking to law enforcement officers, and he says that the vast majority wants criminals to use bitcoins instead of cash, according to this article by Bill Yakowitz.
That’s a very important point. If the Bitcoin network is less useful for criminals than cash, then making it illegal because of money laundering concerns would only help the criminals and make the law enforcement mission more difficult. That in turn would reduce the risk that the Bitcoin network fails because of government regulation, which is the largest single possibility for the project failing to reach mainstream adoption. The reason Silbert gives for this is that the Bitcoin network leaves a permanent record, something law enforcement wants when discussing the balance between privacy and law enforcement interests regarding telecommunication traffic data retention. There is no permanent record for cash transactions anywhere.
“The forensic and data analytics available and applied to Bitcoin is really useful for identifying the movement of money,” Allaire said. “In a cash economy, or in an environment where you have opaque financial institutions, you can only look at records if you subpoena those institutions. It’s a dramatically [less transparent] environment for law enforcement compared with Bitcoin. Global digital currency with a global transparent ledger is actually going to be a huge assistant to law enforcement to monitor criminal activity.”
I would like to add that the FBI or DEA have methods like communications surveillance at their disposal that ordinary citizens don’t have. If you are monitoring the communications of some suspect, you may know their Bitcoin addresses from that monitoring activity. Or you may know at least the time they have communicated with the Bitcoin network and then draw your conclusions if there is a transaction over a couple of million dollars at that particular point showing up in the Blockchain. You may also have inside informants or undercover agents in a criminal organization that give you the missing link between the public Blockchain information and some suspect.
Law enforcement can also pose as criminals themselves; the fact that a Bitcoin address doesn’t reveal easily who holds it makes it easier for the DEA to set up an account on some Silk Road clone and see who sends drugs, then follow the trail back to the seller. Did you know that your post box may keep a photo of you?
On the Internet, nobody knows you’re a dog. On Silk Road, nobody knows you’re the DEA.
Also, some criminals may think they are completely safe against tracking their money flows, while in reality the DEA and FBI are watching. Arguably, that is the most desirable state of affairs for law enforcement. Have the ability to track while the criminals you are tracking are unaware of that ability is even more useful than having that ability with everybody knowing of it, like with the prohibition against anonymous bank accounts.
That is possible with bitcoins, where understanding these issues requires some serious knowledge of how the system works, which some criminals may be lacking. It is not possible with cash and bank transfers.