Why is crypto connected to criminality?
With nearly half of all bitcoin transactions connected to illegal activity, the dark web’s currency of choice risks disrupting the adoption of blockchain as a whole, researchers have warned.
Between 43 and 49 per cent of all bitcoin transactions are linked with the buying and selling of illegal goods and services like drugs, weapons and pirated software, researchers from the University of Technology Sydney and Sydney University have warned.
Further, this illegal activity “risks stunting the adoption of this [blockchain] technology and limiting the potential benefits to society”.
UTS Professor Talis Putnins said bitcoin was the dark web’s “currency of choice” because the alternatives like cash and bank transfers are either too easy to track, like e-payments, or “virtually useless” for international trade, like cash.
The dark web, or darknet, is a part of the internet that can only be accessed through specific software or configurations and is often used for illegal activity.
“Cryptocurrencies (although not perfectly anonymous/untraceable) are considerably less transparent and more difficult to track than bank transfers or Paypal, etc. So they find their use in facilitating online illegal trade (in particular in dark web marketplaces) as perhaps the least traceable of the various forms of electronic payments.
“Although we have been able to estimate the amount of illegal activity that uses bitcoin and have developed tools to make sense of the blockchain, it is certainly not simple to observe the illegal activity or identify those involved in illegal trade,” he continued.
Together with Professor Jonathan Karlsen and Dr Sean Foley, Mr Putnins’ research found that about one-third (32 per cent – 34 per cent) of users are using the cryptocurrency for illegal activity.
Their upcoming paper, Sex, Drugs, and Bitcoin also finds that between 20 and 28 per cent of the total dollar value of bitcoin transactions are associated with illegal transactions.
The researchers had tracked global illegal bitcoin usage from 2009, with an aim to assist regulators in understanding the “size of the task they face in attempting to monitor and regulate bitcoin, particularly as it becomes mainstream”.
“The methods that we have developed in this research to make sense of the bitcoin blockchain are new and combine fairly technical aspects of computer science, econometrics, and network theory,” Mr Putnins explained.
“Armed with these tools, one can make sense of the blockchain, but without them, the bitcoin blockchain looks like a mess of random numbers.
“A further challenge to law enforcement agencies is linking an online entity — a bitcoin user — with a physical person, say Joe Blogs. As researchers, we sought to quantify the amount of illegal activity in bitcoin, and for this purpose it was sufficient for us to estimate which accounts or online entities were involved in illegal activities.”
‘Surprising’ how much sense can be made of bitcoin blockchain
Acknowledging that navigating and understanding blockchain can be difficult for a casual observer; Mr Putnins said that while many think bitcoin is “highly anonymous and untraceable”, that’s not necessarily the case.
“The techniques we have developed can be used by legal authorities in surveillance activities, but more broadly, much of what we develop is transferable to analysing other blockchains,” Mr Putnins said in a statement.
“In the hands of regulators or federal police, our methods potentially provide a lot of value in understanding what is going on – and cracking down on it.”
He explained that one of the key reasons bitcoin became widely used in illegal online settings was due to its perceived inscrutability.
Subsequently, new cryptocurrencies have been developed that are more difficult to crack, while bitcoin users engaging in illegal activity use different techniques to conceal their bitcoin transaction history.
Nevertheless: “Despite the emergence of new cryptocurrencies that are more difficult to track than bitcoin, bitcoin remains the dominant currency in the dark web. By the time the alternative cryptocurrencies had been developed, bitcoin had a critical mass of users in the dark web that made it difficult to displace as the currency of choice.”