The Power of Bitcoin and Blockchain Technology
Since its premiere as a digital currency 10 years ago, bitcoin has received a substantial amount of attention, especially with its value reaching nearly $20,000 a coin in December 2017. Much of the coverage has been positive—in fact, since its advent in 2009, there have been hundreds of other virtual currencies introduced. Today, bitcoin is the world’s largest cryptocurrency. To sort out fact from fiction, it’s worthwhile to see just how far bitcoin has come along with the development of blockchain technology.
Bitcoin is a decentralized digital currency without a central bank or single administrator. As such, it can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. While it sounds like a physical monetary unit, there are no real coins involved—balances are stored on a cloud-based physical ledger known as a blockchain. There are no traditional banks or even governments involved, which lowers transaction fees.
Ups and Downs
Bitcoin has received a bad reputation after a number of events, including its linkage to the infamous Silk Road website, where people could buy anything from illegal drugs and weapons to hiring assassins and employing hackers. As the preferred method of payment for ransomware attacks, bitcoin’s reputation continues to take a hit, even though the first documented ransomware attack was in 1989, well before bitcoin came into existence.
Along with the bad comes a lot of good. Many law enforcement divisions rely on bitcoin and the blockchain technology it is built on to help put many criminals behind bars. Here are some of the most prominent ways in which agencies have used bitcoin and blockchain to uncover the unknown.
- In December 2019, the U.S. Attorney’s office announced that it had taken down the world’s largest dark web child pornography site with the help of the IRS Criminal Investigation division. Agents used bitcoin’s blockchain and traced bitcoin payments to people across the world who were uploading and downloading material on the site. The agents were also able to identify the site administrator who was indicted by a federal grand jury. One common misconception of bitcoin is that it is anonymous; it is actually pseudo anonymous, and blockchains allow for investigators, with enough resources, to find who is initiating these transactions.
- In December 2018, Gerald Cotten, the CEO of QuadrigaCX, one of Canada’s largest cryptocurrency exchanges, died suddenly while traveling in India. His death left some 76,000 customers with no way to access their investments, worth approximately $200 million in cash and cryptocurrency. When dealing with cryptocurrency, there are private keys that give the sole owner or holder of those private keys complete access to those coins. Ernst & Young was appointed as a court monitor to dig through Cotten’s and the exchange’s financial records and blockchain history, where it found nefarious activity. By review of the blockchain transactions, Ernst & Young was able to determine that Cotten was trading Quadriga customers’ money and cryptocurrency on rival exchanges and cashing out multimillion-dollar sums before his death.
Looking past the events that may give some people reason to dismiss bitcoin, there are many examples that have helped bitcoin establish its case as the number-one digital currency. Bitcoin has already proved useful in a very quickly evolving technological world, and I can’t wait to see what’s next.
Do you use or interact with cryptocurrency on a regular basis? The IRS is in the process of sending out letters to some 10,000 taxpayers who use, or may use, cryptocurrency. To ensure you are tax-compliant before you receive this letter, I encourage you to reach out to me.