The Federal Bureau of Investigation (FBI) is worried about the anonymous Bitcoin payment network and its potential to become a haven for criminals for illegal activities like money laundering and hacking, according to a recently leaked internal FBI report.

The FBI report, titled Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity, was published April 24. Although made for official use only, it was somehow leaked to the Internet Wednesday.

In the report, the bureau expressed its concerns about the complexity of tracking down the identity of anonymous Bitcoin users. But along with that, it also released some tips for Bitcoin users to help them further protect their anonymity.

Bitcoin is unique because it is the only decentralized, P2P network-based virtual currency. The way itcreates, operates, and distributes bitcoins makes it distinctively susceptible to illicit moneytransfers, and manipulation through the use of malware and botnets, said the report.

According to the report, thanks to cryptography and its peer-to-peer architecture to avoid a central authority, it's difficult for law enforcement agencies to identify suspicious Bitcoin users and get their transaction records. This anonymous payment network allows people to complete a transaction without having to know anything more about each other, except from a unique 36-character string of numbers and letters - Bitcoin addresses or accounts.

As Bitcoin itself claimed, as of April, 2012, there were more than 8.8 million bitcoins in circulation with a value of about $4 and $5 per bitcoin. The FBI said it its report that the Bitcoin economy was worth between $35 and $44 million, The Wired reported.

This is where the threat of criminal exploitation lies.

If Bitcoin stabilizes and grows in popularity, it will become an increasingly useful tool for various illegal activities beyond the cyber realm, the FBI writes in the report.

For instance, child pornography and Internet gambling are illegal activities already taking place on the Internet which require simple payment transfers. Bitcoin might logically attract money launderers, human traffickers, terrorists, and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers.

Although Bitcoin transactions are almost anonymous, they are published with the user's IP address. Therefore, if a user uses Bitcoin service without a proxy to hide his IP address, he is at risk of being exposed by authorities.

But curiously, the FBI report provided a bullet-point list of ways showing how Bitcoin users can protect 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 user to choose which Bitcoin addresses to make payments from), making it easier for non-technically savvy users to anonymize their Bitcoin transactions.

The FBI report, however, said that the biggest threat for Bitcoin users was not authorities identifying them, but hackers who could rob their virtual Bitcoin wallets dry.

There have also been cases of hackers attempting to use botnets to generate bitcoins on compromised machines, The Wired reported.

You can find the leaked FBI report here.