Bitcoin Wallets Searched by Feds

by Dan Holden | June 18, 2013


If you’re a user of Bitcoin virtual currency or you’ve ever installed a Bitcoin wallet on your computer, the federal government is probably watching your digital transactions, according to a well-known start-up executive and angel investor.

“I just had a government guy in my office telling me that they have forensic software looking for Bitcoin wallets on your machines,” said Gary Kremen, founder of and Sociogramics. “And if they find one, they lock on to you, because statistically, if you were in Liberty Reserve or using a lot of anonymous money, you were probably doing something wrong.”

Bitcoins are a virtual currency that can be used to buy and sell a wide variety of products online and in the real world. The currency is transferable anywhere in the world and can be exchanged for real currency at any time.

The Bitcoin industry witnessed a meteoric rise in value this spring, sparking significant interest from investors – and drawing the watchful eye of the federal government. But insiders now say the feds have been watching the Bitcoin economy for a lot longer, and on a much deeper level.

Insiders have known for some time that transactions involving drugs and pornography were possible, and it was thought that these transactions would be anonymous and therefore difficult for government agencies to track. But that assessment was naïve, said Kremen.

“There are a lot of amateurs in the market, I call them cyberpunks, they don’t understand currency or finance or even how governments look at currency,” said Kremen, adding that government analysts “are confident that cyberpunks are using anonymous money for criminal purposes or tax evasion unless they are on the fringe, believing virtual currencies to be the next Gold 3.0.”

Earlier this year, the United States Department of Homeland Security froze the currency trading account of MtGox, the oldest and largest exchange for the virtual currency, after it was determined that Tokyo-based MtGox lacks a license as a money transfer company. The feds said MtGox lied on a Treasury Department form about its intent to conduct financial transactions across international lines.

Bitcoins, said the feds, are transferable and exchangeable, which exposes the currency to activities such as money laundering – e.g., fair game for investigation by the Treasury Department’s the Financial Crimes Enforcement Network (FinCEN).

Separately, the feds shut down Liberty Reserve, which in 2010 became one of the first exchanges to convert US dollars to Bitcoins and vice versa, for allegedly laundering money.

Liberty Reserve was reportedly shut down after U.S. and Costa Rican authorities arrested several founders and operators, including Arthur Budovsky, Vladimir Kats and Mark Marmilev. Investigators said Budovsky’s businesses in Costa Rica, including Liberty Reserve, were used to launder money for child pornography websites and drug trafficking.

Calls to the Federal Bureau of Investigation’s Silicon Valley Regional Computer Forensics Laboratory (SVRCFL) seeking confirmation of the Bitcoin wallet searches went unreturned by press time.

The potential for vulnerability of Bitcoin wallets has not gone unnoticed.

Hackers have tried numerous times to break into Bitcoin exchanges and wallets, with limited success. MtGox itself has been hacked several times, and various attempts have been made to create malware and other programs that turn unsuspecting computers into Bitcoin mine bots.  Recently, a developer at a game company was fired for manipulating customers’ computers to mine Bitcoins for him.

Find out more about the fascinating world of Bitcoins in Metro next week.

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