Bitcoin may offer a level of freedom that traditional currencies do not, but it's hardly the most secure form of money.
Just as a pickpocket or mugger can rob you on the street, so a hacker can swipe your virtual money. And it can be much more difficult to recover stolen virtual cash than legal tender.
The combination of the fairly anonymous nature of the bitcoin world and hacker know-how makes it difficult for law enforcement agencies to track thieves. And because bitcoin transactions are nonreversible, users often have little recourse when they discover that their bitcoin "wallet"—which stores their virtual coins and notes any transactions—has been ripped off.
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"If the wallet is held on a personal device and they accidentally delete it or forget the password or even if the device is severely damaged, we can use our digital forensic expertise to recover" the wallet," said Simon Lang, senior digital forensics consultant at SyTech, a communications solutions company. "If, however, it is stolen from an account or wallet, then it does become extremely difficult—and quite impossible at times."
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SyTech has recently started a tracing service for stolen bitcoins, but the problem is that exchanges can supply only limited information when a transfer (legitimate or fraudulent) takes place, data that is often restricted to the IP address, and date and reference number of the transaction.
The most valuable piece is the IP address, which can lead straight to the hacker. But a skilled fraudster can make the IP address untraceable.
"As federal regulators acknowledge bitcoin is a currency and establish a regulatory framework around it, there will be an expectation on the part of consumers being regulated that law enforcement will be available to investigate this," said Alex Ferrara, a partner with Bessemer Venture Partners. "They're going to need better tools to connect the transaction ledger and wallet IDs with real world sources."