What the FBI Thinks About Bitcoin

In it's complaint against the alleged founder of Silk Road, Ross  Ulbricht, the Federal Bureau of Investigation discusses its take on Bitcoin. Specifically, FBI Special Agent Christopher Tarbell writes :

Silk Road's Bitcoin--Based Payment System

21. Based on my familiarity with the Silk Road website, I know the following concerning the payment system used to process purchases made through the site:

a. The only form of payment accepted on Silk Road is Bitcoins.

b. Based on my training and experience, I know the following about Bitcoins:

i. Bitcoins are an anonymous, decentralized form of electronic currency, existing entirely on the Internet and not in any physical form. The currency is not issued by any government, bank, or company, but rather is generated and controlled automatically through computer software operating on a "peer--to--peer" network. Bitcoin transactions are processed collectively by the computers composing the network.

ii. To acquire Bitcoins in the first instance, a user typically must purchase them from a Bitcoin "exchanger." In return for a commission, Bitcoin exchangers accept payments of currency in some conventional form (cash, wire transfer, etc.) and exchange the money for a corresponding number of Bitcoins, based on a fluctuating exchange rate. Exchangers also accept payments of Bitcoin and exchange the Bitcoins back for conventional currency, again, charging a commission for the service.

Once a user acquires Bitcoins from an exchanger, the Bitcoins are kept in a "wallet" associated with a Bitcoin "address," designated by a complex string of letters and numbers. (The "address" is analogous to the account number for a bank account, while the "wallet" is analogous to a bank safe where the money in the account is physically stored.) Once a Bitcoin user funds his wallet, the user can then use Bitcoins in the wallet to conduct financial transactions, by transferring Bitcoins from his Bitcoin address to the Bitcoin address of another user, over the Internet.

iv. All Bitcoin transactions are recorded on a public ledger known as the "Blockchain," stored on the peer--to--peer network on which the Bitcoin system operates. The Blockchain serves to prevent a user from spending the same Bitcoins more than once. However, the Blockchain only reflects the movement of funds between anonymous Bitcoin addresses and therefore cannot by itself be used to determine the identities of the persons involved in the transactions. Only if one knows the identities associated with each Bitcoin address involved in a set of transactions is it possible to meaningfully trace funds through the system.

v. Bitcoins are not illegal in and of themselves and have known legitimate uses. However, Bitcoins are also known to be used by cybercriminals for money--laundering purposes, given the ease with which they can be used to move money anonymously