Why Bitcoin is Better for Crime Fighters Than Criminals

OPINION
Jason Weinstein
Apr 4, 2016 at 19:00 UTC  |  Updated  Apr 5, 2016 at 14:11 UTC

Jason Weinstein is a partner at Steptoe & Johnson LLP and a former deputy assistant attorney general in the Department of Justice in charge of cybercrime and organized crime. He is the Director of the Blockchain Alliance and a member of the advisory boards of the Chamber of Digital Commerce, Coin Center and BitFury

In this opinion piece, Weinstein discusses why he believes the misconception that bitcoin is "anonymous" has hidden the fact that the technology actually better meets the needs of law enforcement.

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Here's a newsflash: Bitcoin has an image problem.

If you ask the average person what words come to mind when they think of bitcoin, three of the most common responses will likely be "anonymous", "untraceable" and "a currency for criminals." But all of these common ideas about bitcoin are actually misconceptions.

In fact, every single one of them is wrong.

This may just be a problem of perception, but it can have very real consequences, as it can impact the attitudes of investors, lawmakers, regulators, enforcement agencies and the public toward this technology.

We need to deal with these perception issues head-on.

New twist, old problem

Any technology worth adopting is adopted early by criminals. But, law enforcement has a long history of adapting in order to pursue criminals or terrorists who use "new school" technology to commit "old school" crimes.

They've done it over and over again.

From pagers to burner cellphones to email to online chat to mobile devices to PayPal, just to name a few examples, law enforcement consistently has had to evolve as new technology designed for legitimate purposes is used to facilitate criminal activity.

There are many examples of this phenomenon, but perhaps none greater than the Internet itself. And perhaps the greatest challenge for law enforcement in investigating crimes involving the Internet is – wait for it – anonymity. Indeed, the problem of attribution – often referred to as "putting fingers at the keyboard" – is the most difficult part of any investigation of crime facilitated using online means.

Every day, agents and prosecutors have to figure out ways to tie a string of numbers and characters – whether that's an ICQ chat name, IP address, MAC address or even an email address – to a particular human being. That process is made harder when that human being uses multiple IP addresses or chat names or adopts anonymizing techniques such as proxies or TOR.

It also doesn't help law enforcement with attribution that Web-based communications providers don't have 'know-your-customer' requirements, so agents can't necessarily have confidence in the accuracy of whatever user information is on file.

Yet, agents and prosecutors work to overcome those challenges with great success, and the solution often lies in analyzing data from multiple sources to try to zero in on the particular bad actor.

Bitcoin presents just the newest twist on that old problem.

It's ironic that even though criminal and terrorist use of the Internet is rampant – and was from the very beginning – nobody thinks of the Internet as the "network of criminals".

Instead, people think of the Internet as a place where we all work, shop, socialize, communicate, consume entertainment and learn. But it's a measure of the extent of bitcoin's image problem that every time a cybercriminal commits a ransomware or other cyberattack and happens to use bitcoins as a medium of payment, the case is characterized by the press and policymakers as a bitcoin problem and not an Internet or cybercrime problem. (For more on this issue, see Peter Van Valkenburgh's excellent post at Coin Center).

The attribution challenge presented by bitcoin is far from unique. What is unique is that bitcoin actually provides some attribution advantages.

So wait, it's not anonymous?

It's often said that bitcoin is not really anonymous, but rather pseudonymous.

What that essentially means is that a user's bitcoin address is like an account number that stays with the user; if you can connect that address to a user, you can identify and trace all of the transactions in which that individual has participated using that address.

Indeed, if the individual uses an exchange or wallet service to access the blockchain, then the bitcoin address is essentially like a bank account number, because the exchange or wallet service will maintain records linking the address to a particular individual, much like a bank maintains records establishing the owner of a bank account.

That's not a perfect analogy, because one individual could have any number of bitcoin addresses, but is likely to have a limited number of bank accounts.

But as with banks, law enforcement would be able to obtain information about the address user by serving a subpoena or other lawful process. That's one of the reasons we have seen, and will continue to see, enforcement actions taken at the "on ramps" and "off ramps" of the blockchain – to incentivize exchanges and wallet services to maintain compliance, so data will be there when law enforcement serves the subpoena.

But what if someone obtains bitcoins through a source other than a licensed exchange? What if the individual uses techniques for enhancing anonymity – like multiple addresses, or mixing services? Even then, the individual is not truly anonymous.

Of course, the individual may leave a trail when exchanging bitcoins (however obtained) into fiat currency. But the individual may also leave a trail while engaging in transactions on the blockchain.

There are existing and rapidly improving techniques to help link those users to their bitcoin addresses and transactions using, among other things, analysis of transaction patterns to make connections among multiple addresses used by the same individual; mining (no pun intended) of data from social media and public sources; and analysis of IP addresses used to conduct transactions.

As for mixing services, individuals who rely on them are making a leap of faith, trusting that the service won't cheat them and that the service isn't keeping records that could be obtained by law enforcement. And of course, the bitcoins you get back from the service could themselves be dirty and be on law enforcement's radar.

And here's the real attribution advantage: the traceability, searchability, and permanence of the blockchain.

Whether a law enforcement agent identifies the owner of an address tomorrow or two years from tomorrow, the agent will then be able to trace back every transaction involving that address, all the way back to the beginning.

Moreover, because the ledger is publicly accessible, law enforcement does not have to worry about what type of legal process is required to access the data. And because the ledger is borderless, law enforcement can get the data without having to go through a foreign government. That gives law enforcement the data it needs to "follow the money" in a way that would never be possible with cash.

Law enforcement is still getting up the learning curve on bitcoin, although the case against Carl Force IV, the former DEA agent convicted of stealing bitcoins during the Silk Road investigation, demonstrates that even at this early stage, law enforcement has already developed an impressive capacity to follow the money using the blockchain.

And law enforcement's capabilities in this area will only improve over time, particularly as new analytics tools are developed.

Of course, innovators are coming up with new ways to increase privacy, whether on the bitcoin blockchain or through other types of cryptocurrencies, so law enforcement will continue to have to evolve and adapt to meet the challenges of new technology.

In the early days of commercial use of the Internet, law enforcement agencies got help from Internet companies to help them learn how the technology worked, so they could improve their capacity to go after criminals who misused that technology to facilitate their crimes. That effort went a long way toward dialing down concerns about the Internet. And through the Blockchain Alliance, we are trying to do the same thing for the blockchain.

The more people learn about bitcoin, the more they will realize that it's friendlier to cops than it is to criminals. So if we put concerns about bitcoin in historical perspective, and if we confront fiction with facts, we can change these common misperceptions.

That's an important step on the road to "making blockchain real".

Jason Weinstein is speaking at Consensus 2016 in New York. Join him at the Marriott Marquis from 2nd to 4th May. A list of the event speakers can be found here.

Lie detector test via Shutterstock

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