Bitcoin is a incredible use of peer to peer communication and encryption, allowing direct and immediate money transfer without any central control. It is sometimes claimed to be ideal for illegal activity, which I believe is quite a long way from the truth. At least I would not conduct illegal money transfers using a system where the details of every transaction are kept forever. This point is investigated in USENIX ;login: from December 2013, in the article "A Fistful of Bitcoins - Characterizing Payments Among Men with No Names" by Sarah Meiklejohn, Marjori Pomarole,Grant Jordan, Kirill Levchenko, Damon McCoy, Geoffrey M. Voelker, and Stefan Savage. They analyse the transaction log in the Bitcoin system, using it to find addresses belong to individuals and organisations and follow the flow of money from both Bitcoin theft and trades on Silk Road to where the money end up. This is how they wrap up their article:
"To demonstrate the usefulness of this type of analysis, we turned our attention to criminal activity. In the Bitcoin economy, criminal activity can appear in a number of forms, such as dealing drugs on Silk Road or simply stealing someone else’s bitcoins. We followed the flow of bitcoins out of Silk Road (in particular, from one notorious address) and from a number of highly publicized thefts to see whether we could track the bitcoins to known services. Although some of the thieves attempted to use sophisticated mixing techniques (or possibly mix services) to obscure the flow of bitcoins, for the most part tracking the bitcoins was quite straightforward, and we ultimately saw large quantities of bitcoins flow to a variety of exchanges directly from the point of theft (or the withdrawal from Silk Road).
As acknowledged above, following stolen bitcoins to the point at which they are deposited into an exchange does not in itself identify the thief; however, it does enable further de-anonymization in the case in which certain agencies can determine (through, for example, subpoena power) the real-world owner of the account into which the stolen bitcoins were deposited. Because such exchanges seem to serve as chokepoints into and out of the Bitcoin economy (i.e., there are few alternative ways to cash out), we conclude that using Bitcoin for money laundering or other illicit purposes does not (at least at present) seem to be particularly attractive."
These researches are not the first to analyse the Bitcoin transaction log. The 2011 paper "An Analysis of Anonymity in the Bitcoin System" by Fergal Reid and Martin Harrigan is summarized like this:
"Anonymity in Bitcoin, a peer-to-peer electronic currency system, is a complicated issue. Within the system, users are identified by public-keys only. An attacker wishing to de-anonymize its users will attempt to construct the one-to-many mapping between users and public-keys and associate information external to the system with the users. Bitcoin tries to prevent this attack by storing the mapping of a user to his or her public-keys on that user's node only and by allowing each user to generate as many public-keys as required. In this chapter we consider the topological structure of two networks derived from Bitcoin's public transaction history. We show that the two networks have a non-trivial topological structure, provide complementary views of the Bitcoin system and have implications for anonymity. We combine these structures with external information and techniques such as context discovery and flow analysis to investigate an alleged theft of Bitcoins, which, at the time of the theft, had a market value of approximately half a million U.S. dollars."
I hope these references can help kill the urban myth that Bitcoin is anonymous. It isn't really a good fit for illegal activites. Use cash if you need to stay anonymous, at least until regular DNA sampling of notes and coins become the norm. :)
As usual, if you use Bitcoin and want to show your support of my activities, please send Bitcoin donations to my address 15oWEoG9dUPovwmUL9KWAnYRtNJEkP1u1b.
