Bitcoin has lost steam, but criminals still love it

San Francisco

THE last few months have not been good for bitcoin. The value of the digital tokens has steadily dropped. Bitcoin trading on cryptocurrency exchanges has slowed. And using bitcoins to buy legal items? That has also dropped.

But one corner of the bitcoin economy is still going strong: the sale of illegal drugs and other types of lawbreaking.

The amount of cryptocurrency spent on so-called darknet markets, where stolen credit card information and a wide array of illegal drugs can be purchased with bitcoins, rose 60 per cent to reach a new high of US$601 million in the last three months of 2019, according to data released on Tuesday by Chainalysis, a firm that tracks every bitcoin transaction and serves as an adviser to an array of government authorities.

The continuing growth of illegal transactions underscores the difficulties that bitcoin has had in moving past its reputation as a refuge for scoundrels, even as Wall Street institutions have begun buying and selling the digital tokens.

The enduring success of bitcoin-fuelled illegal activity also points to the struggles that the authorities have faced in containing the new kinds of bad behaviour that cryptocurrencies have helped enable. Bitcoin played a crucial role in the recent growth of so-called ransomware attacks, in which hackers steal or encrypt computer files and refuse to give them back unless a bitcoin payment is made.

Bitcoin is still popular among currency speculators, and illicit activity accounts for only one per cent of all bitcoin transactions. But that nearly doubled from the previous year. Illegal activity appeared to be one of the few parts of the bitcoin economy impervious to changes in price, according to Chainalysis' new Crypto Crime Report.

Chainalysis' data is likely to understate the number of bitcoin transactions going to illegal purposes because the company cannot identify some of the activity dedicated to ransomware, tax evasion and money laundering.

It is widely assumed that some of the people buying bitcoins on legitimate trading exchanges are doing so to skirt national laws. The rise in black-market sales is particularly notable in 2019 because global authorities took down two of the biggest illegal online markets. New markets quickly popped up to fill the void.

That illicit activity is "pervasive" on the darknet, said Calvin Shivers, assistant director of the FBI's criminal investigative division, but he added that the FBI remained "undeterred" and was "surging resources" to tackle the problem.

In addition to the online black markets, the authorities have been aggressively targeting cryptocurrency schemes.

But the amount of bitcoins going into fraudulent activity still hit a new high. Fraudsters more than tripled their take from the year before, grabbing US$3.5 billion from millions of victims in 2019, the Chainalysis data shows.

Illegal transactions have been a central part of the bitcoin story since the first online black market, the Silk Road, helped give people a reason to begin using Bitcoin in 2011.

Bitcoin was useful for the Silk Road because the structure of bitcoin, without any central authority, makes it possible for a user to create a bitcoin wallet and use the tokens without registering an identity with anyone.

There was hope among some in the bitcoin community that the cryptocurrency would find a broader use as electronic cash, as the inventor of bitcoin originally posited.

As the value of bitcoin increased, big companies like Expedia and Stripe announced that they would begin taking bitcoins. But when users realised that bitcoin had many drawbacks as a way of making purchases - like being slower and more expensive than traditional cash - there was little uptake.

Bitcoin aficionados now believe the cryptocurrency is more useful as a new kind of alternative asset, like gold. Many people on Wall Street have bought into that idea, and the Chicago Mercantile Exchange and the owner of the New York Stock Exchange both allow traders to buy and sell derivatives based on bitcoin.

Trading, however, has been tepid. Some believed that the digital token might prove to be popular in countries like Venezuela or Argentina, where local currencies are even less stable than bitcoin.

But in those places, interest has recently fallen off, data gathered by the Block, a research firm, suggests. Bitcoin prices and trading did spike in the middle of last year, soon after Facebook announced its intention to create the Libra cryptocurrency.

The price of bitcoin rose from around US$4,000 to more than US$12,000. But it has become clear that Libra might face just as many legal difficulties as Bitcoin. The price of a bitcoin has recently hovered around US$9,000. Even with the recent declines, bitcoin trading and prices are still far ahead of where they were at the beginning of 2017, before a price run that took bitcoins to nearly US$20,000 each.

Bitcoin advocates have generally been unconcerned about the amount of illegal activity done using bitcoins, because they see much larger amounts of illegal activity with traditional currencies and because bitcoin has significant drawbacks for criminals.

"Bitcoin is still a pretty lousy currency to use for cybercrime," said Ryan Selkis, the founder of the cryptocurrency consulting firm Messari. "Maybe it is good for petty crime, but if you are running a cartel, it is a different story."

The ledger of all bitcoin transactions, known as the blockchain, publicly records every transaction. Names are not assigned to bitcoin addresses, but firms like Chainalysis have tracked criminals by tracing transactions through the blockchain to places that know the identity of their users, like bitcoin exchanges.

Some new darknet markets have pushed customers to use alternative cryptocurrencies that leave less of a trail. NYTIMES