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Comment by kgwgk | Hacker News Reader

Matt Levine, today:

‘One of the weirdest things in recent financial/criminal history is that for a while people really believed that Bitcoin, an electronic payments method that creates a permanent, traceable, public record of all transactions and links them to identifiable accounts, was somehow a good way to pay for crime. “It’s completely anonymous,” people thought, “like digital cash, but you can send it anywhere and no one will be able to trace you.” Not really! I suppose it was even true for a little while, but eventually law enforcement agencies figured out how to trace Bitcoin transactions, and then the fact that years’ worth of criminal financial transactions were just forever openly available to them on the Bitcoin blockchain was … bad for criminals.‘

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I wonder if the media around BTC being anonymous and untraceable was actually encouraged by the intelligence community and law enforcement. It's certainly been a boon for tracking down a lot of criminals.

In that spirit, Levine ends his comment as follows: ‘Do you think maybe Satoshi Nakamoto works for the FBI, and invented Bitcoin as a way to get criminals to make a convenient permanent record of their transactions?’

The idea that Satoshi is not one person but a group at the NSA has been going around for a long time.

I don't think it's likely true but it's an entertaining gedanken experiment.

Now that is a movie script that almost writes itself

I seriously doubt it. Remember, "never ascribe to malice that which can be adequately explained by incompetence or stupidity." Our law enforcement community isn't that bright or long-term thinking. Plus, once criminals get it through their thick skulls that BTC really is traceable after all, they won't use it any more.

But if the opponent knows you subscribe to this rule (assume ignorance over malice), couldn't they take advantage of this?

The aphorism does not call upon you to assume good intentions, but to avoid attempting to establish intention when it has no benefit to solving the problem noted.

Yes, there is no stable state of the system in which ignorance and malice are assessed accurately. If you don't want the rate of malicious action to increase, you need to overdiagnose it.

I doubt it too, but dislike the meme you cited. Intelligence agencies are very much capable of producing elaborate, long term plans and are quite good with crypto. They could introduce it to the world without cooperation or coordination with regular law enforcement. Not saying that they did.

I have never heard a convincing argument for your quote and would like everyone to at least consider malice when the situation warrants it. Maybe "follow the money" would be an equally valid, but contradictory heuristic to deal with unclear situations.

Given how inaccurate the average news media is at everything else what makes you think they would need to encourage that?

You can use Bitcoin anonymously, but it's like using the web anonymously i.e. it takes a lot of effort and a single mistake screws it up.

> You can use Bitcoin anonymously, but it's like using the web anonymously i.e. it takes a lot of effort and a single mistake screws it up.

I don't really get it, but you have a "money out" problem like any fraud.

Even if you buy bitcoin in untraceable in cash, you transfer it to wallets, you have two eventual issues. You'll either buy something and ship it to yourself, or you'll need to get real cash out. The former leaves a vendor ready to give you up, and the latter only works with exchanges that have your ID.

Am I missing something?

You can sell Bitcoin in person for cash.

Is there a big enough cash market for it to be worth "criminal enterprise" level money?

I'm not sure what you're defining as "big enough" here, but localbitcoins.com shows verified, well-reviewed people in my smallish city that would be willing to do up to $30KUSD in one transaction.

If they don’t require an ID card from their cash receiver.

The kind of people you're transacting Bitcoin for cash with definitely don't want to check ID, just the opposite. They likely don't want you to know who they are either.

And now that person knows exactly who you are.

Then the feds find the guy you sold to when they try to sell them on Coinbase. And that person knows your e-mail, number, what you look like. You had to get the coins to them somehow.

Actually, that is kinda scary. The bitcoin I just got for selling a shirt could be one transaction away from child pornography. And it is all in a pubic database.

I'm assuming someone looking to launder a large quantity of BTC wouldn't spend it all on individually purchased shirts. But who knows.

Cash sales of cryptocurrency.

>> You'll either buy something and ship it to yourself

You will?

Also, you have an infinite number of trivially easy to make BTC wallets that are not registered to anyone. That's how you can make it anonymous.

> Also, you have an infinite number of trivially easy to make BTC wallets that are not registered to anyone. That's how you can make it anonymous.

That's not a problem. The problem is that if you are not trading with yourself whoever gets your bitcoins has a connection between a physical "you" and and a wallet that "you" used to transfer money. Now the opsec of the transaction depends not only on "you" but also on opsec of that other person. Eventually someone in that path decides it to cooperate with whoever leans on them in the real, not bitcoin world and the security of that stage is blown. Repeat until "you" is discovered.

