Yes, it’s completely untraceable in that case, because you’ve never even used bitcoin. If you and I know each other only by our bitcoin addresses, then we’re never going to make any transaction in the first place. Why would I be randomly transferring money to someone I know nothing at all about? And if you only ever use an address once, then you’re not receiving money; you’re just providing a way for some random person you don’t even know to destroy some money. You have to have both an exchange of something else, and money both entering and leaving your possession, to make actual use of any sort of currency.
Ah, the good old argument from ignorance. Just because you can’t imagine it doesn’t mean that people don’t do it. You don’t know every single party you’ve bought from on Amazon or eBay do you? You know their store name, you know the ad copy they’ve chosen to use for self-promotion, but you really have no idea who they are.
I need to ask you a question here. Have you ever even read a Bitcoin tutorial? Or a few pages of a whitepaper? Because you continue making false statements here that betray a total ignorance of the entry-level basics. I’m happy to educate, but I don’t know how to do that while you keep forcefully arguing your incorrect intuition.
Mostly true. In your initial step, you will need $100k of Ben Franklins and an anonymous Bitcoin address to kickstart the process. You’ll meet your counterparty in a shady alley, hand him $100k and your burner Bitcoin address, and hold him (figuratively) at gunpoint until he takes out his phone and makes $100k of Bitcoin appear on your phone. (Have some gunpoint small-talk ready; it’s not the world’s fastest network). Poof! You have just become your own anonymous illegal bitcoin exchange.
How did the police find out you bought $100k of Bitcoin? (They don’t know that). How did they know you had $100k of Ben Franklins? (They don’t). How do they know you now own $100k of Bitcoin? There’s no place to look it up!
If we get to the point where investigators have a ton of outside information establishing patterns between conspirators, then Bitcoin isn’t the weak link that cracks the criminal conspiracy. The criminal conspiracy is (maybe) the weak link that is used to (maybe) crack Bitcoin. As I’ve repeatedly said, Bitcoin is only as anonymous as its user cares to make it.
If they’ve discovered some sort of nexus between you and DDD, outside of Bitcoin, then that isn’t ideal. If DD is cooperating with the feds, that’s certainly less than ideal. But it doesn’t have to be fatal. The Bitcoin record only shows that DDD sent $100k to address XYZ. Certainly DDD can tell the feds “UltraVires told me to use address XYZ for drug things, and I sent Bitcoin there”. But there’s no documentary evidence that XYZ is actually your address. For all anyone knows, it’s a burner address created by DDD himself to pin the blame on you. It’s impossible to prove that it’s anything other than a fabrication of a man who is desperate to avoid 10-20 years in prison.
I’ll add another word about the first step here. Obviously cash-to-coin or physical-asset-to-coin is the cleanest way to enter the system. Exchanges are easiest for converting large amounts, of course. But those are identifiable. That’s still not a dealbreaker, but it requires extra steps that most folks wouldn’t consider unless they’re habitual criminal conspirators.
Because, and I am assuming here perhaps incorrectly, that at some point in time in order to get bitcoin, I needed to send someone USD, and the police could see a $100k bank transaction to that effect.
How do I get $100k in cash in the first place without attracting government attention? And as I said in my last post, I am doing all of this shady stuff so I can buy houses, fast cars, fast boats and so forth. In order to do that, I need to turn my bitcoin into laundered USD so I have the exact same problem I do with bitcoin as I do with cash in a duffel bag in my closet.
Oh, I misread your scenario a bit. (Sorry, it happens, lots of scenarios flying around).
So, I’ll reuse my other scenario. The cleanest scenario is that you met someone in an alley and handed them $100k of Ben Franklins, and directed them to send equivalent Bitcoin to your wallet. You must assume they’re compromised, so you use an anonymous wallet.
The second-cleanest scenario is that you send $100k legitimate funds to your legitimate Coinbase account, convert it to Bitcoin. Before you can safely use those funds in a dirty transaction, you run them through an anonymizing step. Depending where the funds are going, it could be as simple as an offline wallet, or you might use a trusted tumbling service (breaks up the funds and mixes them in a network of millions of private anonymous wallets).
