Internal FBI risk assessment of Bitcoin network [pdf]
wired.com
wired.com
Really the big disruption Bitcoin could cause if it becomes well established, is to act as a stable reference frame against which the other currencies can be compared (versus now, where they all float against each other). No government owns the Bitcoin printing press. It cannot be used as an instrument of fiscal policy, and it weakens the ability to use government currency as an instrument of fiscal policy.
I did some research on anonymity (mentioned in that document); I find it hard to project how private Bitcoin will be in future.
Our impression was that currently many users were careless, and that many identities (in the form of publicly disclosed Bitcoin address ownerships) were linked to meaningful transactions; such that with basic network analysis it was possible to passively observe semantically meaningful transactions, like "the person who owns this twitter account, which seems to be a real person, donated to wikileaks" or "this account which is a public organisation donation address is linked to an address that transferred bitcoins to that other organisation".
We speculated that if Bitcoin became widely used, without changes in usage patterns, then a large e-commerce site (someone like Amazon accepting payments in Bitcoin - leaving questions of scalability aside) could passively observe much of what was going on on the network, because they had so many known identity-address pairs to start with (e.g. shipping addresses).
But the other argument is that its probably relatively easy for usage patterns to change.
I think you have to assume that end-users will always be careless. We see this in almost every security setting. So it doesn't matter whether its possible for sophisticated users to guard their privacy, if you don't get privacy by default.
But people could build overlay systems which are backed onto Bitcoin. A lot of the wallet services are like this already, and are not readily amenable to the blockchain level analysis (although of course you then you are trusting your wallet service with your privacy and money). Alternatively core or client developers could add protocol-level or low-level Bitcoin mixing (again, with an overhead cost, so there might be scalability concerns), or develop client interfaces which encourage more privacy by default.
Its too early to tell how observable/analyzable it'll be in steady state, if it builds traction. I think its possible the system will end up much more observable, for casual users, than cash or even credit cards currently are, but I don't think that's inevitable.
The key would be to begin by considering any address linked to an identity that is you or related to you "dirty," and to be careful about avoiding linkage to any of those dirty addresses. To really be careful I think you'd have to delve into graph theory and data mining a bit yourself, or follow the precautions of someone who knows what they're talking about. You'd also have to take care to pay attention to network addresses under the protocol, using Tor or similar proxying systems and considering any address that's been used from an IP that can be linked to you similarly "dirty." Use of VPSes that accept anonymous payment would also be an option, though again... don't SSH to them from your house! Use Tor or smurf the data around by way of proxies and drop sites and such.
Laundering money would require extreme caution to avoid such contamination, and would present many of the same challenges as money laundering in the fiat currency world. BTC/fiat conversions would be very risky. In-person BTC/fiat conversions are vulnerable to old fashioned gumshoe police work: "hey, that BTC you exchanged on localbitcoin... you happen to remember what that guy looked like?" These are also only feasible for small quantities. Large quantities would present a huge challenge.
What this really means is that Bitcoin is not intrinsically an instrument for villainy as some lazy press articles make it out to be. In fact, criminal use of Bitcoin requires orders of magnitude more technical sophistication, which the vast majority of criminals do not have. A highly educated or sophisticated criminal or intelligence network could surely pull off shenanigans with Bitcoin, but I doubt your average thug or child porn wanker is going to even comprehend the stuff I wrote above. So at the very least, Bitcoin is only a criminal tool for very geeky high-IQ criminals.
Unless you intend to prosecute everyone who spends BTC that was ever connected with a "known, even address" (which could very well be an option they take!), anonymity and laundering capability is preserved.
I don't know if it's NP complete. But my guess is no. I can immediately think of algorithms (maybe crude ones, I am no statistician) that could be used to attack it, and they require a lot of iteration, not an explosion of recursion.
When we started looking at Bitcoin we thought that we would have to use such sophisticated algorithms to uncover interesting structure, but it turned out to be much easier than we expected to find structure and meaning, so we never got too sophisticated.
