The growing use of digital currency like Bitcoin is worrying Costa Rican authorities, warning that organized crime can make use of it to move millions of dollars without controls.

Digital currency, not to be confused with virtual currency, among its various names, is electronic money that acts as alternative currency. Currently, alternative digital currencies are not produced by government-endorsed central banks nor necessarily backed by a national currency.

One of the advantages of digital currency like Bitcoin — a cryptographic currency popular on the internet — is its anonymity. That means that, although it has plenty of legitimate uses, it is also favoured by of those who wish to buy drugs online, for example or keep their transactions away from the watchful eyes of authorities.

It differs from virtual money used in virtual economies due to its use in transactions with real goods and services; not being limited to circulation within online games. Earlier digital currencies are often backed by a promise to pay a set amount of gold or silver bullion in exchange for each of its units. Others float against whatever individuals are willing to exchange for it.

Unlike other currencies, digital currency like Bitcoin is not based on sovereign fiat or piles of metal. Rather, it relies on a cryptographic process that requires ever-increasing amounts of computational power to produce new units of the currency.

A cryptocurrency is a type of digital currency that relies on cryptography, usually alongside a proof-of-work scheme, in order to create and manage the currency. Cryptocurrencies are peer-to-peer and decentralized, and are currently all based on the first cryptocurrency, Bitcoin.

The entire thing is based on public-key cryptography, in which a combination of a freely-available “public key” and a secret “private key” allow each owner to keep his funds secure while enabling payments that are irreversible.

The anonymity of transactions was at work in the case of Costa Rica’s Liberty Reserve, a company linked to the largest money laundering operation in the world.

For Costa Rica’s financial regulator, the Superintendencia General de Entidades Financieras (Sugef), the increasing use of digital currency, like Bitcoin, is concerning as there is no “uniformity” on the methods to control it.

Digital currency can easily be used in money laundering, terrorist financing and even scams, like “pyramids” or ponzi schemes and the like, warn police authorities and financial experts in Costa Rica.  It could even have important implications in monetary variables for the economic stability of a country.

Francisco Segura, head of the Organismo de Investigación Judicial (OIJ) – Costa Rica’s judicial police body – told La Nacion that “behind the digital currency there are criminal organizations that trade in the black market”.

Segura added that the OIJ know of these movements, but so far there the only recorded case is that of Liberty Reserve.

For Carlos Alvarado, head of the Instituto Costarricense sobre Drogas (ICD) – Costa Rica’s Institute on drugs – the lack of regulation could lead people to losing everything overnight and with no support.

Worrisome to Costa Rica’s police authorities is not knowing who is making these types of transactions.

The growth of digital currency like Bitcoin is that more and more people these days experience their money transactions as numbers on a computer screen.

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