It doesn’t much matter how you do it. The point is to run it through at least one wallet that’s not publicly identifiable and hasn’t transacted in any identifiable patterns with other wallets. If there’s no common knowledge between you and your counterparty, then one offline wallet is fine. You just need plausible deniability that the address you sent it to wasn’t controlled by you or anyone you know. It was bad men who promised good things, and they lied.
That’s a Ben Franklin problem, not a Bitcoin problem.
So again, this is the same problem as any other fungible anonymous asset like suitcases of Ben Franklins or unmarked gold ingots. The problem isn’t the medium of exchange, the problem is that if you want to move your stuff into DollarWorld, you need to make it look legitimate.
You might approach a party who wants to sell a large, prestigious golf resort in South Florida. You make them an above-board, lowball (but plausible) offer in US dollars. Privately, you make a handshake deal to make up the fair-value difference in Bitcoin. From the outside, it looks like you’re a master negotiator, but both parties to the transaction understand that you converted $100k of dirty funds into a clean house. Or boat, or art, or whatever.
Again, money-laundering isn’t a unique problem to bitcoin, nor really in scope of what it’s for. Bitcoin just provides the platform for people who prefer not to know each other, and prefer not to trust each other, and prefer to keep their business off of government-regulated books. Those are necessary preconditions for successfully keeping funds clean, but Bitcoin isn’t an out-of-the-box money-laundering service.
With regards to the title of the OP, it seems like many of the examples of using bitcoin are for negative purposes to society. The value of anonymous transactions doesn’t seem to be used for buying coffee and groceries. It seems that it’s used to facilitate transactions with money launderers, drug dealers, tax evaders, killers, human traffickers, etc. Undoubtedly the easy and anonymous nature of the transactions means that those criminal industries expand and more people will be victims of those crimes. With Bitcoin the average person can have anonymity to pay for stuff like child porn, whereas before they would have had to use a more traceable way to pay. Linking payment to the buyer may have dissuaded them from buying it in the first place or more easily allowed them to be caught afterwards.
I think I see your point. Say you an I have a common hobby. That might be rare books, stamps, cocaine, antique art, machine guns, gold coins, or contract murder. While normally we would have to use our bank accounts so that they government sees every transaction, with bitcoin, all they might see is that we bought bitcoin or perhaps withdrew cash.
The illegal stuff mentioned above could still be prosecuted by traditional methods, but with bitcoin, neither the government, our wives, or anyone else can see the individual transactions we make regarding the items, so it gives us an additional layer of privacy. Sure we could use cash, but that is impractical over the internet.
Am I sort of getting somewhere?
Not exactly. With Bitcoin, the government can see every transaction. That’s because everyone can see every transaction. It’s fully transparent. It has to be transparent, because that’s what allows you to function as your own bank. Your software has to know that your counterparty’s balance went down by 1000 in order for yours to go up by 1000.
This transparency can confound people’s intuitions about privacy. If every transaction since the beginning of time is 100% transparent and publicly available, how can it be private? And the answer is that the privacy of Bitcion doesn’t depend on the transactions being private. Bitcoin isn’t automatically or inherently private or anonymous, but it can be made as such, for these 3 reasons:
- A transaction bears no identifying information except the addresses involved, and the amount they transacted, and the timestamp of the transaction. Also the balance of the address before and after the transaction IIRC
- Bitcoins carry no information about who’s touched it, or when it was touched, because there’s no such thing as a bitcoin.
- Most critically, you don’t need to identify yourself to become a Bitcoin participant. With a few clicks on your own computer, you are now a peer. Contrast with your traditional bank, where you have to show ID to even open an account, and you aren’t even allowed to transfer your own money.
Let me elaborate a bit on that last point, because that’s where the real magic is. When you go to your bank’s website to “transfer money” to another bank, you’re actually not transferring anything. You’re asking the bank to debit your account, and then send a SWIFT transaction to another bank to credit a different account. Suffice it to say that you don’t get to be a member of the SWIFT network without jumping through a bunch of hoops to identify yourself as a bank, or at least as trustworthy as a bank, and that you adhere to all the reporting, retention, and identity verification policies that a bank would. As a consumer, you can’t do anything on SWIFT yourself, the bank is (by law) your gatekeeper.