There's a very active field of research on these cluster finding algorithms - the term to search with is 'community finding algorithms' - http://en.wikipedia.org/wiki/Community_structure has a reasonable introduction.
>And wouldn't finding such a cluster be NP-complete?
That isn't a problem, in practice.
Finding the maximum clique in a graph is an NP complete problem, which you might be thinking of - but 'clique' is a stricter definition than most people would use for 'community', (in that a clique requires all nodes to be connected to each other), and even then very good heuristic clique finding algorithms exist in practice (E.g. the Bron Kerbosch algorithm).
Some community finding algorithms have objective functions which are NP complete to maximise, but again, often fast heuristics are available.
Consequently, there are many good community finding algorithms out there that will quickly find clusters on networks the size of the Bitcoin graph - we ran some, but we didn't do much with their output.
Its difficult to dig into such problems without a ground truth, and again, we could uncover a lot of meaning using simpler techniques.
I think the benefit of this cycling, though, is in the size, not the obscurity. That is, if 60% of the users (and 99% of the addresses) are cycling money to obscure connection to a person, then either:
- You have to accept that "Joe spent a bitcoin that was once in a crime" is insufficient evidence Joe had any connection whatsoever to it, since "most users have touched that bitcoin too"; or
- You have to make it a crime to be a part of such a cycler altogether, which would effectively require an outright ban on Bitcoin.
These conclusions follow no matter how much structure to the trades you can detect.
They obscure transactions quickly and cheaply.
That being said, assuming that everyone plays fair, uses common sense, and keeps the Bitcoins distributed fairly evenly, there shouldn't be a problem (after all, that is how Bitcoins were designed).
[1] Bitcoin Charts, "Exchange volume distribution." http://bitcoincharts.com/charts/volumepie/
Big assumption.
One I would argue is a necessary evil.
http://www.dgcmagazine.com/bitcoin-the-european-central-bank...
http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyscheme...
What would make it any more (or less) stable than the traditional reference currencies of gold, ammo, and canned baked beans?
Fiat is obviously variable on the whims of the issuing government.
Gold may be taken out of circulation to make jewelry or electronics (or another use not yet discovered). Ammo and baked beans can be consumed. Bitcoin has no utility value and cannot be used for anything other than as a currency.
Similarly, the supply of these other items can be expanded. An asteroid full of gold could be mined, a new ammunition factory built, or a bean farm planted. Bitcoin has no physical identity, it cannot be reproduced, counterfeited, or grown outside of the well defined properties laid down in the original protocol.
Bitcoin is truly the first pure reference currency. Manipulative games can still be played with bitcoin markets, but the risk of external non-economic events affecting your money supply is removed. A political party can't decide the world needs more bitcoins, a new vein of bitcoins cannot be discovered, and nor can a new use for bulk bitcoins be invented.
Other than reserve requirements for lending bitcoins, accounting regulations for considering earned bitcoins as either cash income or accrued income, underwriting requirements for bitcoin-denominated loans, excise taxes on bitcoin transactions, and so forth.
Issuing currency is not the goverment's major control on the money supply.
(U) What Users Can Do To Increase Anonymity
...
• (U) Combine the balance of old Bitcoin addresses
into a new address to make new payments.
Yeah, there are ways to make it true/er, but I'm arguing against the principle of the suggestion. And I have doubts that combining (only your) addresses will ever increase anonymity.
On the other hand, if you move bitcoins from wallet 1 to wallet 2, then do the buying from wallet 2, there's some separation and people aren't sure if it's the same person.
And regardless, if you then use 4 to do anything that's linked to you, it's further evidence that you are linked to all the accounts - in no way better than before, and possibly worse. You also can't use the money from 2 or 3 to do things linked to you, because now they're linked to you and the sketchy 1. If you had left them isolated, observers would only have information on 1, nothing would have changed, and you could use 2 and 3 without leaking any information about 1.
edit: here's the main article I'm aware of http://anonymity-in-bitcoin.blogspot.com/2011/07/bitcoin-is-...
