On the surface, Bitcoin seems perfect for crime. The digital, peer-to-peer currency is largely known for its independence from governments or banking institutions, as well as its supposed anonymity.
Naturally, as a result, Bitcoin has been widely used on the black market website Silk Road, which has been called “the Amazon.com of illegal drugs.” Silk Road is designed to keep its users entirely anonymous as they conduct business with the site’s drug purveyors. Bitcoin has fit in nicely in this market, allowing distributors and customers to make their purchases without exchanging cash, and thus arousing suspicion from law enforcement. As of September 2012, Bitcoin transactions on Silk Road amounted to $1.9 million per month, Carnegie Mellon researcher Nicolas Christin told The Economist.
[BITCOIN: 7 reasons to be wary]
[MORE: 10 scary facts about Bitcoin]
By this logic, the only advancement that could make Bitcoin a better fit for illegal online transactions is a simple, two-step method to turn physical cash into Bitcoins. Although Bitcoin can be mined, that process requires a computer to solve complex math problems, and is designed to become increasingly difficult and time-consuming. The alternative is to purchase Bitcoins, which can be done fairly easily online, but involves a cash transaction from a traditional online payment service. Theoretically, that’s where Lamassu’s Bitcoin ATM could come in handy.
The Bitcoin ATM is exactly what it sounds like. A user enters a dollar bill, scans a QR code, and receives Bitcoins in their online wallet. The obvious market for the device is any individual or business who deals in cash and would rather save it in Bitcoin than in a less anonymous bank account.
However, Lamassu co-founder Zach Harvey says Bitcoin is “horrible for money laundering.” That’s because Bitcoin is not nearly as anonymous as it’s been made out to be.
“People criticize anonymity, and, well, Bitcoin isn’t supposed to be 100% anonymous, and I think expecting it to be is focusing on something that isn’t one of its main advantages,” Harvey says. “In fact, it’s probably the most transparent currency.”
Some simple research on Bitcoin shows that although transactions are conducted anonymously, they can be traced. The Block Chain logs and displays all Bitcoin transactions. Starting there, anyone interested enough to see where the Bitcoins used to make one transaction could follow its trajectory from its origins.
Some researchers have used these resources to try to track down Satoshi Nakamoto, the mysterious person (or persons) behind Bitcoin. In 2012, security experts Dorit Ron and Adi Shamir downloaded the entire graph for all Bitcoin transactions and followed them back to their origins, concluding that they all descend from one large transaction made in November 2010, which was covered up in an attempt at maintaining anonymity.
“Finally, we noted that the subgraph which contains these large transactions along with their neighborhood has many strange looking structures which could be an attempt to conceal the existence and relationship between these transactions, but such an attempt can be foiled by following the money trail in a sufficiently persistent way,” the report explains.
Ron and Shamir’s research also found that “most of the minted Bitcoins remain dormant in addresses which had never participated in any outgoing transactions,” suggesting that these accounts were created to store, but never use, the Bitcoins belonging to the system’s creator. Harvey believes these accounts have never made outgoing transactions because Bitcoin’s creator wishes to remain anonymous, and knows that making a single transaction could tip his hand.
It may be difficult, but Bitcoin transactions can be traced back to the accounts and people responsible for them. Those looking to hide illegally obtained money from law enforcement, which has its share of capable hackers on its side, may be better off using cash, Harvey says.
“It doesn’t matter how many times they split it up. All they need is a computer to backtrack that and find exactly what the source was,” he says. “So, people using old systems of money laundering to try to fuse that with the Bitcoin network are basically failing, and are very easy to find. It’s so bad that they could be money laundering for 10 years, and make one mistake down the road and you see everything they’ve done.”
Harvey co-founded Lamassu with his brother Josh and friend Matt Whitlock have developed a passion for the digital currency over the past few years. He acknowledges the many critics of Bitcoin, and was even skeptical himself when he first learned of it. But now, Harvey says he has “answers for pretty much all the criticisms” that he’s heard.
Perhaps more so than its supposed ties to criminal activity, Bitcoin’s volatility has been the focus of its critics. Its value is known to balloon, sometimes amounting to hundreds of dollars, only to crash shortly thereafter.
While that may be off-putting to those looking for a return on cash investments in Bitcoin, it’s not necessarily relevant for the larger movement, which aims to establish Bitcoin as a tool that simplifies global payments, rather than a get-rich-quick scheme.
“It is definitely volatile. It’s going up and down, and we can expect it to keep going up and down until it stabilizes when it gets to mass acceptance. But that’s just growing pains,” Harvey says. “And I think a lot of the people who are into Bitcoin don’t really focus on the price that much because they’re more excited about the technology and what it can enable, such as immediate transfers anywhere in the world.”
These advantages are broader for those using the Bitcoin ATM when dealing in cash, Harvey says. Convenience stores, for example, deal in cash every day, making them susceptible to robbery, be it from thieves or employees looking to skim a few dollars out of the register. Depositing cash into a Bitcoin ATM would remove that risk, transferring the money into a digital currency that is stored in an online wallet.
The potential for these use cases is what prompted Harvey and his co-founders to work on the Bitcoin ATM full-time. He and his brother were running an online guitar store based out of Manchester, N.H., as they experimented with Bitcoin in their free time. Roughly six months ago, they landed on the Bitcoin ATM, which excited enough people to convince them to launch Lamassu and build the device. They showed an operational product demo of the device at last month’s Bitcoin 2013 conference, and plan to begin production later in the summer. The company plans to sell the device for $5,000 for an individual unit, with a reduction for wholesale orders.
Lamassu has already seen global interest in its Bitcoin ATM, and Harvey is particularly interested in providing the device to third-world nations with limited banking resources. He compares the potential for Bitcoin in these regions to the boom in cellphone sales. With limited landline telephone resources in many third-world nations, cellphones became massively popular because private companies could build and distribute them without relying on a government-provided infrastructure. The Bitcoin ATM could accomplish a similar goal by providing a currency system to those who were previously limited to cash-only transactions.
“They would [meet] all those banking needs using Bitcoin, and they won’t ever have to use a bank account,” Harvey says.
For the time being, Bitcoin as a movement has its own issues to sort out, and Harvey acknowledges that. Security will need to improve for the online Bitcoin services that have been targeted for theft, but many in the industry believe that will progress as the system matures. Alternative digital currencies, such as Ripple or TerraCoin, stand to fragment the market, but Harvey says a simple software update could enable the Bitcoin ATM to support them.
Naturally, as the market expands, more services will emerge to help bridge the gap between today’s tech-savvy Bitcoin enthusiasts and everyday consumers who could benefit from it, Harvey says.
“The Bitcoin protocol itself is extremely simple. It’s just a matter of what services support it to make it really simple for those who are not tech-savvy,” Harvey says. “And that’s the kind of service I expect to see during this year and next really start to pop up.”
Colin Neagle covers emerging technologies and the startup scene for Network World. Follow him on Twitter and keep up with the Microsoft, Cisco and Open Source community blogs. Colin's email address is firstname.lastname@example.org.