Contrast with Bitcoin network, where anyone can be a participant without anyone’s permission. And not only that, your interaction with the network doesn’t need to be mediated by any third-party servers or platforms. You can create your Bitcoin address right on your computer as you would a Word document or other file. You can send directly to anyone on the network, and then you can destroy the wallet. Naturally , the transactions aren’t destroyed when you destroy the wallet - the transactions live forever in the public transaction history - but it destroys the only real proof that you ever controlled that wallet.
Is the other major thing that people are missing is that you can’t use an address to identify a wallet if it’s only used once?
Correct me if my understanding is wrong about this:
Wallet “HMS” has addresses A, B, C, D
Wallet “Shady Dealer” has addresses X, Y, Z
So for example, “HMS” can purchase 1 bitcoin from an exchange and transfers to his private wallet using address A
“HMS” then transfers 0.6 bitcoin from B → X and 0.4 bitcoin from C → Y
“Shady Dealer” then cashes out 1 bitcoin from address Z through an exchange (let’s say he does it through two withdrawals of 0.2 and 0.8 bitcoin each)
So the bitcoin ledger shows:
Exchange → A (1.0 bitcoin)
B → X (0.6 bitcoin)
C → Y (0.4 bitcoin)
Z → Exchange (0.2 bitcoin)
Z → Exchange (0.8 bitcoin)
How exactly do people propose that you can draw a connection between addresses A and Z? Just because the value of the exchange transactions for A and Z were similar? What if Z has many clients and has cashed out dozens of bitcoin through an exchange?
If the police come knocking at HMS’s door, can’t he just say that he transferred his bitcoin to an offline wallet and then lost it? My understanding is that you can’t actually determine that A, B or C are associated with each other, nor X, Y and Z - all that you can know is that A accepted bitcoin from an exchange and that Z cashed out bitcoin from an exchange. A could have done any number of things with that bitcoin, including holding on to it, transferring using address D to legitimate businesses, cashed it out using address D on an exchange, etc. How can anyone prove what is done with bitcoin in that private wallet? Then again a lot of services exist where they claim they can figure things out through blockchain analysis so I’m curious what exactly they look at.
It’s hard to say what people are missing, because multiple people seem to be missing at least one major fundamental piece of knowledge of how things work, preferring to believe their own (incorrect) guess as to how things work. Few people are doing what you’re doing, transparently stating their assumptions so as to check if they are flawed.
The argument that people are making seems to be that, since all transactions are public forever, you can run them through a magical box called “sophisticated pattern analysis” and reveal trading patterns.
To some extent that’s true. If you trade in patterns, and take no steps to obfuscate them, then some external software could see that addresses A, B, and C usually trade with D, E, F, so it’s most likely just 2 different parties involved. That’s just 2 people or entities, and if you can identify one party, they might be willing and able to betray the other. (But they might not).
The obstacles to that approach are:
- People know (or should know) not to trade in patterns
- People know (or should know) to be very careful trading with people that they have real-life connections to.
- Even if you can identify a pattern involving several different parties, it does you no good unless you can identify at least one of them. Bitcoin stores no such identity storage, so it’s regular gumshoe work to establish identity.
I wouldn’t admit to owning or operating an offline wallet, nor even knowing what one is. My story is that I have a gambling addiction, so I transferred the money to an offshore gambling site, and I gambled it all away. Or they stole it and I have no recourse. Perhaps the police can help me find the bad men who took my money?
Whatever. As long as I don’t admit the money went to an address I control, I’m in the clear and they can’t prove otherwise. I definitely don’t want to tell them I know anything about offline wallets.
Yes, in other words, I know more than nothing about them. At the very least, I know that they claim to have some product that I want. And 4-6 weeks later, I’ll have verification that they did, in fact, have that product, and I’ll know where they shipped it from. That’s actually a fair bit of information, a far cry from the “no information” you claimed.
Let me give a concrete example. Suppose you’re a crime lord: You’re filthy stinking rich, with most of your income coming from illegal sources. Most of the money comes to you through various underlings, and occasionally one of those underlings gets caught by the police: Unfortunate, but it’s just business. And you’ll never get caught, because you’re smart, and doing everything right: You make sure that none of your underlings know who you are, and communicate with them only through anonymous channels, and you have a good enough spy network in the police force that you learn as soon as any of those underlings is compromised, and thereafter have nothing at all to do with them.
