One of the most common misconceptions regarding Bitcoin is that it is anonymous or untraceable, when in fact this couldn’t be further from the truth. Bitcoin is the opposite of untraceable. All of the transactions that have ever occurred in the network are stored in the immutable and public ledger that is the Blockchain.
One could counter with the fact that, despite being public, Bitcoin is still anonymous in the sense that no personal data is required. This is also not true. Bitcoin’s nature is pseudonymous, meaning that one or more pseudonyms are attributed to every user. This pseudonym is the public key or wallet address.
Think of it this way: An unsigned letter is anonymous, but one signed with a fake name is pseudonymous. How does this make a difference? Well, in an anonymous environment, there is absolutely nothing that connects the letter to the author, while in the other case, the pseudonym connects the letter to the author. If this pseudonym is found in another letter, we can always assume the letter is from the same author. With the signature (even if it’s fake), one now has the information not only to link both letters to the author but also to acquire certain pieces of data about his identity.
The same is true for Bitcoin, which despite giving you the option of using as many pseudonyms as you want, usually converges to a few centralized entities like exchanges and brokers, which will have knowledge about your personal details.
Another issue is that, despite being difficult, it is possible to listen for transactions’ relays and log their IP addresses, which can reveal your IP if you’re not using Bitcoin through Tor.
These characteristics make Bitcoin less than optimal for cybercriminal activity and the dark web is beginning to realise this as we can see from markets like Alphabay exploring alternative cryptocurrencies like Monero and Ethereum. Nevertheless, Bitcoin is still the most popular coin by far and while the community has access to tools like bitcoin mixers and decentralized exchanges and while developers are working on anonymous solutions like Mimblewimble, law enforcement also has access to certain companies and tools that help them trace transactions and make arrests. Today, we’re going to list some of the companies that are working on this field and the tools they have built.
One of the most worrying news any cryptocurrency user has seen is definitely the attempt by the European Commission to make exchanges store user IDs and wallet addresses in a central database as an anti-terrorism measure. Of course, this yet to be approved or implemented, but it’s one of the major threats that cryptocurrencies are currently facing.
Several companies are also working to make Bitcoin transactions traceable for law enforcement. The Blockchain Intelligente Group (BIG) launched QLUE in February, platform to aid in the fight against financial crimes involving Bitcoin, which incorporates various techniques and advanced search algorithms to detect suspicious activity within Bitcoin transactions, use of “Dark Web” tools such as Tor, and other methods.
Founded in 2015, Chainalysis is (as the name suggests) another company that focuses on blockchain analysis. It is the leading provider of Anti-Money Laundering software for Bitcoin. Chainalysis focuses on providing solutions for corporations, allowing them to to assess risk in the Bitcoin economy.
However, Chainalysis also focuses on helping law enforcement. They have a partnership with Europol and other international law enforcement agencies and provide web based investigation tools that are used globally to track, apprehend, and convict money launderers and cyber criminals. These tools allow L.E to identify criminal activity, connect victims to criminal revenue and trace the services that criminals use to exchange BTC for fiat or other cryptos.
Numisight provides a publically available app that allows uses to visualize blockchain data, giving them the opportunity to add and remove related transactions from the visual graph provided by the app. Here’s an example of the Numisight app tracking seized coins sold at an FBI auction.
Lastly, we have Elliptic, a company that considers itself “the global standard for Blockchain intelligence”. The company provides tools to identify illicit activity on the Bitcoin blockchain and provides data to financial institutions and law enforcement agencies. Their tech has been effective in major international investigations. They also provide L.E agencies with support in investigations so that these can interpret and act upon the data uncovered.
All of these companies are taking advantage of the pseudonymous nature of Bitcoin and the flaws that cyber criminals commit when making transactions. If you’re a casual user, you probably have nothing much to worry about. Nevertheless, privacy should be a right and not a privilege. If you want to keep your financial info hidden, try using alternative cryptocurrencies like Zcash, Monero or Komodo as these are fully anonymous and their transactions cannot be traced even by the corporations we just talked about – At least for now.