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Why bitcoin fraud suspect Alexander Vinnik looks set to be extradited to the US

Alexander Vinnik (right), suspected of running a money laundering operation using bitcoin, denies all charges against him. EPA-EFE/ANA-MPA

Everyone is going crazy about bitcoin, yet very few people understand what it is, how it relates to blockchain and whether this is a legitimate investment tool or a massive scam. The extradition case of Alexander Vinnik – the alleged Russian mastermind of a US$4 billion digital money laundering scheme – brings all this to the fore.

Vinnik, who was arrested in northern Greece, describes himself as a bitcoin consultant and denies all charges brought against him by US officials who have accused him of running the BTC-e exchange and laundering billions of dollars via bitcoin transactions.

He had been waiting for Greece’s Supreme Court to decide whether he could be extradited to the US, where he faces a cybercrime trial. On Wednesday, the court ruled that Vinnik can be extradited to face charges in the US. It’s now up to the Greek justice minister to determine whether the extradition will take place – but it is likely Vinnik will be facing US authorities before long.

Vinnik, 38, is one of seven Russian suspects arrested or indicted worldwide this year on US cybercrime charges. He has fought hard against extradition to the US, deploying an expensive team of Greek criminal attorneys before the court. Vinnik has said he is willing to be extradited to his home country of Russia, where he is sought on lesser fraud charges.

If the Greek justice minister decides to send Vinnik to Russia instead it will be a diplomatic issue between Greece and the US.

Is bitcoin too murky?

Some might bristle at the idea of getting involved in bitcoin, given the Vinnik allegations and other not-so-pretty news stories around the bubbling cryptocurrency that is waiting to burst. But you might still be wondering how it works, and whether you can make some money out of it.

A good starting point is to reflect briefly on the value of money. What do you understand by value? Take this year’s must-have Christmas toy – a programmable robot made of little bricks. Your kids want one, you want one, it is in short supply and out of stock pretty much everywhere. Its price is climbing outside standard toy stores. You can buy it for multiples of its retail price on online auction sites. This is a valuable commodity. Perhaps one you could invest in. If you can obtain some of these scarce items at normal price, you could make a killing auctioning them online.

Now consider this, what if the toy wasn’t a physical item? What if the sought after product was a game app? You can download it, but you need an activation code to use it, and codes aren’t easy to come about. Scarcity would be due to rationing in supply, not due to physical lack of stock. Assuming you could buy multiple activation codes and auction them online, you could treat these as an investment. Never mind for a second who makes the app and why there are limited activation codes. It is considered a valuable asset. Could it be a commodity, a source of value, a store of such value? Could it be used as currency?

Substitute the toy robot or app with bitcoin and you get an idea of what is happening. Bitcoin is a type of software. Think of it as a digital token that can be programmed to do various things, containing a variety of information.

Bitcoin and other cryptocurrencies are based on blockchain technology, an information storage system which works as a decentralised ledger. Information is not held on a central server, but is duplicated and dispersed across a huge network. Every time this information is updated, a corresponding change is made across the network.

What is the benefit of this decentralisation? Blockchain enthusiasts will tell you that the system is impossible to corrupt or manipulate. Any attempt to “hack” information will be rejected by other nodes in the system that hold the true copy of the information. If you have been awarded a digital token, a bitcoin, you can be sure (we are told) that it is genuine.

Beyond government control

Great, so we have a supposedly impenetrable digital ledger that evidences little bits of software that people think are valuable. Sounds benign, so why is Vinnik facing allegations of money laundering? Law enforcement officers have realised that the decentralised nature of the ledger and the anonymous nature of the originators and holders of bitcoin potentially make it a wonderful conduit for illegally obtained funds.

Bitcoin investors are as happy as pigs in mud. But should you invest? Shutterstock

Remember, the ledger is currently beyond the control, or knowledge of governments and state authorities. Rightly or wrongly, bitcoins are considered valuable and people exchange them for real money. The value of bitcoin has well exceeded US$10,000 and financial firms are set to start trading futures – which are bets on the price of upcoming contracts to exchange bitcoin. Blockchain could be a revolution not only in finance, but also in money laundering.

But the era of cowboy cryptocurrency trading is set to come to a grinding halt. Regulators worldwide are reacting to soaring values with attempts to inject a degree of transparency in these trades. Starting with the EU, legislation is planned to force online platforms where bitcoins are traded to carry out due diligence on customers and report suspicious transactions. It will bring trades within the network of rules that try to prevent money laundering and dealing in proceeds of crime, including terrorist financing.

If you are thinking of speculating on bitcoin, should you do it? Before you make up your mind, remember this: the last innovation in finance promising incredible rewards with appropriately apportioned risks was the creation of synthetic CDOs and derivative-laden layercakes in the mid noughties. And we all know how that went.

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