Well, OK, but you’re still rich, and you want to enjoy being rich (that’s why you got all of that illegal money to begin with, after all). And so when your daughter turns 16, you decide to throw the biggest, best party ever for her, because after all, you’re rich, and she’s worth it. So you call up the best caterer in town, and the rental place, and even her favorite local band.
Now, suppose you’ve been using bitcoin for all of your illegal transactions (which are, after all, almost all of your income). You can’t afford to just use clean money to throw this party: If you could, you wouldn’t have turned to crime in the first place. No problem: You can convince the caterer and the band and so on to accept bitcoin (easy enough, when you’re spending so much). And you want to avoid tracing, so you only ever use each wallet twice: Once to receive your illegal income, and once to pay someone else for something.
The party is a smashing success, and you’re happy your daughter had a great birthday, and the caterer and band are happy that they got paid a lot. Everyone’s happy. Until two weeks later, when Five-Finger Jimmy, one of your underlings, gets caught. As usual, you notice, and as usual, you cut off all ties with him. But in an effort to get a lower sentence, he sings like a bird, and tells the cops everything he knows. Including the addresses of all of the wallets he’s sent illegal money to.
And then the cops look at the blockchain, and see that one of those wallets he sent money to, has only ever had two transactions: One transfer from Jimmy’s wallet, just like he said, and one transfer to another, publicly-known wallet. Because of course the caterer makes their ownership of that wallet public, because they’ve got nothing to hide, and they want people to know how to pay them. And so the cops go to the catering company with warrants in hand, and ask them about that transaction, and being good, legitimate citizens, they say “Oh, yes, that was the payment we got from Mr. Bigg, for that party we catered at Bigg Mansion”.
And so now, the cops know exactly who that “anonymous” wallet belonged to, and so who was receiving those illegal payments from Jimmy.
Except as I showed from my example above, that’s not what it looks like on the blockchain (that is if you are smart and uses different addresses for every transaction). Instead, what the cops see is:
Jimmy transferred money to some address A
Some address B transferred money to Mr. Bigg
Explain how you link address A to B? Unless I’m misunderstanding, you don’t see one wallet with only two transactions that have ever occurred - instead, you see one transaction from Jimmy into a black hole (anonymous wallet), and one transaction from the black hole to the caterer. But I think there is no way to differentiate these from the millions of other transactions to and from the black holes that are anonymous wallets. Even the caterer says that you are the one who owns address B, there is no connection between address A and B.
I suppose where you are getting at is if the caterer says that you own address B and the cops come asking where the funds from wallet B came from, you might need to have some sort of explanation as to how it is funded through legal means. But why are the cops even asking the caterer who paid them when there is no reason for them to be asking them?
How does the money get from wallet A to wallet B?
Is that not also a transaction?
The information is also there that address A transferred bitcoin to address B. Otherwise B would not have any bitcoin.
You seem to be under the mistaken impression that transactions can take place that are not recorded on the public blockchain.
All transactions are recorded on the blockchain. If they are not on the blockchain they didn’t happen. There’s no such thing as ‘offline’ or private transactions.
The same kind of links are missing in your example above.
No. The blockchain shows:
Exchange → A (1.0 bitcoin)
A → B (0.6 bitcoin)
A → C (0.4 bitcoin)
B → X (0.6 bitcoin)
C → Y (0.4 bitcoin)
X → Z (0.6 bitcoin)
Y → Z (0.4 bitcoin)
Z → Exchange (0.2 bitcoin)
Z → Exchange (0.8 bitcoin)
I think this was a misunderstanding of mine - I was under the impression that a wallet could have multiple addresses and that the funds stored in the wallet were pooled, but reading a bit more I think I was mistaken. That is, I thought you could receive funds using address A and then send funds using address B without any transfer between the two.
Thanks, that’s very helpful. I think now that I’ve read up a bit more on how bitcoin transactions work I think I understand now and also why HMS_Irruncible indicated that you’d have to claim that you sent the money to a wallet that you don’t control.
You still have zero identifying information on who you’re doing business with on Amazon. They don’t have to tell you anything about that. If they choose not to tell you, you’re never going to know. Ergo, as I said, and contra what you said, people in fact do trade with one another all the time, without having any details whatsoever about their identity. It’s an uncontroversial and unremarkable fact of internet life. Why die on this hill? It’s silly.
