The Bitcoin Big Bang: Tracking Tainted Bitcoins

A visualization tool that can identify where a Bitcoin comes from is good news for banks, which are obliged by law to find out the source of the money they receive to ensure they’re not holding tainted funds. If banks take a bitcoin that’s been earned selling drugs on one of the “Dark Web” markets, or that has been through a known money-laundering service, they could have serious issues with regulators.

The Bitcoin Big Bang visualisation summarises the entire six-year history of all bitcoin transactions, as recorded in the 35 gigabyte public blockchain ledger. The main goal, according to the team, is to deliver anti-money laundering (AML) compliance tools to institutions with activities that are under close regulatory screening.

The Bitcoin Big Bang shows the emergence over time of the largest 250 entities on the bitcoin blockchain, and their interconnectivity. The team has already identified some of the biggest Bitcoin movers such as Mt.Gox and the various Silk Roads. These include exchanges that have, knowingly or not, allowed trades of Bitcoins that have passed through the Silk Road and other Dark Web markets for illegal goods and services.

Elliptic has harnessed the underlying technology supporting the visualisation to deliver a full suite of anti-money laundering (AML) services. They will be opening their API to a select group of test customers this summer.

Elliptic’s CEO James Smith said to Business Insider, “if digital currency is to take its legitimate place in the enterprise it inevitably must step out of the shadows of the dark web. Our technology allows us to trace historic and real-time flow, and represents the tipping point for enterprise adoption of bitcoin. We have developed this technology not to incriminate nor to pry; but to support businesses’ anti-money laundering obligations. Compliance officers can finally have peace of mind, knowing that they have performed real, defensible diligence to ascertain that their bitcoin holdings are not derived from the proceeds of crime.”

The Bitcoin Big Bang Visualization Tool

Octopus Investments led Elliptic’s $2M funding round in Summer 2014. Advertized as “A safe home for your bitcoin assets,” Elliptic obtained "ISAE 3402 Type 1 assurance accreditation" from KPMG earlier this year for its Vault service, known as a SOC 1/2 report in the US. They also insure the bitcoin they hold for their customers.

“One of the most important areas where this work needs to be focused is in building trust and transparency around digital currency infrastructure, particularly with regards to security. That’s why we recently asked one of the “big four” professional services companies, KPMG, to perform a rigorous review of our Elliptic Vault bitcoin custodian service.”
— – Nathan Jessop, Analyst for Elliptic

The Bitcoin Big Bang is not the first attempt to visualise bitcoin transactions. The now defunct blockviewer.com released an Open Source tool, authored in July 2013, which visualizes the Bitcoin blockchain by building an ownership network on top of the underlying transaction network, and presenting a web-enabled user interface to display the visualization results.

Block Viewer built with code from Bitcoin Visualizer

Coinalytics recently released an invite only service, Jarvis, a visual and analytical workspace to perform in-depth investigations across the Bitcoin blockchain. Built on top of the Coinalytics back-end, the user interface allows users to visually interact with an enriched version of the blockchain, and focus on transactions and entities of interest to analyze relationships and uncover hidden patterns. They also offer a Blockchain Explorer and a Tracker Beta.

“Our goal is to abstract complexity needed to do advanced analytics on the blockchain and offer insights in real-time. Our end-to-end intelligence platform allows efficient and effective in-depth analysis to identify valuable insights. Key applications for this solution are for leveraging the blockchain to answer Bitcoin compliance, business intelligence or finance questions.”
— – Coinalytics

Coinalytics’ Jarvis

Visualization tools: a potential threat to privacy?

Bitcoin’s Blockchain has always been intended as a public ledger. “The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.” States the Bitcoin Whitepaper.

This pseudo anonymous value transfer system is built to be transparent, but can be difficult to navigate. All of the blockchain visualization tools, which track bitcoin transactions, have a common requirement. While the wallet addresses used to send and receive bitcoins are on a public ledger, the ownership of those wallets is not. Information regarding ownership of a wallet can sometimes be as easy to find as scraping an exchange’s website, or engaging in a bitcoin transaction with an individual.

“We are not using this data to invade users’ privacy, and we have removed identifying information from many of the entities in the visualisation. Neither are we passing judgement on any activity – we are simply providing businesses with information about links to criminal activity, in order to inform their compliance decisions.”
— – Elliptic

In 2011 Dan Kaminsky, Chief Scientist at white Ops, explained in detail how an IP address could be attached to a bitcoin wallet. While the legality of the process is beyond the scope of this article, there is a clear misunderstanding in the industry regarding anonymity. Several Wallet providers have been created specifically to increase user privacy, including Darkwallet and Samourai, while other services have also been used prolifically.

Bitcoin mixers have long been the cornerstone of anonymizing Bitcoin transactions, a topic that Elliptic briefly touches on, “These mixers are used to mask the source and destination of transactions. This is of particular use when transacting on dark marketplaces.”

The ability to mix tainted bitcoin with untainted would appear to be an issue that the team hasn’t tackled in depth. Those transactions are recorded on the Blockchain, but the origins of a bitcoin in a mixed transaction are unidentifiable.

Elliptic states that the use of their new tool is, “working to counter the illicit use of bitcoin, by providing businesses with tools that can analyse cryptocurrency payments and determine whether they are likely to be proceeds of crime.”

In the UK, the registered jurisdiction Elliptic operates in, the proceeds of crime are clearly defined, “Prosecutors are not required to prove that the property in question is the benefit of a particular or a specific act of criminal conduct, as such an interpretation would restrict the operation of the legislation.”

As with cash that has flowed through a criminal transaction, Bitcoin would appear to fall under the same umbrella. As such the UK excludes property, including cash, as exempt from qualifying as the proceeds of crime following an exchange back into the legal financial system.

“Where the funds or property have been acquired by a purchase for a proper market price or similar exchange and to cater for any injustice which might otherwise arise: for example, in the case of tradesmen who are paid for ordinary consumable goods and services in money that comes from crime.”
— – The UK Crown Prosecution Service

Will The Bitcoin Big Bang and the likes be the solution banks are waiting for to finally jump in on the Bitcoin bandwagon? Certainly having financial institutions being able to comply with AML regulations could be the missing piece of the puzzle that could help Bitcoin reach mainstream adoption.

This technology enables mass monitoring of blockchain based digital currencies, which could end up automatically alerting financial institutions and authorities of coins being associated with illegal activity. The issue that faces a range of regulatory institutions is who to target. Bitcoin users are putting their financial records on a public ledger, those that are aware of the risk will no doubt employ many techniques to obscure any proceeds of crime. Those that aim to leverage bitcoin transparency for easier record keeping and auditing will no doubt battle these techniques for some time.