Why Bitcoin (And Other Cryptocurrencies) Will Inevitably Become Tools Of The Rich, Powerful, and Criminal


E.J. Fagan

GFI / Fagan

E.J. Fagan

Last week, an op-ed that I wrote for The Baltimore Sun prompted a lot of very strong reactions, both positive and negative. I argued that efforts to make Bitcoins functionally anonymous are very dangerous, because money laundering is inherently very dangerous.


To summarize my argument: transnational crime is a global business valued in the hundreds of billions of dollars, and criminals need a way to easily launder, move, and invest that money to make it worth the risk. I brought up two examples-rhino poaching and human trafficking-in the op-ed, but there are dozens more crimes (including drug trafficking and weapons smuggling) to which you can refer.

There is a very strong, very vocal online contingent that supports the idea of a cryptocurrency. Their most common reaction to the op-ed went something like this: people who are oppressed by human rights violations need anonymous money transfer in order to… do something. It's not actually clear what the something is.

Complimentary Tech Event
Transform talent with learning that works
Capability development is critical for businesses who want to push the envelope of innovation.Discover how business leaders are strategizing around building talent capabilities and empowering employee transformation.Know More

I understand the intuitive appeal of money transfers that no one can trace, but we don't have to talk about it in the abstract. There are a lot of places in the world where you can move money around with functional anonymity. Anonymous shell companies and secrecy jurisdictions like the British Virgin Islands and Mauritius make it relatively easy to conceal your identity, especially in developing countries with little to no anti-money laundering capacity. Zerocoin-the technology I argued against in my op-ed-would make this problem significantly worse, but anonymous financial transactions already harm the world on a daily basis.

The evidence is clear: the ability to conceal movements of money is not a tool of the little guy. Those nameless oppressive governments, that bitcoin proponents oppose, are filled with corrupt officials that absolutely adore financial opacity. Tunisia has been struggling to trace the £11bn hidden abroad by the Ben Ali regime for more than three years with little success. We may never find the majority of the Gaddafi regime's hidden money, estimated to be as much as $80 billion. Contrary to what some Bitcoin supporters espouse, anonymous financial transactions are undeniably a tool of oppression. It should be no surprise that Russia and China, two of the biggest money laundering hubs in the world, are some of the fastest growing markets for Bitcoins.


This is what modern-day oppression looks like. Dictators, corrupt public officials, and their supporters are getting vastly wealthy, while the people in their countries live in poverty. We try to prevent Western financial institutions from accepting money from these types of people (called Politically Exposed Persons or PEPs in anti-money laundering parlance), but financial secrecy makes it very difficult to do so effectively. People in developing countries suffer as a result.

In fact, I'd argue that one of the biggest differences between a developing and a developed country is the level of control over its own financial system. If I am a public official in the United States or Europe, and I want to steal a billion dollars from a public project, I am going to have a very tough time doing it without exposing myself to law enforcement. Under the status quo-including, to a certain extent, transactions using bitcoin-money transfer leaves a paper trail. Zerocoin is dangerous precisely because it is designed to leave no paper trail. Large amounts of money can just disappear into thin air.

It doesn't stop at corruption, oppression, and transnational crime, either. Imagine going through a divorce, only to find that all of your mutual bank accounts are empty, the money has disappeared, and your former spouse refuses to disclose what happened to it. Or, imagine that after being the victim of fraud, law enforcement convicts the fraudster, only to find that all of his assets have disappeared, with absolutely no paper trail. Anonymous shell companies already enable these scenarios, but Zerocoin would make it worse.

To completely dispel the myth that anonymous financial transactions are a tool of the little guy, our rigorous economic research-led by a former senior IMF economist-conclusively demonstrates that unrecorded financial transactions significantly exacerbate income inequality: making the rich richer and the poor poorer. They are a tool of both political and economic oppression, with serious socio-economic consequences.

The thing about financial opacity is that it is impossible to limit its criminal uses. If you can use an untraceable payment system to buy small amounts of LSD from Silk Road, someone else can use it to buy a sex slave or move a $10 million kickback to an offshore bank account. And they will use it because they have hundreds of billions of dollars to move, and-under the status quo-they sometimes get caught (although not often enough).


Does Zerocoin have any benefits that justify allowing these kinds of harms? I haven't heard anyone make that case. So here's the challenge to supporters of anonymous money transfer: Make an affirmative case for it. Give examples of where we'll all be better off if people can make untraceable peer-to-peer money transfers. Tell us how you are going to be substantively less free in a world where financial paper trails exist.

E.J. Fagan is Deputy Communications Director at Global Financial Integrity, a research and advocacy organization based in Washington, D.C., dedicated to studying and curtailing illicit financial flows.