As long as you control all the wallets, the money is still yours.
Also, if you do this, you're likely not forming a new TOR connection each time you do any transaction, so you're leaking your IP address and traffic - easy to gather and be reasonably confident that someone is doing precisely what you described, and since it's all recorded forever, all the actions are essentially tainted forever. If you do form a new connection each time, you'll slow down substantially, and there may be a way to block you at the entry points to the TOR network (I don't remember TOR's details well enough to be sure, though).
edit: also, this will be very easily identified behavior unless people do it all over the place (and then transaction fees are basically guaranteed soon after), so you'd stick out like a sore thumb. I would be willing to bet that while it would give you some anonymity and you might shake off a few addresses, you won't gain complete anonymity, and it'll probably ultimately be worse and slower and harder than just using a few mixers. And if you ever transact them in a way that re-forms those connections (if they're all millionths of a coin, it's unavoidable), you just undid almost all your work.
Making a new TOR connection per transaction shouldn't be too hard to automate.
Transaction fees are intended to be motivation to be a miner. Since 50 bitcoins per mined block will soon become 25 and eventually nothing, transaction fees will progressively take over to become the majority of miners' income. They're not enforced by the protocol, so there may be some transaction-fee-free miners out there at any given time, but they're not likely to be the majority of the compute power (and will probably diminish as time goes on). You might end up waiting for a long time for your transaction to be confirmed.
Of course, whether that behavior would stand out depends on how other users of the system behave.
Plus, I can divide my 1000 wallets into 20 islands, and only have 1-2 transactions between the islands.
I think that what they are getting at here, is the following scenario:
Imagine that you have several addresses, with different balances, in the same wallet. If you do a payment using the normal client, which requires the total balance from all those addresses, this will create a transaction with all those addresses as inputs. In the Bitcoin protocol this provides unambiguous proof that the input addresses are all controlled by the same user. (With some provisos: obviously wallet services overlaid on the network complicate this; as do some other more sophisticated uses of the protocol; but in general, at a protocol level, this is true).
So, that then shows any passively listening third party that all those addresses were under control of a single user. This knowledge can then be applied transitively, to consolidate ownership of large quantities of accounts. (We tried explain this in our paper: http://arxiv.org/pdf/1107.4524v2.pdf Fig 1.6)
What the report is probably getting at, is that an alternative thing to do, would be to instead send all the payments to a new account, in separate transactions. This would introduce a lot more ambiguity for a passive attacker - passive ownership assumptions become a lot less clearcut. You can still try make deductions, but its going to be much larger to do at large scale, and require more statistical assumptions.
Its not completely obvious that this is what the paper is suggesting, but thats my reading of it, and I think that makes sense.
Don't take it to extremes - this can clearly be stretched to include running the whole process through mixers and back to a single address while improving anonymity. It doesn't say that. In principle, is combining addresses better for anonymity than not?
Linking together abstract pieces like that can be one of the first steps to figuring out a very anonymous network.
And yes, those links are basically all you can use in an anonymous network to deanonymize actions. So how is linking things better than not?
Anyway. Thanks for chiming in :)
Yeah. Difficulty obtaining bitcoin transaction records. Good on you, FBI.
As for "obfuscation," I was under the impression that the system doesn't attempt to obfuscate what payment addresses are involved in a transaction. It's not pertinent to the network which physical person controls which addresses.
"detecting suspicious activity, identifying users, and obtaining transaction records is problematic for law enforcement." - That must deeply hurts FBI people :)
"Despite the virtual nature of Bitcoin, users value the currency for many of the same reasons people trust Federal Reserve notes: they believe they can exchange the currency for goods, services, or a national currency at a later date."
People do not trust "Federal Reserve notes" (or any other official currency) - they are forced to use it, since they must pay taxes in it.