My answer is the same as the other 2 times you proposed this equivalent scenario. You’ve purposely contrived a scenario that contains an avoidable rookie mistake. Bitcoin only purports to make such mistakes avoidable; it cannot avoid them for you.
Specifically, this part:
No. I do not do that. Neither does anyone who knows what they’re doing. That’s not a way to avoid tracing. That’s a really good way to get caught (which is why you shoehorned it into your scenario).
I wouldn’t want to be in that situation, and I’d plan assiduously to avoid it. But if I did screw up like that, all isn’t necessarily lost. I could simply state that Jimmy is lying about the bitcoin address to avoid serious jail time. I could state that the caterer is also lying about our Bitcoin arrangement as well. What arrangement? I made no such arrangement. I never even heard of Bitcoin! Honestly, both these characters sound shady and dishonest. They probably cooked up a scheme to keep Jimmy out of jail, and pin the blame on an innocent olive oil dealer. I mean, just look at me. I’m a fat old marshmallow, don’t even own a smartphone.
Why would I know anything about bitcoin, apart from the news headlines. I challenge anyone to prove I’m the one who controlled that “Bitcoin Wallet” (if that’s what you call those techy things). You got nothing!
This is not a defense I would be comfortable mounting, but if it came to that, my attorney would repeatedly hammer on the fact that nobody has documentary evidence that I ever participated in Bitcoin at all, much less that I controlled this particular… what was the funny word? A “Bitcoin address”? Never heard of it, I’m an old-fashioned guy.
But the overarching point is, if I’ve been as stupid as you’ve described, then I’ve pretty much voided the warranty on anonymity. Bitcoin can let smart people do smart things. It can’t protect you from the consequences of not being smart, nor does it promise to.
The last thing I’ll point out is that in the scenario you described, all the information leaked out a side channel. Bitcoin was the strong link, Jimmy was the weak link. And because, even after all the stupidity, the Bitcoin address is still not identifiable, that absence of documentary evidence still might be able to keep me out of jail even after I’ve gotten caught running the world’s stupidest gang of criminals in the stupidest possible way.
- Apologies for the multiple posts. I was receiving an error about too many links, which I think was related to it thinking I was actually linking to ShadyShit dot com.
Now that’s just silly. When I buy from a third party seller on Amazon I’m still doing business with Amazon. At the least Amazon has financial data on the seller, or they couldn’t be paid, and the authorities could use that to link the selling company to individuals. If it came to it a lawsuit could be filed to get the information Amazon knows about the seller. Amazon purchases are not an example of an identity free transaction.
I think the bolded part is where you are talking past some of the others. You say, “your identity never needs to intersect with any other entity on Bitcoin…”
I agree, if you have a Bitcoin address that only has one transaction from mining a block, and we ignore other obvious side channel leaks from outside the network, the person that controls that address is completely anonymous within the Bitcoin network. The trouble is that you must, by necessity, intersect your identity with another entity to make Bitcoin useful as a currency, and that is what others have been repeating at you.
In other words, Bitcoin itself, the protocol, can be used without leaking information, but it can’t be used in the real world for anything useful without doing so. I also think the point being made about traceability is that in many circumstances it is likely to leak more information than if it wasn’t used.
Above is your original hypothetical about how you could remain anonymous while transferring money from your bank account to ShadyShit.com. The point I think many have made is that you have now linked your identity to ShadyShit.com in two ways. First, ShadyShit has provided you services in exchange for your payment. This is probably why the authorities are asking you about the Bitcoin transfers in the first place. Second, there is an intersection, however indirect, between your bank account, through Bitcoin, to ShadyShit.
For Bitcoin to be useful it must have side effects in the real world, and for it to be useful to to you, those side effects must benefit you. That’s the intersection in the real world, and in your hypothetical you also have an intersection on the blockchain.
One counterpoint you’ve offered is that they can’t absolutely, positively associate the intermediary blockchain addresses to you. That’s true, you have deniability, but not necessarily plausible deniability. A lot of your scenarios involve lying to the authorities. Just some advice, and I’m not a lawyer, but don’t do that. If you lie to the police you are committing yet another crime, and an obvious one at that. Just assert your right to legal council and refuse to answer any questions.
If you make statements on the record that you have no idea what Bitcoin is, they could get a warrant and find Bitcoin software on your computer. They could subpoena your Coinbase account and show you make regular transactions. They could find your posts on message boards talking at length about Bitcoin. What is the jury going to think of that?
