Saturday, March 17, 2018

Old News In The Latest News: Criminals Don't Prefer Bitcoin

As increasing regulatory scrutiny is directed at Bitcoin, something that those of us who have been involved in cryptos for a long time know about is finally starting to creep into the awareness of the major financial media: criminals don't prefer Bitcoin.

One of the constant attacks levied at Bitcoin by critics who do not actually study what they're criticizing is that it's a tool for criminals, terrorists, and North Korea to launder money.

At one point, it was, no doubt. This is because names are not explicitly attached to Bitcoin wallets, and wallets can be generated anonymously. Instead, Bitcoin wallets are in essence "numbered accounts." A key difference between a classic numbered account and the blockchain within which Bitcoin wallets reside is that there is no central authority who actually knows the identity of the owner of such an account, who is charged with keeping that information secret.

However, unmasking the identity of a Bitcoin account owner is possible to do with associations between wallets, by tracing transactions between wallets with known owners and other wallets with which a known wallet has conducted transactions. All of this is publicly available information on the blockchain, and it always has been.

For example, here's one of my wallets, which I have posted to this blog before:


Now that the world knows that I am the owner of this wallet, it's possible to begin tracing my wallet's association with other wallets. In this case, you can see that this wallet has only ever received spends from other wallets. Most of these sending addresses trace back to Coinbase, and maybe a few to Gemini, where I was purchasing Bitcoin prior to storing it here in my paper wallet. 

So then, if I were suspected of conducting illegal activity of some sort, investigators could use this information to trace relationships between me, others suspected of the same crimes, and Bitcoin wallet addresses we had interacted with in common. As more and more of these associations are detected and mapped out, it becomes increasingly likely that the owner of a particular wallet can be unmasked. There are now many software tools that make this process even easier.

Basically then, Bitcoin was only ever "anonymous" when it was relatively new and no one had begun to map out the associations between wallets. But owing to the antics of people who used Bitcoin's early pseudo-anonymity for illegal activities, the attention and resources of law enforcement agencies were focused on it and that pseudo-anonymity quickly went away.

So while "anonymous Bitcoin" has never really existed, the myth has persisted. Finally, it appears that the reality of the situation is coming to light. Anonymous cryptos do exist, and that is actually where criminal enterprise shifted to a long time ago:

"According to a recent report, illicit activity that is typically associated with bitcoin is on the decline, with the cybercrime industry and money launderers moving away from bitcoin to so-called privacy coins, like Monero—coveted by the underworld for the anonymity of transactions—luring away those who once turned to bitcoin for such features.

“It was clear from this research and from other sources that Bitcoin’s moment in the criminal sunshine may be declining in favor of other types of VC,” officials at virtualization-based security firm Bromium wrote in a recent news briefing on cryptocurrency usage.

“One reason why criminals avoid Bitcoin relates to the transparency of the blockchain and the increasing number of tools for detecting how funds are transferred via bitcoin wallets,” Bromium wrote." -- A. Hankin
Monero (XMR) is one of a few so-called "privacy" coins that were built to do something that Bitcoin does not: completely hide the identity of wallet owners (I own a little bit of Monero, which I have mined with spare CPU cycles on my several computers using Minergate). Law enforcement agencies can pick off individual Monero wallet owners, but that would only be because they had seized equipment upon which said owner had a Monero wallet. Beyond that, the trail runs cold, because Monero and other cryptos like it scramble the identities of other wallets with which a particular one has sent and received spends (it even disguises amounts of Monero sent between wallet addresses, taking away all possible "bread crumbs" that could conceivably be used to map out relationships between entities).

It's good to see this information finally getting out there in front of a broader audience. The criticism, "Bitcoin is used by money launderers and blah blah blah" has force in that it can convince those who are not yet involved in cryptocurrency that they should stay away from it. Never mind the fact that the same criticism can be levied against the U.S. Dollar and that these same people would not stop using it; the fact of the matter is that they are already familiar with the USD and really can't stop using it, and that it's simply not relevant what someone else does with their units of USD to an individual's moral character. All the same, perceptions drive decisions, both personal and of public policy, so a misguided perception that Bitcoin is a tool of crime will be reflected in the actions taken in both spheres, which then is reflected in the price of the commodity. Greater awareness of what has been stated here, that those days are more or less behind now for Bitcoin, will in time bring more people into the space.

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