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Bitcoins: Wagering Virtual Currency on Virtual Gaming

Walter Lamar
4/21/13

The virtual currency, bitcoin, recently gained attention as its trading value topped $140 US per coin on April 2. Most of the hoopla surrounding the news about bitcoin skirted the critical fact that the $1.5 billion trading system is mostly funding illegal transactions, particularly drugs and pornography. Increasingly, bitcoins are also used to participate in the legally gray area of Internet gaming. Bitcoin-only casinos handled about $2 million in bets in 2012, which is a small slice of the online gaming pie, but are also seeing month-to-month growth rates of nearly 900 percent.

The bitcoin, which relies on “mined” numerical strings to support its currency and to track unique transactions, is designed to be anonymous. Many retailers who accept bitcoins add additional layers of privacy protection. One of the most transparent is Mt. Gox, the Tokyo-based currency exchange site that handles 80 percent of bitcoin-to-dollar transactions. Mt. Gox claims to collect enough data that a determined computer forensics specialist could identify individuals who make transactions.

On the other end of the spectrum is Silk Road, which provides nearly impenetrable layers of security to protect the identities of the shoppers and the sellers on this “black market Amazon.” Like Amazon, shoppers can browse categories of products offered by various sellers, who post chatty descriptions and product photos, then receive feedback from customers. Unlike Amazon, the categories include not only books, CDs and electronics, but also drugs, pornography and weapons, all sold for bitcoins.

Under the category “Drugs,” for instance, shoppers can choose from over 250 different kinds of street drugs and pharmaceuticals. Recent estimates put the total annual revenue at Silk Road at $24 million dollars, most of which came from marijuana and pharmaceutical sales. If you’re thinking of checking out this brazen website, don’t bother. Before they accept you as a customer, you will first have to correctly configure the anonymizing network Tor to disguise your network identity and location, which takes some skill.

Although leaders in the US and elsewhere have shown concern about how bitcoins are being used for illegal transactions, it’s hard to know what to do about it. Senators Charles Schumer and Joe Manchin have been pressuring the DOJ and the DEA to shut down Silk Road, but it’s unclear, without knowing where the operators, sellers or buyers are, whether agencies even have jurisdiction. A recent sting operation against a site similar to Silk Road netted eight suspects in three countries. In this case, law enforcement got lucky because of email vulnerabilities, not because they could track the bitcoin transactions.

Eighteen months after Silk Road launched, agents tried to bust individuals trafficking in child pornography. The privacy fanatics who built the Tor network anonymizer boasted about actively thwarting their investigation and preventing the FBI from bringing the criminals to justice. After that, paranoia reigned for a while among the black marketeers, but by now, it’s back to business as usual, selling at least $2 million every month of illegal products to people across the US and Canada.

Bitcoin proponents fiercely defend the bitcoin from claims that its primary uses are illegal. A member of the core bitcoin development team asserts that bitcoins are not as anonymous as they claim to be, but that law enforcement simply hasn’t caught up with the technology. Devoted users point to a robust legitimate marketplace for bitcoin transactions and the importance of having the freedom to make private transactions outside of the international banking system.

To date, Carnegie Mellon has published the only study of illegal trafficking on Silk Road. The report suggests a number of potential intervention strategies for controlling this kind of illicit trade. Attacking the network may cripple one area of the market, but can’t bring down the whole system, especially since bitcoin users usually store their own funds rather than banking them. Attacking the financial infrastructure becomes less likely as the bitcoin system gains value, stability and legitimate backers. Attacking the delivery model would require the DEA and/or the FDA to enforce controls for suspicious packages going through the U.S. mail or customs. This approach could be effective at targeting individuals, but it’s hard to imagine this potentially invasive and monumental program could gain support or funding.

Whether our leaders acknowledge it or not, the final intervention strategy described in the report—to do nothing—is the one we’ve adopted. The news that bitcoins could be used to buy drugs online was enough to start the surge in value, and since June 2011, when the first Gawker article came out about “The Underground Website Where You Can Buy Any Drug Imaginable,” the bitcoin’s value has increased tenfold. At this point, it’s hard to tell what impact, if any, the bitcoin might have for Indian country casinos or law enforcement, but the trends indicate that doing nothing may soon cease to be an option.

Walter Lamar, Blackfeet/Wichita, is a former FBI Special Agent, Deputy Director of BIA Law Enforcement and currently President of Lamar Associates. Lamar Associates Indian Country Training Division offers culturally appropriate training for Indian Country law enforcement and service professionals with both on-site and online courses.

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Anonymous's picture
Nice to see you done your research! What a lot of rubish
Anonymous
Anonymous's picture
I was wondering why you were hating on bitcoin so much, then realized you're worried it will lead to ONLINE gambling, thus probably taking away the need to travel to Indian casinos. Why panic so much? You can still offer the whole experience, completely different from online.
Anonymous
Anonymous's picture
Most likely Walter is close, if not in an urban setting with high speed internet, unlike the vast majority of American Indians, hence, they ignore this type of hype.
Anonymous
Anonymous's picture
Hello Walt, This is your old BIA partner Woodrow Star. Now a politician with my home tribe in Pendleton OR. I like reading this type of vigilant reporting, especially since I was the chair on our local Gaming Commission, but have been elected and moved over to cover a greater range of issues. Keep it up man, proud of you...
Anonymous
Anonymous's picture
Seems to me.... the writer's concern about bitcoins is not about the currency itself, but about the potential for abuse. Cash transactions can often be untraceable, but with bitcoin use, it's basically impossible to discover the people involved.
Anonymous