Another counterpoint you’ve offered is that you will obfuscate your transactions in the blockchain, so that your patterns can’t be differentiated from the noise, and that no sophisticated pattern analysis magic box would be able to decipher the pattern because if done correctly it must be impossible, or at least infeasible. Maybe that’s the case, but the people who design the magic boxes are smart, and all the information is right there in the blockchain, so I wouldn’t gamble my freedom on my being smarter than they are. Many smart criminals have made that bet and ended up in prison.
Serious question: have you ever purchased any goods or services with Bitcoin not directly related to cryptocurrencies?
If not, your challenge of finding one of your addresses doesn’t mean much. If you have, I think it would be fun to have a try. Send me the receiving addresses of three unrelated product or service providers you have paid with Bitcoin and I’ll give it a go.
On multiple occasions you have accused others of lacking understanding of how Bitcoin works, but from my perspective Chronos and others are making valid, correct points, and you are ignoring them. I don’t mean to speak for them, but I have read the papers and feel I have a decent understanding of Bitcoin. I decided to respond because someone is wrong on the Internet…
As for the general topic of this discussion, I think the concept of a blockchain was an innovative and important contribution to computer science, and will be a net benefit to humanity going forward. A decentralized, cryptographically secure ledger has many uses, even outside cryptocurrency.
I also think cryptocurrencies are here to stay, and are also a net boon. Perhaps not in the current incarnation of libertarian antigovernment mode, but maybe as something that works within government regulation to facility international trade and remove some of the barriers for the unbanked.
I don’t like Bitcoin and proof of work. It extremely wasteful of energy, and I don’t see a fix for that while keeping Bitcoin what it is. I’m not sold on proof of stake, but there have to be better, lower energy ways to allow the benefits of cryptocurrency without the energy cost.
But there will be records from the venue where you threw this lavish party for your daughter’s sweet sixteen party and hundreds of people will vouch for that along with hundreds of pictures on Facebook and Instagram. So you are saying that the caterer and everyone else involved is lying and you’ve never heard of bitcoin? We can clear this up right now. Show me the bank record where you paid the caterer so we can arrest them for telling this vicious lie about you. Your response would be?
Common point of confusion here. Just because there is an intersection of transactions does not mean that my identity intersected anywhere compromising in the blockchain. This point of confusion seems to come up repeatedly.
I’m purposely continuing to ignore “real world” comments like this, except to note my annoyance at people dragging in non-Bitcoin concerns after having failed to find the hole in Bitcoin. It’s the old motte-and-bailey arguing style.
Those are the worst-case scenarios. I explored them to illustrate my options in that case (turns out, they’re not all bad). Me talking to the police is a dramatization; I’d never actually do that. I dramatized several unimportant steps because they don’t serve the point.
And… the deniability only has to be as plausible as the accusation. A random person saying “this guy controlled this bitcoin address on April 1st” is something you find very plausible, because it’s a scenario contrived on this thread, assuming there are criminal actors involved, injecting enough side-channel information to ensure it will fail. Without those contrivances, it’s not a very plausible accusation at all, so it doesn’t require much plausibility to deny it.
I wouldn’t have made that statement unless I knew there was nothing Bitcoin-related on my computer. They don’t need a warrant. I’ll happily surrender it.
Counterpoint: you say “all the information is right there”, but it’s not the information they need. Pattern-recognition software only works when there are patterns to discover. No pattern, no recognition.
This is an interesting challenge. I’m not a criminal, so I have no hardened resources at hand. Plus I’m at a disadvantage because you already have a great deal of side-channel information on me from this board.
But, if you can specify exactly what kind of information you propose to surface (addresses, names, whatever), I’ll consider contriving an experiment for you.
It’s not an accusation, it’s a plain statement of fact. We’ve seen folks making arguments based on comically false technical understanding. For example, there was a mistaken belief that Bitcoins exist and have unique identities and can be traced back to their source. When I point out that their entire argument was based on false assumptions, they quietly moved onto more vague, easily defensible claims like “real world blah blah.” So it really looks like folks have preconceived notions and are striving to fit facts to it.
Anyway, propose an experiment in which you specify the pieces of data you need as inputs, and what data you propose to surface as output, and I’ll consider whipping one up for entertainment’s sake.