Perhaps you are one of those who remember the birth, back in 2008, of Bitcoin. At that time, many were the voices that pointed to the new digital currency as the ‘Internet cash’, long awaited by the ‘cypherpunks’, a currency that could guarantee privacy thanks to the possibility of carrying out transactions between accounts identified by long alphanumeric stringswithout the need to use a single personal data.
In short, as stated by its mysterious creator —Satoshi Nakamoto— in one of the emails that are preserved from him, “participants can be anonymous”. Not surprisingly, dark web black markets (such as Silk Road and its successors) initially adopted it as their primary payment method.
But all those Internet criminals forgot a small detail: although it is true that you can operate with bitcoins without using any name, or ID/passport number, if there is something that makes cryptocurrency transactions stand out, it is because all of them are registered in the unchangeable and 100% public ‘accounting book’ of the blockchain.
And that, if at any time the balance of a bitcoin wallet is used to buy something or to be exchanged for fiat currency, the digital trace will allow – although it requires a lot of research – to link the alphanumeric code with a name and a face.
And it has been that false sense of privacy of Bitcoin that – fortunately – allowed to bring down the largest digital community of pedophiles in the world in 2017in a story now revealed by Wired magazine.
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Chainanalysis, blockchain forensics
All thanks to a company, Chainalysis, that had built its business on the totally transparent nature of the blockchain, in which —unlike what happens with ‘normal’ money— there is no possibility of ‘losing the money trail’.
Quite the contrary, in fact: each new transaction allows to delimit the contacts and the activity of the owners of each account. And if the user being hunted had been especially cautious, there were always ways to goad them into revealing themselves…
…if at any point the money landed on a cryptocurrency exchange (where financial regulation requires users to provide proof of identity), a mere exchange between the investigator and his target was enough to remove any illusion of anonymity.
Added to this was Chainalysis, new techniques to detect when an attempt was being made to ‘tangle the skein’ of the money thread, dividing it among hundreds of accounts, which in turn moved it among hundreds of new accounts.
But every time a transaction led to sending money from several of those accounts to the same recipient, allowed investigators to detect which accounts were still under the control of the same user or organization. Thus, “up to millions of accounts” were linked together.
The dark case of Welcome To Video
Welcome To Video was a website that sold access to an unusually huge (and frequently updated) catalog of child sexual abuse photo and video clips for bitcoin. From a single Bitcoin addressChainalysis software (called Reactor) was able to trace payments from website customers.
All of them had relied on cryptocurrency’s reputation for anonymity and had done little to cover their tracks. In fact, the accounts receiving their payments had settled their contents in a few large transactions on two Chinese platforms (Bithumb and Coinone).
But Chainalysis’s analysis techniques made it possible to do much more than find out where that money had gone: it also made it possible to track who had been buying bitcoins in order to pay for the ‘subscription’ to Welcome To Video. Again, many of them they had been paying for the child porn platform from the same addresses they used to buy the cryptocurrency.
At that point, the bulk of the investigation fell to a US federal agency that does not usually deal with this kind of case: the IRS (Internal Revenue Service). Treasury inspectors do not have to deal with cases of child pornographybut tried to argue that “this was just another case, with a money trail to follow.”
Indeed, there was a huge ‘bug’ on the page that made things easy for the agents: The thumbnail images on the front page of the website pointed to a normal web server, which was not hiding behind the TOR network. A server located outside of Seoul (South Korea). But what mattered more was discovering the producers and consumers of the material:
“You can’t let a child get raped while you go and try to bring down a server in South Korea.”
Finally, the operation led to the arrest of the site administrator and 337 pedophiles (including an American school deputy principal and the husband of a daycare director). In one of the cases, more than 450,000 hours of videos of child abuse were found in the house of one of the detainees.
Some of them later tried to claim that the IRS had violated the privacy of their transactions to illegally investigate them. The judges made it clear to them that, when using bitcoins, they had never had such privacy.