Criminals have used the anonymity offered by Bitcoin to fund their illegal activities, almost since its inception. Bitfury is launching an analytics solution to put an end to it.
In 2017, we saw tremendous activities in the cryptocurrency space. Several new Initial Coin Offerings (ICOs), accompanied by phenomenal rise in value, of course led by Bitcoin, the most famous of the cryptocurrencies. In December 2017, Bitcoin reached the US $ 20,000 mark, an apt reflection of the tremendous enthusiasm of the cryptocurrency traders.
The cheer of the cryptocurrency traders haven't been matched by the governments, regulators, investigating agencies, and central banks. Many countries have banned Bitcoin either completely or partially, for e.g. Iceland, Ecuador, Bolivia, Russia, Sweden, China, Thailand, and Bangladesh. In India, the Reserve Bank of India (RBI), i.e. the central bank responsible for monetary policy, had issued 3 warnings to the cryptocurrency traders stating that cryptocurrencies are not recognized as legal tenders and anyone investing them must do so at their own risk. Following up, the Government of India (GoI) has, in February 2018, declared in the national parliament that they will do everything possible to prevent funding of illegal activities using cryptocurrencies, and they don't consider cryptocurrencies as legal tender. The most severe blow to cryptocurrencies came from South Korea in January 2018, when the justice minister indicated that legislation may be introduced to ban cryptocurrencies completely in South Korea, because, among other reasons, the government wants to prevent funding of crime using cryptocurrencies. 20% of world's Bitcoin transactions happen in South Korea, and this announcement sent the global cryptocurrency market tumbling down. Although the South Korean government has softened their stance since then, they still are very serious about regulating cryptocurrencies to prevent funding of crime with cryptocurrencies. In all of these, the common theme is abuse of cryptocurrencies by criminals.
Since almost its inception, the anonymity provided by Bitcoin has tempted criminals to use it for funding their criminal activities. The other cryptocurrencies have the same issue as well. A person trading in cryptocurrency can do it anonymously, or by using pseudonyms. The cryptocurrency trader can also operate using multiple addresses on the network. Criminals use these features to create a complex web of transactions while financing their illegal acts, making it very hard for the law enforcement agencies to follow the trail of money. Investigators are often completely helpless when the crime is financed with cryptocurrencies. How many cryptocurrency traders can they track, and how can they determine whether multiple addresses used on the cryptocurrency transaction ledger belong to one single criminal? How can they identify the real identity of the person concerned?
There actually exists a technology, using which multiple addresses of a user on the underlying blockchain of Bitcoin can be linked back to their single user. It's called “clustering”, however, it's not very reliable. An analytics model can be built from the user-address data from the underlying blockchain, and we will call this 'on-chain' data. However, using on-chain data alone results into a degree of error that's too high for law-enforcement purpose. Moreover, it's hard to de-anonymize the user from the on-chain data alone. This makes the analytics model built using only clustering technology inadequate for the investigation agencies.
San Francisco, California, USA-based Bitcoin mining and blockchain transaction processing company Bitfury has launched a collection of software, collectively called “Crystal“, to bridge the gap. There is a crucial difference in how Crystal is designed to build the Analytics model, compared to the analytics models built earlier for this purpose from the on-chain data alone. We are social beings, and the criminals using Bitcoin to finance crime aren't exception to this. We leave multiple footprints on the online world, so do the criminals. Various sources of information exist outside the blockchain underlying Bitcoin about the Bitcoin traders. These sources include web, various cryptocurrency-related forums, and multiple other sources. Let's call these 'off-chain' data. Crystal combines on-chain and off-chain, both sets of data, to build its analytics model. Using clustering technology on the on-chain data one subset of the analytics model is created, which is then validated using the off-chain data, and this reduces the margin of error significantly, making it far more useful to the investigating agencies. As a matter of fact, Bitfury has already identified one-sixth of the users on the Bitcoin blockchain, by linking multiple addresses to their real user and de-anonymizing the data using on-chain and off-chain data sets.
Bitfury took two years to develop this solution, and their CEO Valery Vavilov believes that the solution will help the investigating agencies significantly. A light version of Crystal has been made available to users for free, and Bitfury plans to release pricing charts for enterprise subscription in March 2018.