Bitcoin: Fraud's New Best Friend


"Bitcoin is the buzzword."

Jim Butterworth, CFE, and executive director of services at ManTech, explored virtual currencies, such as Bitcoin (BTC), in his session, “Bitcoin and Virtual Economies: Fraud’s New Best Friend.” In this breakout session, Butterworth explored the concept that while virtual currencies may be the future of financial technology, they’re also stepping stones to the expansion of fraud’s playground.

A trend emerges when you look at the history of virtual and "synthetic" currencies. Going back to 1990, Butterworth shared "significant events in the history of synthetic currencies" starting with Through, people could earn beenz, a form of online currency, for performing activities such as visiting a website. They raised $80 million, but eventually became insolvent, shutting their doors and giving people only 10 days notice to spend their beenz. is now known as one of the greatest dot com disasters., e-gold, Digicash. These virtual currencies all eventually became insolvent as well, closing their doors, keeping the money and leaving their consumers, or victims, with their assets tied up.

In 2009, Bitcoin — a cryptocurrency that uses an open source, peer-to-peer network operating with no central authority or bank — was launched by an unknown developer or entity that goes by the pseudonym of Satoshi Nakamoto. Bitcoin boasts a high level of anonymity and most recently made headlines when became the first major retailer to accept the online currency. 

However, even Bitcoin has seen its fair share of troubles. The largest Bitcoin exchange, Mt. Gox, filed for bankruptcy following a reported hack and subsequent loss of $350 million (though many in the Bitcoin community think Mt. Gox's CEO made off with the money). 

Butterworth also explained that Bitcoin is highly volatile in market value, and depositors are vulnerable to theft because of unsecured online exchanges. For example, the FBI shut down the underground online market Silk Road in October 2013. The site was back in business one month later, but hackers stole 4,400 BTC. If you were to exchange that at today's price of around $590 per BTC, this amounts to $2,596,000. "This is truly a borderless economic system that is not encumbered by a financial authority," said Butterworth.

World governments seek to regulate financial institutions such as Mt. Gox, Butterworth said. However, there are even more issues to consider than regulating financial institutions.

Online currencies also depend on a downloaded software program. Software programs can open the door for fraudsters; downloading software from a third-party source is not 100 percent safe. In August 2013, for example, virtual thieves swiped cash from Bitcoin accounts held on Android phones due to a bug in the Androids' apps. 

What does this mean for us? For the foreseeable future, fraud will coexist with these alternative currencies. “Fraudsters look to steal from users and move money around; users look to buy illegal contraband and purveyors will continue to turn a blind eye,” Butterworth said.

Virtual and cryptocurrencies are still the Wild West — one with billions in dollars in transactions. This creates a hotbed for fraudsters and new fraud techniques, something the fraud community will be combating for the foreseeable future.

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