

While bitcoin startup founders, venture capitalists and other advocates heralded the benefits of evolving virtual currencies on the first day, law enforcement officials struck back on the second day with warnings of the dark side of bitcoin and its many alternatives, or altcoins.

Two days of hearings on virtual currencies before New York State’s Department of Financial Services ended Wednesday with few surprising comments.

Possibly the most welcome news from the hearings for bitcoin proponents is the seemingly open-minded initial stance by Benjamin M. Lawsky, New York State’s first Superintendent of Financial Services, who has said he doesn’t want to overly restrict what could be the source of a promising innovation hub for his state.

But Lawsky is fully aware of the leadership role he is undertaking as the first state official in the nation to create a regulatory framework specifically addressing virtual currencies.

“No industry should be defined entirely by its bad actors. But it’s very clear that there are serious and documented dangers about the use of virtual currencies to subvert critical anti-money laundering requirements,” Lawsky said in his opening statement.

Law enforcement representatives Wednesday cited their biggest concerns with the surging popularity of virtual currencies, including their potential for tax evasion and the ability of bitcoin technology to obscure transactions — primarily as it relates to money laundering.

They dismissed arguments from bitcoin advocates that their successful crackdown of some criminal networks, particularly those associated with Silk Road and Liberty Reserve, shows that the bad actors in virtual currencies can be caught. They countered, however, that the prosecutions only show there are probably many other illegal operations brewing.

“Without stronger government oversight, we are allowing cybercriminals, identity thieves, traffickers of child pornography, and other malevolent actors to operate in a digital Wild West,” Cyrus Vance Jr., the district attorney for Manhattan, said at the hearing Wednesday.

Vance and Richard Zabel, the deputy U.S. attorney for the Southern District of New York, recommended that virtual currencies get tougher regulations than those tied to the movement of official or “fiat” currencies.

“One aspiration with Bitcoin is for it to be a main artery of the commercial world,” Zabel said. “Its intrinsic qualities mean it needs to be treated differently.”

The anonymity of bitcoin transactions drew much criticism from Vance and Zabel.

They emphasized the practices of Bitcoin “tumblers,” operations that accept a Bitcoin payment, and then reissue the virtual currency utilizing other addresses to create an anonymous digital trail, making the source of the initial deposit nearly impossible to trace. Some bitcoin enthusiasts favor this process for privacy reasons, but law enforcement calls it a “Bitcoin laundry.”

“In the cases I have seen they serve no other purpose than automated money laundering and identity concealers,” Zabel said.