Pay-per Trails

Cracking down on crime using the blockchain

Jack Davies
Oct 21 · 8 min read
Image from Chainalysis Team blog post here.

As the global understanding of blockchain technology matures, we are increasingly seeing vindication for the original design elements chosen for Bitcoin.

This design, as set out over ten years ago in Satoshi Nakamoto’s seminal white paper, has not only remained secure over the last decade, but is now also proving its robustness as a public ledger that incentivises honest behaviour by economic actors.

One of the most crucial elements of this design pertains to the transparency of the blockchain as a public, open, and auditable ledger of payments and data. More specifically, one particular extract from the white paper reads:

Transactions must be publicly announced.

— Satoshi Nakamoto, Bitcoin: a peer-to-peer electronic cash system (2008)

We need only look at this line of the white paper to determine that Bitcoin is, and was intended to be, a transparent system, in which transfer of control of ownership of digital assets is achieved in an unambiguous manner. It is important to note that there is a difference between transparency and privacy here. Of course, the blockchain does not natively contain information relating to real-world identity for participants in transactions, which means that Bitcoin is a pseudonymous system in which we cannot directly attribute identity to activity.

However, there are two important subtleties to this pseudonymous system that are often missed when analysing the blockchain:

  1. Pseudonymity is not anonymity; and

The first point here is something that deserves its own, separate discussion to explain clearly and in detail. However, the second — that activity on a public ledger is traceable — is the crucial element that I want to dig into further in this article.


An Immutable Evidence Trail

When we talk about the fact that activity on a public blockchain is traceable, what we really mean is that a significant amount of important information about each Bitcoin transaction is made visible to everybody, both inside and outside of the underlying network.

There is an excellent discussion of the definition and meaning of the term ‘traceability’ in monetary systems, as provided by Dr. Craig Wright, in this article:

However, for this discussion, we want to dive into an explanation of the specific data elements of blockchain transactions that allow the token exchanged on the chain to be considered traceable. Every transaction in Bitcoin is added to the blockchain, due to its inclusion in a valid block, with the following information included:

  • The payment amount;

To go into a little more detail, the ‘source(s)’ of a payment in this context refer to the transaction outputs (UTXOs) being spent in a transaction, while the ‘destination(s)’ for a payment refer to the new UTXOs created by the same transaction.

If this terminology sounds a little unfamiliar then don’t worry, you can think of this a little like spending money in a shop. The source(s) of your payment might be the physical coins or cash in your pocket, and the destination(s) of the payment might simply be the merchant who accepts your money in exchange for a good or service. The translation into blockchain terminology is that this interaction is modelled as a transaction which changes the control of ownership of the money at the point at which is spent.

The proxy for ‘time’ that is recorded for your payment on the blockchain can be taken as the block number (or ‘height’) of the block in which the transaction is recorded, the timestamp recorded in the block header of that block, or some combination of the two. The fact that there is no concept of a standard, synchronised clock in a distributed blockchain network means that we cannot have a high-precision time attributed to these transactions. However, these proxies for real world time are generally accurate enough to conduct forensic analysis for criminal investigation. Once again, the fact that the blockchain acts as a timestamp server is an aspect of the original design for Bitcoin that has been in use for over a decade.

Section 3 of the original Bitcoin white paper.

So, even though a Bitcoin transaction is not directly tied to a real-world identity, it clearly records a significant amount of information about the economic activity it represents. This is how a pseudonymous system can both preserve privacy whilst maintaining traceability.

In effect, the blockchain acts as an immutable evidence trail of data relating to economic activities. This valuable data is already being used to tackle illegal activities and put criminals behind bars.


Case Study: Child Pornography Bust

In news that broke last week, a large-scale child pornography operation was effectively brought down with the help of cutting-edge analysis of transactions made on the BTC blockchain.

As has been widely reported over the last few days, the investigation was jointly undertaken by several bodies including the IRS Criminal Investigation (IRS-CI) unit and the Homeland Security Investigations (HSI) department in the US, the National Crime Agency (NCA) in the UK, and with additional help of Germany’s Federal Criminal Police and the South Korean National Police.