I feel like I'm missing an obvious point here, could you possibly help me?

Evil Criminal Mastermind amasses wealth in BTC. --> They have that BTC in a wallet. --> The Feds know that Dirty Money has gone to that wallet's address. --> ECM makes a new wallet, transfers BTC to it. --> Feds know that BTC went from wallet A to wallet B.

However many wallets Evil Criminal Mastermind makes, they're still going to be traceable by the Feds, right?

>> However many wallets Evil Criminal Mastermind makes, they're still going to be traceable by the Feds, right?

Yes, if:

>>ECM makes a new wallet, transfers BTC to it.

But if ECM initiates a new wallet with cash or other methods and doesn't tie their identity to it, then no.

> The Feds know that Dirty Money has gone to that wallet's address

They don’t. A wallet can have infinitely many addresses with nothing linking them together externally - only the holder of the wallet knows they’re related.

Think of a Bitcoin wallet as macOS’ Keychain or a LastPass account - and a Bitcoin address as the login credentials of each site you visit: provided you use a distinct login for each site, each site owner has no idea what other sites are in your LastPass/Keychain store.

Similarly: provided you use a new address for each bitcoin transaction then people you transact with have no knowledge of other transactions you’ve had.

People do often reuse addresses - however. Creating new addresses is free and instant - but consolidating your funds becomes a pain, especially if you have a lot of low-value transactions where the amount associated with each address would be eaten-up by the bitcoin network’s transaction fees.

And dumb criminals reuse addresses too - sometimes you see those “I have your password, send me bitcoin” emails using leaked passwords - and they all use the same (or a small number of addresses) - if this scam was run better they’d generate a new ransom address for each mail recipient. And I think that’s how they busted the operator and customers of the website in question: because they used a single address to receive funds at.

Ohhh, that makes much more sense. Thank you!

You could trade your Bitcoin for Ethereum with A and then trade Ethereum with Bitcoin with B and you get back Bitcoin that can't be digitally tied back to your original source.

Or Monero/other privacy coins to increase the gap.

And where are you going to trade your Bitcoin for Ethereum and vice versa?

It may not be traceable directly through the blockchain(s), but the exchange destination will be, and they're almost certainly going to be complying with local laws which means they'll respond to a subpoena for data and give law enforcement whatever info they have on you, and most exchanges require KYC verification to handle any significant amount of funds.

If you can buy bitcoin in untraceable cash, you can sell it for untraceable cash. Also, you can (could) convert traceable payments to your electric utility and computer hardware to mining efforts that couldn't be linked to your power bill.

The problem is that most people don't do either of those things, instead, they buy and sell it at exchanges with very traceable credit cards.

The problem with exchanging BTC for untraceable cash or vice versa is the people you would be dealing with are probably criminals who are not above robbing you of your BTC and/or cash.

Iirc there is a bitcoin “atm” somewhere in my city

If the cash loaded into a bitcoin "atm" is legal, it's traceable. If it is illegal then your results may vary, most likely to your financial and legal detriment. If you think a bitcoin "atm" is a solution to this problem then hopefully your lawyer accepts bitcoins.

Every Bitcoin ATM I've seen here require you to look into the front-facing camera and insert/swipe ID.

An easy solution to that is to find a homeless person nearby and use fake IDs -- i.e. bribe someone else do the transaction instead of you

Aren't there bitcoin mixers? Where like, 100 people put in x number of bitcoins, they get combined into one wallet, then x bitcoins are sent to 100 new wallets? That makes it so you don't know which of the hundred new wallets is tied to the one input wallet?

And 100 people just joined a criminal conspiracy...

It would be an interesting legal case... you would have to demonstrate that the other participants in the mixing should have reasonably knew that the other participants were laundering money.

https://www.coindesk.com/eu-authorities-crack-down-on-bitcoi...

Have they gone after any of the users of the mixer?

What criminal conspiracy? Using a mixer is not a crime. There is no communication with other users of the mixer. There is no crime being planned.

Interestingly, as far as I understand it, the bitcoin protocol does not technically allow bitcoins to be combined, only split. The blockchain records transactions (balance transfers, basically) sourced from other transactions, so any output of the mixer wallet is conceptually traceable right through the mixer back to the input wallet[1]. There is an explicit link in the protocol.

Now, the rules of operation of the mixer may (and in practice, definitely do) invalidate that link in reality, but it still exists in the protocol and can be the subject of legislation.

