Wired has obtained a new report from the FBI that details the agency’s growing concern that Bitcoins will become an attractive currency for those looking to dabble in some illicit activities without (hopefully) getting caught.

I won’t go into the ins and outs of how Bitcoins work since I covered that pretty extensively last month, but here’s the Cliff’s notes version: Bitcoin is a decentralized, virtual currency that operates on a peer-to-peer network. You will never hold a bitcoin as it exists only only online. Use of Bitcoins is mostly anonymous. There is a finite amount of Bitcoins that will ever be produced, which is how the market is regulated from over-production. Currently, the exchange rate of Bitcoins to U.S. dollars is about 1 Bitcoin to $4 or $5.

The FBI report highlights some insightful details about the current economy of Bitcoins. For any Doubting Thomases who had written off Bitcoins as a fad, the report details some lucrative highlights:

As of 18 April 2012, the third-party bitcoin trading platform Mt. Gox recorded more than $8 million in transactions conducted over the past 30 days through Mt. Gox trading, an average of more than $276,000 per day.

According to Bitcoin as of April 2012, there were more than 8.8 million bitcoins in circulation. With the average market price in
April 2012 between $4 and $5 per bitcoin, the FBI estimates the Bitcoin economy was worth $35 million to $44 million.

The report goes on to detail the ways in which Bitcoins have already been manipulated to conduct illegal activity, such as a money laundering scheme via an online role-playing game or how Bitcoins have been thieved from third-party services by hackers. Indeed, if you’re using Bitcoins you probably should fear the threat of getting hacked a bit more than the feds, but if the multi-signature security that Gavin Andresen, the Lead Core Developer of Bitcoin, is working on, that threat will be less, well, threatening.

One of Bitcoins’ greatest appeals is how it mostly keeps the identity of the user anonymous, although this isn’t fail-proof, either. In a classic example of cutting off one’s nose to spite the face, the FBI lists ways in which Bitcoin users can be identified, which should be a tip-off for Bitcoins users on what not to do if they really want to avoid being tracked down (hint: according to the report, it involves laundering Bitcoins through third-party services registered outside the U.S). Wired actually went a step further and compiled a to-do list gleaned from the FBI report on other steps Bitcoin users can take to ensure their anonymity:

Create and use a new Bitcoin address for each incoming payment.

Route all Bitcoin traffic through an anonymizer.

Combine the balance of old Bitcoin addresses into a new address to make new payments.

Use a specialized money-laundering service.

Use a third-party eWallet service to consolidate addresses. Some third-party services offer the option of creating an eWallet that allows users to consolidate many bitcoin address and store and easily access their bitcoins from any device.

Individuals can create Bitcoin clients to seamlessly increase anonymity (such as allowing users to choose which Bitcoin addresses to make payments from), making it easier for non-technically savvy users to anonymize their Bitcoin transactions.

Although, given that the FBI knows how Bitcoin users can improve anonymity, you should probably assume that the agency is already working on ways to work around these steps, so caveat emptor, Bitcoiners.