A team of researchers from the famous British University of Cambridge has identified a way to track stolen bitcoins even after they have been properly recycled. This can offer law enforcement a powerful new way to track the proceeds of fraudulent activity.
Recycling
Although Bitcoin , like many other cryptocurrencies, is not totally anonymous (such as Monero or Zcash) but only pseudo-anonymous , it is not easy to trace the stolen funds and trace back to those who make the transactions.
It is also difficult to identify the actual owner of the address that holds the funds after the bitcoins have already been traced.
Although transparency in the blockchain reigns and every transaction can be seen and traced, the units themselves (bitcoin and satoshi) are impossible to trace because they obviously do not have serial numbers or other individual identifiers. The most used way to hide the traces of stolen bitcoins is recycling.
For example, an attacker could put three stolen bitcoins and seven clean bitcoins into one wallet . After that, it could subdivide the ten bitcoins and transfer them to a large number of wallets , making it impossible to determine which ones are clean and which are not.
One way to keep track of this activity is to assume that all 10 bitcoins in the original wallet are 'dirty' . So, follow the chain of transactions in which they are involved. However, this is highly inefficient because we need to analyze a huge number of transactions.
Research
The research team, made up of Ross Anderson, Ilia Shumailov and Mansoor Ahmed, developed a system based on the FIFO principle (First In, First Out).
Anderson and co have built an algorithm that adapts a nineteenth-century British law that sets up a series of simple rules to divide the remaining money when a bank goes bankrupt. This law has become the basis for the allocation of money in a wide range of situations.
Researchers have shown that when they apply this rule to the public bitcoin transaction register, it reveals noteworthy patterns of criminal money laundering activities that had been difficult to detect until now.
n other words, referring to the example above, where the first three bitcoins on the ten in the wallet were stolen, the algorithm assumes that the first three that come out in the next transactions of the offending wallet are the stolen ones and follow them until their next address , where they re-apply the same rule. The other 7 bitcoins are not followed. In fact it is a simple rule that however greatly reduces the cases in question.
The Taintchain algorithm then shows the results so as to allow the display of suspicious behavior patterns . It has been applied starting from addresses linked to thefts known to the police and, following all the transactions of the blockchain, it has come to establish where the stolen bitcoins are. This technique allows to improve the accuracy in the taint analysis process and therefore to go back to the current position of the stolen BTC.
This visualization process is difficult due to the large volume of transactions, but the team was able to identify a variety of money laundering behaviors.
I realize that it is difficult to explain everything behind the algorithm in a nutshell. You can find the PDF of the research in full format HERE .
The Darknet and current laws
Meanwhile, the darknet markets are still thriving , despite the important efforts of law enforcement agencies trying to fight them.
According to a report by the analysis company blockchain Chainalysis, there is no decline in this type of activity even when the values of the crypto fall .
In fact, in 2018, the activity of the darknet market had an important growth, which does not reflect the sudden drop in prices of cryptocurrencies.
Source: Michele Porta