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.
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.
''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.
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