July 9, 2017 10:20 am JST

As bitcoin's value rises, so does criminal activity

From WannaCry to scams, virtual currency brings new opportunities for crime

KEITA SEKIGUCHI, YUKINORI HANADA and KENTARO SHIOZAKI, Nikkei staff writers

WannaCry attackers have demanded ransom payments in bitcoin.

TOKYO -- Bitcoin is enjoying an impressive rally, with its price triple what it was at the beginning of the year. But the surge has also led to increased criminal activity that takes advantage of anonymous transactions of the cryptocurrency.

WannaCry, the infamous ransomware attack that began around mid-May, locked files on corporate and government computers worldwide and demanded payment into certain bitcoin addresses in exchange for unfreezing those files. The transactions can be monitored online in real time.

"Three hundred fifty-one people paid!" an insurance company executive said in disbelief while looking into one such address.

The origins of the malware are still unknown, with some pointing to North Korea and others to Russia. Regardless, victims have paid a total of $130,000 so far to the attackers.

Exploiting holes

So why bitcoin, instead of actual cash? Bitcoin is essentially a chain of digital records, or "blocks," of every transaction it has gone through. In theory, the technology makes it possible to trace the currency back to everyone who has ever owned it.

"It's actually not suited for money-laundering," said Takashi Okita, head of SBI Ripple Asia, a joint venture of U.S. financial technology startup Ripple Labs and Japanese financial services giant SBI Holdings. The WannaCry attackers have not yet withdrawn anything from their accounts, likely out of concern about getting caught.

But back doors do exist. There are virtual currency exchanges around the world that lack measures to prevent illicit activities, allowing users to set up an address under a fake identity. Combined with software like Dark Wallet, which combines multiple transactions into one, tracking the money can become extremely difficult. Somebody may even be able to withdraw bitcoin as cash at a bank somewhere without getting caught.

Some are also bypassing such exchanges altogether. LocalBitcoins, a platform for peer-to-peer transactions, has seen increased traffic this year. The system allows users to physically meet up with others in the area, and exchange bitcoin for cash on the spot.

A record $45 million changed hands through peer-to-peer transactions in the week through May 27, according to bitcoin information site Coin Dance. "It's becoming more popular among people who don't want to provide personal identification," said Noriyuki Hirosue, CEO of Japanese cryptocurrency exchange Bitbank.

Worthless copy cats

Over 1,000 virtual currencies exist in the world today. But there is also a growing number of so-called scam coins, which are essentially worthless currencies that lure users on false promises to make them rich or to help those in need. Noah Coin, for example, claims to help economic development in the Philippines. The Philippine Embassy in Japan issued a warning in March that the currency is not part of any governmental projects.

Authorities are taking action. The Financial Action Task Force, a global anti-money-laundering body, recommended in 2015 that virtual currency-to-cash exchanges be licensed. The FBI and Europol are tracking down bitcoin-related crimes with the help of ethical, or "white hat," hackers.

Japan passed a law in April requiring virtual currency exchanges to ask for personal identification, such as a driver's license, before allowing people to open an account. They also cooperate with the police on any suspected criminal activity. "We receive requests from the police almost every day," an official at one such exchange said.

As a borderless currency, bitcoin can be traded in any country where it is not banned. Regardless of how closely authorities in one country monitor transactions, criminals could simply shift their funds to a less stringent nation. Creating a robust global framework is key to turning bitcoin into a widely trusted currency.

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