bitcoin is used to facilitate an awful
lot of bad stuff
um it's not just things like online drug
dealing it's things like um
you know viruses which will encrypt your
hard disk and hold you up to ransom from
the original crypto locker through
things like wannacry and in the old days
kidnapping just didn't work because you
couldn't get the money away and the
existence of cryptocurrencies changes
that in in ways that may have wider
ramifications
what we've been looking at
is how you go about tracking stolen
bitcoins
suppose you're foolish enough to let
people know that you've got 10 million
dollars worth of bitcoins and somebody
comes into your house and sticks a gun
up your nostril and gets you to transfer
them to him how can you go about tracing
the stolen loot well people have known
since the beginning of bitcoin that you
can in fact trace stuff because the
blockchain is entirely public and all
the transactions are there for everybody
to see but how do you go about doing
this in practice people like martin
moser and reiner burma came up with a
couple of approaches the first approach
they said is poison tainting and poison
tenting means that if you put a bad
bitcoin
into a transaction or address then it
poisons everything that's there so if
you open a new wallet and you put in
three stolen bitcoins and then seven
freshly mined bitcoins then when you go
and spend that utxo it's 10 stolen
bitcoins the problem with this is that
over a few thousands or tens of
thousands of blocks it completely
poisons the entire blockchain at least
the active blockchain that people are
using for trading so the second method
that they come up with was what they
call haircut tainting and here if you
put three stolen bitcoins into a new
wallet and then seven freshly mined ones
then you end up spending ten bitcoins
each of which is thirty percent tainted
and you just write the software as a
track all this
now the problem with haircut tenting is
that within a few thousand blocks you
end up with all the active bitcoins in
the blockchain being tainted just a
little bit under 10
because something over six percent of
all bitcoins have been stolen at least
once so what can we do about this well
the breakthrough came when i was talking
with david fox who was one of our law
lecturers and is now a law prophet at
edinburgh
and he pointed me to what lawyers knows
clayton's case and this was a judgment
of the high court in london in 1816
after a bank went bankrupt during the
napoleonic war and they had to sort out
who owned what
among the rubble and the master of the
roles one of the senior judges in
england at the time ruled that you had
to do first in first out right the first
money that went into an account is used
to satisfy the first checks that are
drawn on it
and so this gives us a sound legal basis
for trying to do some computer science
because first in first out or fifo is
something that programmers and
communications engineers understand very
very well so we went and wrote some
software which does a 5 foot tenth of
the blockchain
and so whenever coins are stolen and put
in a transaction perhaps join with other
kinds the coins that went in first are
the coins that go out the first satoshi
inn is the first satoshi out and so on
and when we run this over the blockchain
we find that a fascinating thing happens
that the tent remains concentrated
rather than being spread out
so for example if you look at a theft of
about a thousand bitcoins in 2014 and
trace it forward to 2016
then if you use poison tainting or
haircut tenting then it affects about
one and a half million addresses which
is a lot
however
if you use fifo tainting then only 11
000 addresses are affected so what's
happening here
is that bad bitcoins tend to keep on
circulating in bad neighborhoods of the
internet
and we find that whereas
you know with haircut tenting most of
the bitcoins out there are tainted one
way or another if you use five for
tenting then the majority of bitcoins
aren't tainted at all the tent is
concentrated um among oh gosh about 20
or so of the bitcoin stock all of a
sudden we've got a practical way
to trace stolen bitcoins both over the
short term if somebody came and did an
armed robbery at your house yesterday
and over the medium term if a bitcoin
exchange goes bust and it turns out that
somebody inside it has been stealing
bitcoins for a year or so
so it's fit for both purposes
and this has got all sorts of
interesting implications
now that the regulators have started
insisting that bitcoin exchanges be
regulated now the the us financial
crimes enforcement network which is part
of the us treasury
started um requiring bitcoin exchanges
to be regulated in 2013. they busted
btce which was a big criminal operated
bitcoin exchange in greece and they went
and busted a few places in america as
well and so now the message has got
across and even in
you know relatively remote places like
the philippines they've now got round to
passing laws saying that all bitcoin
exchanges have got to register as
foreign exchange dealers and that means
that when you change bitcoins whether
into dollars or euros or pounds or even
into pieces
you've got to produce your passport in a
of utility bills so that there's a
record of who you are the european union
for its part has decided from the amend
the fourth anti-money laundering
directive that they're going to require
companies to provide hosted bitcoin
wallet services to also
fall under the regulation and this means
that if you get your bitcoin wallet run
online by a service company as the great
majority of bitcoin users do then you'll
have to provide your passport and your
gas bills just as if you were opening an
account at hsbc there's an interesting
top-level view of this which is that
very often when a new disruptive
technology comes along
people build systems and they completely
ignore the existing laws for a while and
they try and build something better and
if they do build something better then
it gets
you know blessed with regulation and
absorbed into the system uber comes
along and it says we're not a taxi
company we're a service company we're a
platform
and so they start providing cheap taxi
rides in london and then people notice
that
some of the cars are unsafe that the
drivers are working 16 hours a day that
they're getting less than minimum wage
that they're not getting criminal
records background checks that sometimes
they rape customers and the crimes
aren't reported and eventually the mayor
of london says listen pal you are a taxi
company and we're pulling your license
see you in court
and the moral is that very often when
you get a new and disruptive phenomenon
coming along
you can sort it out perfectly well by
applying existing law to it once you can
figure out an intelligent way to do that
and so what we've done
is produce software which enables you to
track stolen bitcoins effectively
and we're going to be making this
publicly available so that if your
bitcoin gets stolen you can apply it to
the doc the blockchain and you can find
where your property's gone and we're
also going to be publishing a tent chain
which will be a public list of coins
that have been publicly reported to be
stolen and we hope that that will be
taken over by the authorities perhaps by
europol or somebody like that
and will then have to be
taken into account
by bitcoin exchanges when they ponder
whether to give value for
a piece of cryptocurrency that
somebody's offered them if i'm holding
some bitcoin and as far as i know
legitimately why do i want to go and
find out if they might actually be
stolen well this this is a
this is a perpetual problem um with
anti-money laundering um measures in
that nobody actually wants to know the
truth right citibank what doesn't want
to know that they've got john gotti as a
customer and they would push back very
very hard against laws which said that
citibank ceo had to go to jail if it
turned out that a mafia bus was a
customer so instead they lobby for laws
which say that so long as citibank has
got to pass brothers and two gas bills
off every customer they don't have to go
to jail
and so mr gotti is good at finding
passports and gas bills and city bank
doesn't have to go to jail and
everybody's happy and so we've got
ourselves at a a an equilibrium in the
anti-money laundering world of
traditional money that doesn't really
quite work however once you move into
the world of cryptocurrencies the fact
that cryptocurrencies are completely
traceable changes the game entirely it
you know once you have got public
information of what money went where and
when it suddenly becomes impossible for
banks to turn around and say now hang on
a minute we didn't know
so the bitcoin people have been lobbying
for at least five years to have bitcoin
to be declared money because if bitcoin
becomes money then now what if there was
a secret mathematical relationship
between p and q would that change
anything what if p was actually equal to
some multiple of q