But it is good, that at least some people realize that there is no such a thing like US dollar, only those "notes" printed by Ben Bernanke and his pals.
If one day Bitcoin gets truly popular governments will be in trouble. How to tax that beast? I wonder if there is any other solution then poll tax.
"Hi Everyone, POTUS here. About those treasury bonds a lot of you are holding... we're not going to pay interest on them. Or pay back the princiapl. Ever. On a totally unrelated note, here are some pictures of our 11 carrier strike groups. Impressive, aren't they?"
The US would never need to default on its debt, since its debt is in USD. Worst case, it would just print more money, leading to inflation.
If the U.S. decided to completely default on it's debt it would be more destructive to the U.S. economy since the majority of the debt is held by U.S. citizens & institutions. Insurance companies & banks would collapse instantly since the a very large percent of their asset bases would be wiped out.
We (meaning U.S. citizens) owe more to ourselves than to any foreign entity. Default is, at least right now, a political non-starter.
They were the largest military power at the time, Germany in land, British Empire(India,Pakistan, Afghanistan, Ethiopia...) on the sea.
They started getting in debt and a little country called United States became the biggest creditor of the world.
They they killed each other in a stupid war trying to reign supreme, and someone else did.
Now this someone else had started thinking their power will be forever. We will see...
However, since the US government cannot be forced into default - after all, the US government runs the USD system, and all its obligations are denominated in USD - this is all just political posturing.
It's kind of depressing how effective this posturing is. It's a testament to the terrible state of public education about fundamentals of our monetary systems.
Source: http://en.wikipedia.org/wiki/European_sovereign-debt_crisis
Even if I were to agree with you on the collapse, that’s not all Euro countries. Germany, for example, had never any problems or trouble that could by any sane person be described as collapse.
[edit] "But not even the owners are allowed to view their own gold. According to the Federal Audit Office report, the Fed explained that "in the interest of security and of the control process" no "viewings" are possible." http://www.spiegel.de/international/germany/german-politicia...
Really? There I was thinking foreign governments liked holding their reserves in US dollars...
> that at least some people realize that there is no such a thing like US dollar, only those "notes" printed by Ben Bernanke and his pals
Wake up, SHEEPLE!
Yes every government has to keep dolar reserve because this is the only currency you can buy oil with. USA managed to force oil suppliers to accept only US dollars.
This is the source of the dollar power and enable FED to print as much dollars as they want. People all over the World must purchase dollars.
But regarding your original point, foreign govts and banks hold the US dollar because historically it has been strong, stable and accepted everywhere. It has no intrinsic value and recently governments are moving away from solely pegging their currencies to the US dollar as it has weakened relative to other currencies in the past few decades (eg Euro).
Another reason they take the US dollar is that they have no other choice. If China or Saudi Arabia were to say 'we want gold!' or 'we want resources!', trade relations would have stopped a long time ago.
Obligatory XKCD ref: http://xkcd.com/1013/.
I trust Federal Reserve notes. US currency has high barriers to counterfeiting and can be exchanged for goods and/or services with actual rather than virtual anonymity. I may be a cave man, but I'm not alone. US banknotes are the 'gold standard' of black and grey markets around the world.
Integrating licit and illicit revenue streams will always be a foundational issue for any illegal enterprise. I have not looked deeply into the implementation details, but Bitcoin does not strike me as a viable money laundering solution. At the point you move large amounts of value out of the ecosystem and into the 'straight' economy, you require the complicity of bankers.
Estimated to be 20% to 25% of GDP compared to an average of 15% to 20% in the neighborhood.
Edit: as an extra fact, "we" (I've never seen one) hold most of 500€ bills that have been printed.
That doesn't explain why people continue to accept official currency in excess of their anticipated tax bill, or why criminals who aren't expecting to pay tax at all still deal in official currency.
It is legal tender for debts. Offering currency to a creditor extinguishes the debt, whether or not they accept it.
