Is Bitcoin More Traceable Than Cash?

The New York Times argues that this week changed Bitcoin's reputation as "secure, decentralized and anonymous" (adding "Criminals, often operating in hidden reaches of the internet, flocked to Bitcoin to do illicit business without revealing their names or locations. The digital currency quickly became as popular with drug dealers and tax evaders as it was with contrarian libertarians.") "But this week's revelation that federal officials had recovered most of the Bitcoin ransom paid in the recent Colonial Pipeline ransomware attack exposed a fundamental misconception about cryptocurrencies: They are not as hard to track as cybercriminals think..." [F]or the growing community of cryptocurrency enthusiasts and investors, the fact that federal investigators had tracked the ransom as it moved through at least 23 different electronic accounts belonging to DarkSide, the hacking collective, before accessing one account showed that law enforcement was growing along with the industry... The Bitcoin ledger can be viewed by anyone who is plugged into the blockchain. "It is digital bread crumbs," said Kathryn Haun, a former federal prosecutor and investor at venture-capital firm Andreessen Horowitz. "There's a trail law enforcement can follow rather nicely." Haun added that the speed with which the Justice Department seized most of the ransom was "groundbreaking" precisely because of the hackers' use of cryptocurrency. In contrast, she said, getting records from banks often requires months or years of navigating paperwork and bureaucracy, especially when those banks are overseas... Tracking down a user's transaction history was a matter of figuring out which public key they controlled, authorities said. Seizing the assets then required obtaining the private key, which is more difficult. It's unclear how federal agents were able to get DarkSide's private key. Justice Department spokesman Marc Raimondi declined to say more about how the F.B.I. seized DarkSide's private key. According to court documents, investigators accessed the password for one of the hackers' Bitcoin wallets, though they did not detail how. The F.B.I. did not appear to rely on any underlying vulnerability in blockchain technology, cryptocurrency experts said. The likelier culprit was good old-fashioned police work. Federal agents could have seized DarkSide's private keys by planting a human spy inside DarkSide's network, hacking the computers where their private keys and passwords were stored, or compelling the service that holds their private wallet to turn them over via search warrant or other means. "If they can get their hands on the keys, it's seizable," said Jesse Proudman, founder of Makara, a cryptocurrency investment site. "Just putting it on a blockchain doesn't absolve that fact...." The F.B.I. has partnered with several companies that specialize in tracking cryptocurrencies across digital accounts, according to officials, court documents and the companies. Start-ups with names like TRM Labs, Elliptic and Chainalysis that trace cryptocurrency payments and flag possible criminal activity have blossomed as law enforcement agencies and banks try to get ahead of financial crime. Their technology traces blockchains looking for patterns that suggest illegal activity... "Cryptocurrency allows us to use these tools to trace funds and financial flows along the blockchain in ways that we could never do with cash," said Ari Redbord, the head of legal affairs at TRM Labs, a blockchain intelligence company that sells its analytic software to law enforcement and banks. He was previously a senior adviser on financial intelligence and terrorism at the Treasury Department. The story includes three intriguing quotes: Justice Department spokesman Marc Raimondi said the Colonial Pipeline ransom seizure was only the latest of "many seizures, in the hundreds of millions of dollars, from unhosted cryptocurrency wallets" used for criminal activity.Hunter Horsley, chief executive of cryptocurrency investment company Bitwise Asset Management, said "The public is slowly being shown, in case after case, that Bitcoin is good for law enforcement and bad for crime — the opposite of what many historically believed."A spokesperson for Chainalysis, a start-up that traces cryptocurrency payments, tells the Times that in the end, "cryptocurrencies are actually more transparent than most other forms of value transfer. Certainly more transparent than cash."

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