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After meeting with a terrorist released in the Gilad Schalit prisoner deal in Saudi Arabia, 24-year-old Amir Brakhat was expecting $60,000 in cold, hard cash in exchange for launching a terrorist attack against Israelis. Had the Shin Bet (Israel Security Agency) not arrested him, he would have received at least part of that reward from two agents who smuggled thousands of euros and dollars into the West Bank in cigarette cartons, the agency said this week.But what if there had been an easier way to get him the money, one less likely to get caught up in Israel’s web of intelligence and border agents? That’s a fear being stoked by the popularization of bitcoin, a new online currency that is starting to catch on as a means of buying and selling goods online.“The threat is that it’s almost anonymous, it’s very fast and it’s global, so money can be transmitted across the world almost instantly leaving almost no trail,” says Steve Hudak, chief of public affairs for the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury.Bitcoins were born in 2009, when a mysterious hacker using the pseudonym Satoshi Nakamoto wrote the special code behind the currency and then completely disappeared from the Internet. Nakamoto made a limited number of BitCoins – 21 million to be exact – which people could obtain by “mining” them like virtual gold, using decoding programs on their computers to uncover them.The experiment could have easily flopped, but instead people starting digging for, buying and selling the currency. At the start of 2013, the virtual cash sold for $15 a unit. Fueled by an explosion of media exposure, including a feature in The Economist and a New York Times article pegging the Winklevoss twins of Facebook litigation fame as enthusiastic investors, the price reached a high of nearly $266 last week before crashing over the weekend.“Its value as a currency is kind of overshadowed by its volatility,” says Hudak. “In some ways it acts like a commodity.” Yet the currency has already climbed back up to $85, a price that values the hacker experiment at well over $1 billion.BitCoins are not the first virtual currency, nor are they the first to raise concern about illicit transactions.Internet gamers in Second Life use Linden Dollars to buy online wares, and WebMoney and Liberty Reserve are both means of transferring funds over the web.“Every system that deals with payment can be an opening for terror finance, and that’s the trouble: distinguishing between legitimate and terror finance transactions,” says Col. (res.) Jonathan Fighel, senior researcher at the International Institute for Counter-Terrorism.“The principle is very simple. It’s a payment through the Internet, not the bank, so there’s no regulatory infrastructure following the monetary transactions.” The popular Internet payment system PayPal, Fighel says, is also a possible means for sending illicit funds, though he admits he’s not aware of specific cases in which terrorists have used it.Bitcoins, however, are unique in that they are completely decentralized.Instead of some clearinghouse tracking who is in possession of how many BitCoins, users buy and sell them directly to one another in “peer to peer” (P2P) transactions.That unusual feature, which makes BitCoin transactions a lot like virtual exchanges in cash, has already caught the interest of law enforcement agencies.Last April, the FBI wrote a report that leaked onto the Internet citing the dangers posed by the new online currency.“Bitcoin is unique because it is the only decentralized, P2P, networkbased virtual currency. The way it creates, operates and distributes bitcoins makes it distinctively susceptible to illicit money transfers.” Iran, for example, could theoretically transfer loads of cash to Hamas instead of smuggling bags of cash through hostile territories, as it has done in the past.Even though the currency is not anonymous per se, the report noted how users could take simple steps to cover up their transactions, such as changing their bitcoin addresses for each incoming payment, using a web anonymizer and storing their currency in a third-party e-wallet service.The FBI listed “money launderers, human traffickers, terrorists and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers” as those most likely to take an interest in Bitcoin’s vulnerabilities.Indeed, a flurry of criminal activity has already been associated with bitcoins.It’s the sole currency used to buy and sell illegal drugs on an online forum called Silk Road, buyers and sellers of Internet malware, bots and spy tools trade with it, and a variety of criminals use it in online games to launder money.So what can governments do to keep bitcoins out of the hands of terrorists and other criminals? According to Hudak, they are already finding ways to regulate the new currency.“Part of the challenge is the anonymity, but the good part is that somewhere, someplace, virtual currency needs to be exchanged for real currency to have any value, other than a very small marketplace where you can maybe buy some things online,” he says. “The activity of exchanging virtual currency for real currency falls under our regulations.”In other words, even if the currency is unregulated, those entities that buy and sell it for real cash can be overseen using existing laws. Companies that create virtual wallets for storing bitcoins, then, are required to notify authorities of transactions worth over $10,000 in cash or a series of transactions that appear suspicious, just like a bank or other financial institution.International cooperation through bodies like the Financial Action Task Force (FATF) and intelligence are an important tools as well, says Fighel.The FBI report agreed that, at least for now, bitcoin’s limitations as a virtual currency constrained its potential damage. “Since maintaining anonymity while using Bitcoin requires that users not exchange or transfer their bitcoins using third-party bitcoins services that require real world account information, the use of bitcoins to make donations to disreputable groups [which can be done within the Bitcoin P2P system] will likely remain one of the most popular uses for the virtual currency,” it predicted.Like other online experiments and innovations, bitcoin may not ultimately survive, though its success thus far suggests that there is a demand for some online currency – and there are already competitors waiting in the wings. Whichever one ultimately takes its mantle, however, will likely present similar challenges to law enforcement and counter-terrorism officials.“FinCen agrees that there’s a threat with cyber currencies,” says Hudak, noting that the marketplace for bitcoin and its competitors remains small. “But,” he warns, “it has potential to grow.”