[1] For example, if the mixer wallet is created with nothing and receives 100 BTC from 8 other wallets, there's no record that looks like "Mixer Wallet: 100 BTC". Instead, there's a set of records that looks like this:

    Mixer received 52 BTC from tx 5d41 [which deposited 2,000 BTC in Kingpin]
    Mixer received 20 BTC from tx 402a [which deposited 20 BTC in Whore]
    Mixer received 10 BTC from tx bc4b [which deposited 100 BTC in Hitman]
    Mixer received 13 BTC from tx 2a76 [which deposited 2,000 BTC in Kingpin]
    Mixer received  5 BTC from tx b971 [which deposited 8 BTC in Smuggler]

And payouts from the mixer create records that are in turn explicitly sourced from those. This mixer can't pay out more than 52 BTC in a single transaction, because that is the largest single amount it received.

I think the idea is you'd have mixers for each denomination e.g. 5 BTC, 100 BTC, etc, and you'd just send that amount so everyone gets the same payout and you can't tell clean coins from dirty.

Which IMO just makes everyone liable, the law usually doesn't look favourably upon intentionally tricky bullshit.

The denomination doesn't mean much. When the mixer pays out 5 BTC, it must source those 5 BTC from a transaction that gave at least 5 BTC to the mixer. In the example, that's all of the transactions, but if you wanted to pay out 15 BTC at once, you'd be limited to the first two.

A transaction has only one source, so that payout is obviously attributable to the source transaction. If the mixer gave you 5 BTC from Whore, you're holding Whore bitcoins. If the mixer gave you 5 BTC from Kingpin, you're holding Kingpin bitcoins.

The idea is that 100 people put in the 5 bitcoins, then each of those 100 get back 5 bitcoins to a different address... yes, you can track the bitcoins themselves, but you don't know which of the new wallets belonged to which of the old wallets... the 5 tainted bitcoins (from an illegal activity) might end up going to a totally different person who had nothing to do with the illegal activities.

In your example, the original owner of the whore coins would end up with the kingpin coins and vice versa.

It is described here: https://en.wikipedia.org/wiki/Cryptocurrency_tumbler

Yes, I understand this idea, and it is what I mean when I say that the rules of operation of the mixer invalidate the link -- in reality -- between the coins that you got from a mixer (post-mixing) and the coins that were given to the mixer (pre-mixing).

But the protocol doesn't reflect the reality of the mixer; the mixer is built on top of the protocol. Within the protocol, those coins are still linked, allowing perfect tracking of coins as they pass through the mixer.

You can argue in court that your kingpin coins aren't really kingpin coins, but you'll always be hamstrung by the evidence. What you really have are plainly-labeled kingpin coins and an admission to purposefully receiving contraband.

That's the usual argument, but I don't see how that sticks around when it's pretty much just money laundering without even a cover story.

At the end of the day that new wallet needs to be converted to cash or use to pay for something to be useful, which makes it traceable, which ties the person to using a mixer which I have no doubts will become illegal itself if it becomes a problem.

Yes, they could make it illegal... but it isn't yet.

You can buy goods and services that don’t need physical shipping, as in this case: CP images and videos.

You can earn bitcoin anonymously by mining it - at least this was more feasible a couple of years ago than it is now - but in 2011-2017 if you were to buy $4,000 worth of graphics cards you could mine $4,000 worth of cryptocurrency on Nicehash in a few months (and keep going to make a profit too). No ID required (though they probably track your IP address somewhere...)

Didn't Nicehash turn out to be a scam and its (former) CTO was arrested this month?

Nicehash worked for me - I made a few thousand dollar’s worth of BTC by mining Ethereum for them.

...after spending a few thousand on GPUs first, right before the crash. Ouch.

So are tumblers not a thing any more? I thought in general tumblers made it pretty impossible to trace things unless you are moving a volume of money that is much bigger than what the tumbler typically processes in a day.

https://www.coindesk.com/eu-authorities-crack-down-on-bitcoi...

What if you bought btc with cash from a stranger on localbitcoins and put it into an empty wallet. How would anyone link those btc back to you?

Unless the localbitcoin guy is an FBI agent or something...

Trace btc to the localbitcoin guy, find intersection of his location data from cellphone service company with location data of others around the time of transaction.

I think the real problem is high volume transactions. In theory, buying money off of localbitcoins assuming you connected to their service anonymously, met with the seller anonymously, etc. should be safe.

But if you're accepting payment and then cashing out, you will need a safe way to cash out and localbitcoins will get you caught fast. Agents would see the money going to a localbitcoins user. They could either setup a sting or just contact whomever has been buying these coins off of you.

Imagine if you see all transactions made with this $100 bill.

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