Does Bitcoin enable crime?

Bitcoin started as a network of few people exchanging digital currency. But, over the years it gained popularity and grew into an international phenomenon. Along with that, the value of Bitcoin also increased exponentially.?

Why would the governments get involved with Bitcoins and other digital currency?        

Problem: Unchecked flow of cash

Governments started noticing Bitcoin since it enabled the flow of untraceable digital cash in and out of the financial system. People can buy Bitcoins using local currency, transfer those Bitcoins to people residing in other countries where they can simply sell it back in exchange for currency in their own country.

How can the governments control this free flow of capital?        

Solution: Disconnect Bitcoin from the financial system

One way the governments can regulate free flow of Bitcoins is to regulate the local exchanges. You can move Bitcoins from people to people pretty easily, but when you have to convert it into dollars or your local currency, you need to go through an exchange.

Bitcoin exchanges are regulated the same way as Banks. You would need to provide quite a bit of your personal information to open an account on a Bitcoin exchange. Any profit you make would be reported to the government for tax collection.

Problem: Crime

Another reason why the governments might worry about untraceable digital cash is that it makes certain kinds of crimes easier. In particular, the crimes like

• Kidnapping and extortion – The criminals who demand the money in Bitcoins where it becomes extremely difficult for law enforcement to follow the money
• Ransomware – Hackers can operate from remote locations across borders and demand money in Bitcoins which they can convert to local currency later
• Tax evasion – People can hide sources of income when they get paid in Bitcoins.
• Sale of illegal items – Sale and purchase of banned items can potentially be easier when the parties involved can remain anonymous. A good example of that was SilkRoad until it was shut down in 2013. It was essentially the ebay for illegal items.

How can the law enforcement tackle this problem?        

Solution: Breaking the anonymity in Bitcoins

Bitcoin transactions are not anonymous in the true sense of the word. Yes, anyone can create several public Bitcoin addresses and do transactions in the Bitcoin network and not reveal their real name. But you still have those public addresses available on the blockchain. In computer science it is called “Pseudonimity”, meaning your real name is not revealed, but an identifying marker is available. However, this identifying marker is unlinkable to your name.

This is not very different from a lot of infrastructure you are already familiar with. For example, in Reddit, you can create a long term pseudonym and use it for posting in the forum. You can create as many as you want and it won’t be tied to your real name.

In practice, most Bitcoin users use different addresses for each transaction. So that even if someone figures out the identity of one of the addresses, they won’t be able to link that person to the other addresses that he or she uses.

But, there is a way to link some of these transaction, at least statistically. Let’s take an example. Alice has 4 bitcoins in address A and 5 bitcoins in address B. Now, if she wants to buy a TV for 9 bitcoins, she needs to create a transaction that combines address A and address B and send it to the TV merchant. This transaction will be recorded on the public blockchain. Anyone who analyses the blockchain can now know that both address A and B, belongs to the same person. However we still cannot link it to Alice.

If we continue the above analysis, we can come up with a graph of related address. Then, patterns emerge for businesses that constantly deal with Bitcoins

When law enforcement is tracking the Bitcoins used in a crime, they can use this information to identify a business that accepted those ransom coins and continue the money trail from there.

Another way for law enforcement to go after the identity of criminals is to monitor the network itself. On a peer-to-peer network, if you control or monitor a lot of nodes, you can statistically predict the IP address of a transaction that is appearing on the network. Sometimes a computer sent out information about only one transaction, meaning that the person at that IP address was the owner of that Bitcoin address. And sometimes a surge of transactions came from a single IP address —probably when the user was upgrading his or her Bitcoin client software.?

A real-life example – Silk Road

Now, let’s looks at a real-life example.

Silk Road was an online black market, best known as a platform for selling illegal drugs. It was operated as a Tor hidden service, which means online users were able to browse it anonymously and securely without potential traffic monitoring. The website was launched in February 2011 and currency of choice was Bitcoins.

Ross William Ulbricht, from Austin, Texas, was the mastermind behind the creation and operation of this service. Ulbricht's online pseudonym was "Dread Pirate Roberts" after the fictional character in the novel The Princess Bride.

Ulbricht was first connected to "Dread Pirate Roberts" by Gary Alford, an IRS investigator working with the DEA on the Silk Road case, in mid-2013. The connection was made by linking the username "altoid", used during Silk Road's early days to announce the website, and a forum post in which Ulbricht, posting under the nickname "altoid", asked for programming help and gave his email address, which contained his full name. In October 2013, Ulbricht was arrested by the FBI while at the Glen Park branch of the San Francisco Public Library, and accused of being the "mastermind" behind the site.

To prevent Ulbricht from encrypting or deleting files on the laptop he was using to run the site as he was arrested, two agents pretended to be quarreling lovers. When they had sufficiently distracted him, according to Joshuah Bearman of Wired, a third agent grabbed the laptop and handed it to agent Thomas Kiernan. Kiernan then inserted a flash drive in one of the laptop's USB ports, with software that copied key files.

On February 4, 2015, Ulbricht was convicted on counts of money laundering, conspiracy to commit computer hacking, and conspiracy to traffic narcotics. He was sentenced to double life imprisonment plus forty years, without the possibility of parole.

Conclusion

In a perfect system it would be nice to keep the anonymity of “good” users of the system and prevent the “bad” users from being anonymous.

The biggest bottleneck is that technology cannot distinguish the good users from the bad users. Also, good and bad are often subjective, depending on the view of the government and the cultural sensitivity of the people in the society.

Yes, Bitcoin is anonymous, and it can enable crime. But it is not that different from using cash. However, Bitcoin has the advantage that it is backed by a technology that can be tweaked in the future to close some of these loopholes that enables crime.