Law enforcement officials testified on Wednesday that virtual currencies like Bitcoin have opened up new avenues for crime that government has not been able to keep up with.
The most forceful statements came from a prosecutor with the United States attorney’s office in Manhattan, Richard B. Zabel, during the second day of hearings about virtual currencies held by New York’s top financial regulator, Benjamin M. Lawsky.
Mr. Zabel went through a list of six ways in which virtual currencies are more prone to crime than current forms of money transfer, including the ease with which money can be laundered over borders at the click of a mouse.
The testimony of Mr. Zabel and Cyrus Vance, the Manhattan district attorney, was a blow to Bitcoin advocates who have said that digital money carries no more risk than ordinary money and should not be treated with harsher regulations.
Both Mr. Zabel and Mr. Vance said that they needed more tools than they now have to stem the tide of problems cropping up with virtual currencies as they have become more popular.
“Whatever weaknesses they have must be addressed much more seriously,†Mr. Zabel said.
Mr. Lawsky has indicated that Bitcoin is becoming popular enough that regulators need to create regulations that can encourage its growth but limit illegal activity. The price of an individual Bitcoin has risen more than 5,000 percent over the last year, but there has also been a growing list of serious crimes committed in the Bitcoin network, which government officials have struggled to clamp down on.
For their part, Bitcoin advocates have said that virtual currencies are no more prone to crime than credit cards or cash. One of the most popular arguments put forward is that transactions done by criminals using Bitcoin are easy for law enforcement to trace because of the public ledger where transactions are recorded. Earlier this week, Mr. Zabel’s office unsealed a complaint against two men accused of helping exchange Bitcoins for people interested in making drug purchases.
On Tuesday, during the first day of the hearings, Tyler Winklevoss, a Bitcoin investor with his twin brother, Cameron, said that “Bitcoin is a terrible place for criminals to conduct criminal activity†because of the public ledger.
But Mr. Zabel said that while it might be possible to find the computer that a particular Bitcoin purchase came from, digital money users have countless ways to cover their tracks that are not available to people going through traditional banks.
Mr. Zabel was involved in the team that tracked down Ross Ulbricht, whom the authorities contend is the owner of the Silk Road online market, where drugs and child pornography were available. Mr. Ulbricht used a so-called Tor network to obscure himself, the authorities said, and Mr. Zabel said it was only after overcoming “substantial hurdles†that his office found Mr. Ulbricht.
Another argument put forward by virtual currency advocates is that cash is actually more attractive to criminals than new forms of digital money, because cash can be moved without any digital trace. Mr. Zabel struck back at that idea by pointing to the difficulty of moving large amounts of cash around the globe.
“Although cash is also an anonymous form of currency, there are significant barriers to transferring bulk cash out of the banking system,†he said.
The people representing the Bitcoin industry at the hearings pushed back against any strenuous new regulations on virtual currency companies. But at another panel on Wednesday, top executives of two of the most prominent Bitcoin companies said they were hoping that Mr. Lawsky does provide more regulatory clarity so that everyone will feel more comfortable using digital money.
“Regulation could be a good thing,†said Fred Ehrsam, the co-founder of Coinbase, the largest middleman for Bitcoin transactions.
Regulators around the world have been grappling with the appropriate way to treat Bitcoin, coming up with very different approaches. The Chinese government recently made many types of virtual currency transactions illegal. The hearings in New York drew a global audience. Mr. Lawsky said that viewers from 108 different countries tuned in to the webcast his office set up.