Most people do trust cash, within certain limits, because they're not crazy libertarians. The value of bitcoin is every bit as illusory and consensual as paper money.
That it's not under central control and has a fixed supply is interesting, but doesn't give it intrinsic value.
Having a static, fixed supply and independence from central control makes something valuable to you, not so much to me.
>If the supply of BTC was infinite, it would have essentially no value
But there are many other circumstances that could result in BTC having no value, regardless of scarcity. For instance if people stopped using it, at all. There would be no value in being the only one with bitcoin, regardless of how scarce they are.
edit: Probably not the best example, but either way, value is a perception.
I'm not defining value in the philosophical sense, which as you point out is entirely subjective, but you seem to be arguing against the generally accepted definition of value as applied to a system where something is exchanged in return for something else.
> But there are many other circumstances that could result in BTC having no value, regardless of scarcity. For instance if people stopped using it, at all. There would be no value in being the only one with bitcoin, regardless of how scarce they are.
Perhaps you need to re-read my comment. I never said scarcity alone was enough - if no one used it, it wouldn't have utility. You need both, hence my use of the word 'and'.
And thanks for the completely unnecessary downvote.
Have another, for whining about it!
1) Bernake et al. are feckless idiots and will leave the money presses running long after inflation rears its head, a la Zimbabwe, causing hyper inflation and the destruction of the world economy
2) The economy picks up a bit and they stop printing. However, that huge pool of money they have created is enough to drive inflation so high that they are either faced with allowing a period of high inflation 70's style or breaking the economy again with restrictive monetary policy.
Outside wild conspiracy theories I don't think 1 is plausible and 2 is hardly likely to lead to the huddled masses attempting to warm themselves around a pile of burning trillion dollar notes. So I think confidence in the dollar is safe for the interim.
It sounds a little bit crazy to propose that hyperinflation would happen to one of the really big world currencies (euro, dollar, yen...). But I don't see any technical reasons why it couldn't happen at some point in the future.
The tl;dr version: The root cause of hyperinflation has never in history been runaway printing of money. Rather, the root cause is always some mixture of foreign-currency denominated debt, political chaos, and collapse of a country's productive capacity.
To give a bit more detail: This analysis applies to both the Weimar republic hyperinflation (excessive reparations demanded by the victors of World War I denominated in real goods and foreign currencies, combined with a military occupation of Germany's steel and coal industrial center) and the recent Zimbabwe hyperinflation (high USD-denominated government debt combined with a collapse of domestic production due to stupid economic reforms).
The hyperinflation is simply a result of such untenable economic situations. They tend to be "cleansing fires" in some sense: especially in the Weimar republic case, the hyperinflation made it very obvious to everybody that the war debts need to be backed off.
Related, "gold bugs" may have had a good decade but I also believe that gold's value comes from nothing more than tradition: you can't eat it and you can't defend yourself with it.
You would tax Bitcoins in the same way you tax transactions in USD, EUR, and so on. There really is no difference, once you stop to think about it.
Even with the USD, taxation does not work by the government subpoenaing your bank's records. Instead, it is your (or your employer's) responsibility to report your income and related data according to the legal requirements. The same applies to Bitcoin transactions.
Obviously there are some differences in the investigation of tax evasion. But there will still be records somewhere, and prosecution is used to deal with similar problems when transactions are cash-only.
Last I checked, people use US Dollars for a fuck load more than paying taxes.
> How to tax the beast.
Cash is and was even more so in the past harder to track than bitcoin and yet somehow the "hooligans" managed to collect taxes.
I was amazed: the guys whom I talked were "right guys". One of them told me: "From the call log I can tell more than a guy think himself" (Excuse me for bad English) M
Yea, it sure does reveal how silly the FBI is. I mean, why would the organization tasked with domestic security & stability analyze the potential threats of Bitcoin? Bitcoin is made of lollipops and rainbows; it could never be used maliciously.
