In February this year, he was jailed for three years and six months after pleading guilty to importing 60 grams of cocaine and MDMA via an online store, and possessing 32 controlled weapons. Howard became the first Australian to be convicted of drug importation through online stores such as the Silk Road, a site accessed through what is known as the ''Deep Web'' or dark side of the internet. As investigators discovered, he had used the site 11 times to buy drugs. The following month another 20 people were arrested across the country, and 18 kilograms of drugs, worth $8.2 million, were seized as part of co-ordinated raids on drug imports organised through similar online sites. Almost all these sites conduct trade only in bitcoins. The Australian Crime Commission's acting chief executive, Paul Jevtovic, says the virtual currency's anonymity makes it highly attractive to criminals and money launderers, though little is yet known about how widespread it is in illicit markets. Bitcoin has become of growing concern to the agency. ''The ACC is currently working with partners to explore the Bitcoin market and other digital currencies, to better understand its size and criminal threat,'' he said. Meanwhile, Bitcoin is being used legitimately in Australia for everything from buying meat via online butcher Honestbeef to electronics at Gadget Direct, clothes from Patcht or books from Favoryta.

In just over four years, the virtual currency has gone from a standing start to $US1 billion worth being traded in April this year alone. But while the currency is unstable and fluctuates like commodity prices, the anonymity it offers and zero transaction fees drive its growing popularity, particularly in the badlands of cyberspace. Drugs, child sex material, illegal gambling, guns and even the hiring of hitmen can be found and paid for via sites on the Deep Web, the hidden side of the internet that requires special software to access. The illicit services found in the Deep Web, provided by ''DarkNets'' - secret networks between trusted peers - are paid for with Bitcoins, making the transactions almost impossible to trace. This is going to be one of the challenges that defines modern policing.

NSW Police Minister Michael Gallacher says the phenomenon is causing serious concern inside the state government, with evidence that Bitcoins are being used to buy firearms, child exploitation material, stolen credit card data, forged passports, bomb-making instructions and extremist literature. ''This is without question going to be one of the challenges that defines modern policing,'' he says. ''The conversation has started, DarkNets in particular have been discussed at length at a joint-agency and government level. ''But new technology moves at a much faster rate than government can possibly respond. We're going to need to see some action from the federal government soon before emergent technology gets away from us.'' In April last year, the FBI detected instances of an online game's virtual currency being used to purchase in-game virtual items, which were then on-sold to other players for ''clean money'', in a cycle of exchange that legitimised dirty money. In a similar report in July last year, the Australian Transaction Reports and Analysis Centre, AUSTRAC, the federal agency that charts money flows in and out of the country, warned of the potential for criminals to use online video games and virtual worlds, such as Warcraft or Second Life, with digital currencies such as Bitcoin.

AUSTRAC chief executive John Schmidt warns that digital currencies will become even more attractive to criminal groups as financial regulations tighten. But he says ''funds transferred via digital currencies and virtual worlds will almost always intersect with the traditional financial channels, such as banks and remittance services at some point, whether as physical currency or electronic funds''. Bitcoin transactions are listed in logs or a ''blockchain'' but the users' computer's IP address is not linked to that transaction, making it relatively anonymous if real names or addresses are not used. Hugh McDermott, a Charles Sturt University financial crime expert, said law enforcement is a catch-up game when it comes to technology. Loading

''Criminals have been using Bitcoins for some time because it is not regulated and it's not controlled. There is also a huge jurisdiction issue because it's online. ''We're really behind the eight ball. Eastern European crime groups are big on this, it's the No.1 growth area of money laundering. We need to move quickly with this and need to regulate this growth area,'' he said.