The investigation, which sought to take down the website ‘Welcome To Video’ — one of the world’s largest known child pornography operations — led to a total of 338 arrests, including that of the site’s operator Jong Woo Son. The Darknet website, based out of South Korea, took bitcoin as payment in return for granting its users access to the horrifying illegal content advertised on the site itself. As one of the earliest examples of a website monetizing illegal pornographic content using bitcoin, the site was able to collect over $370,000 in bitcoin payments before the operation was taken down last year, according to the US Department of Justice.

However, whilst the criminal operation had chosen to use bitcoin in part due to a mistaken conception that it would provide a truly anonymous payments layer, the use of bitcoin for payments ended up being one of the primary reasons for the downfall of the operation. A key reason for this is the fact we discussed earlier — that the blockchain forms and immutable evidence trail — that facilitated the international task force in identifying and tracking down the sources of criminal activity.

“Through the sophisticated tracing of bitcoin transactions, IRS-CI special agents were able to determine the location of the Darknet server, identify the administrator of the website and ultimately track down the website server’s physical location in South Korea,”

— IRS-CI Chief Don Fort, US Department of Justice statement (16/10/2019)

The statement released by the US Department of Justice makes clear the significant role that careful analysis of the BTC blockchain played in isolating the necessary information to locate and map out the various users and content contributors of the site. As we mentioned earlier, the payment sources, destinations, amounts and approximate times of each bitcoin payment received or made by the ‘Welcome To Video’ site were publicly visible to those analysing these transactions.

According to the official Chainalysis Team blog, one of the key tools used in conducting this analysis was the ‘Chainalysis Reactor.’ The tool essentially allowed investigators to use the available transaction data to create an instructive graph of the actors who had come into contact with bitcoin addresses associated with any payments the Welcome To Video platform.

This graph then helped facilitate international cooperation between investigators and exchanges alike, allowing crucial Know Your Customer (KYC) data to be collected for those recipients or senders or funds tied to those addresses. The tools provided by Chainalysis were able to further aid the process by aggregating and categorising information relating to the bitcoin transactions according to regional jurisdiction.

It seems pretty clear, then, that the use of a transparent, public blockchain ledger is certainly not in the interests of a criminal wishing to conduct illegal activity in return for payment. In fact, it would seem that quite the opposite is true in general — that the use of the blockchain to facilitate such activity is strictly worse than existing methods of achieving the same goals, given that the blockchain records an immutable record of activity. This is surely not something in the interest of criminals.

“There’s a lot of a people who have this perception that bitcoin is totally anonymous … and it’s been the downfall of many people in many investigations.”

— Christopher Parsons, Citizen Lab (2019)

The ‘Welcome To Video’ case is a high profile demonstration of why the blockchain, and its native transparency, provide a platform that is strictly more honest than existing cash systems. Moreover, it is an excellent example of what happens to those who should seek to use bitcoin to facilitate crime.

Perhaps, then, this case will help to ease the minds of many who may have previously held an association between cryptocurrency and Darknet activities — it is clear now that bitcoin does not aid such behaviour but rather helps to penalise it.


Digital Signatures

As a final consideration for this article, it is worth making the point that digital signatures, the mathematical constructs which underpin the ability to transfer control of ownership of digital assets on the blockchain, are admissible as evidence in court.

Moreover, digital signatures are perfectly valid in signing legal documents and formal contracts. This fact is made perfectly clear on the website of the UK Law Commission, which clearly states:

Electronic signatures can be used to sign formal legal contracts under English law, the Law Commission has confirmed.

— the UK Law Commission, (21/08/2018)

In general, all transactions on the vast majority of current blockchain implementations are signed by a form of digital signature (a form of electronic signature). They actually tend to form the bulk of the full data size of an individual transaction, which means they are certainly plain to see on the public blockchain.

So, now we know two important facts about blockchain transactions — that they are both:

  1. Signed by digital signatures; and

This means that not only are any transactions associated with illegal activity recorded unchangeably on a public ledger of connected information, but that activity is now signed by the perpetrator in such a way that is admissible in a court of law as evidence of their criminal behaviour.

I’m not sure about you, but that sounds like a system that law-breakers will want to steer well clear of.

Bitcoin SV Wales

The home of Bitcoin SV and blockchain for Wales.

Jack Davies

Written by

Researcher at nChain, passionate about scaling Bitcoin (BSV).

Bitcoin SV Wales

The home of Bitcoin SV and blockchain for Wales.

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