Seriously, analyzing it critically doesn't mean they are afraid of it. It just means it is an unknown that they want to understand.
As far as I understand bitcoin (which isn't too far, admittedly), the generation of bitcoins is actually encouraged, and only possible within some well-defined boundaries which basically just ensures that bitcoins are put into circulation up until it hits the fixed limit. Maybe someone could clear that up for me? In that case the "malicious actors" would actually be performing a useful service for the bitcoin ecosystem.
Other ways of profiting off botnets include renting out DDoS and spam capabilities.
What does a botnet cost?
No, it's not acceptable to hijack thousands of computers through malware and use their processing power and electricity to mine bitcoin for you. That's why they're malicious, the computers they're using aren't theirs.
The particular phrasing of "assesses with low confidence" took a bit of twisting to understand, though. Its just a convention you have to get use to in these kind of reports, I guess.
The police usually don't investigate tort law, only criminal law. When the police do get involved in civil law disputes it can get quite controversial.
So does centrally controlled currency...
Does anyone know of some good resources (online courses, books, etc)?
IMHO, you should listen to economists that (a) emphasize looking at the operational realities of what actually happens in the monetary system, and (b) tell you that banks matter for what happens in the economy.
(If you find it hard to believe that a majority of economists ignore banks in their models of the economy, good for you and your common sense!)
This means you should read what Steve Keen writes and listen to what he says (he blogs at http://www.debtdeflation.com/blogs/), and what the Modern Monetary Theory crowd write, as they explain such basic things as what role reserves and bonds play, from first principles (start here: http://neweconomicperspectives.org/p/modern-monetary-theory-...).
More generally, "endogenous money" is an important keyword to look out for, because our monetary systems are endogenous in the sense that money is mostly created by banks, not by the government.
If you venture into online economics resources, you will run into a lot of (economic) Austrians. I believe this is mostly because of the Mises institute, which is well funded by people with an ideological ax to grind. It's good to reflect on their messages occasionally, but they should be taken with a grain of salt. (And since they are hardcore gold bugs, they don't get endogenous money, which means that much of what they say simply doesn't apply to our current economic framework.)
* "End the Fed" by Ron Paul
* "Economics in One Lesson" by Henry Hazlitt
* "The Mystery of Banking" by Murray Rothbard
* "What has government done with our money?" by Murray Rothbard
* "Debt: The First 5000 Years" by David Graeber
This wikipedia link could be a good start in addition to the selection of books above: http://en.wikipedia.org/wiki/Federal_Reserve_System
Read it: http://www.ecb.int/pub/pdf/other/virtualcurrencyschemes20121...
Edit: BTW, if you are interested in international monetary policy you can find many important publications on the ECB site:
But if you actually read those publications, you'll notice that they aren't very urgent at all. Their stance is basically that they want to keep up with the development, but don't see a reason to act right now.
Sounds like if you make a market for gift cards you need to be a licensed money transmitter FYI.
How are IP addresses linked to the block chain?
However, if you have your own supernodes and can see which node first broadcast that transaction, and you know either they sent it or are more connected to the original sender than you are.
It's pretty hard for someone to hijack your wallet with a Trojan and if they do get into your bank account that way then the police and the bank might take an interest.
I know this is a meme in the BTC community - any criticism of BTC as a payment method is met with the claim that "it's just like cash" and any criticism of weaknesses of BTC as a currency is met with the claim that "it's a payment method and a commodity". To me it pretty much fails at all of the above.
There's no doubting it's good for purchasing contraband though.
Cash (in volume) is currently treated with suspicion for criminal activity, and is the center of attention for policing crime/drug money, financial fraud and money laundering. So bitcoin should be as well.
And it can be regulated in the same way as cash - you can ask financial institutions to report any bitcoin deals above $xxx (as they do for cash), you can regulate any intermediaries/payment services to follow the existing money laundering laws also for bitcoin - a core provision is know-your-customer, i.e., no anonymous customers allowed.