Blockchains and privacy: tracing transactions

While Bitcoin is reasonably private, it's not perfectly so. Your name isn't on the blockchain if you make a transaction - instead it's a random string of characters called an 'address' - but over the years, cryptographic researchers have developed tricks to de-anonymise these adresses and trace transactions. Chainalysis is one company set up to do exactly this. Phillip Gradwell is their chief economist, and told Phil Sansom and Eva Higginbotham how it works...

Philip - We're not actually trying to analyse what any individual is doing. We're not trying to name, "these are Phil Sansom's Bitcoin". But there is a need to actually understand how value moves on a blockchain. And if you're a cryptocurrency business, somewhere you might go to buy or sell Bitcoin, you need to do anti-money laundering checks in the same way that your bank needs to do that as money as sent in and out of them.

Phil - How do you actually do this? Because going from a random number to an actual person, organisation, thing... I have no idea how that's actually done.

Philip - Okay, so let's break it down. Whenever you make a transaction using Bitcoin or another cryptocurrency, you've got to tell the network that you're actually making that transaction. We can look at all of that data because all of those transactions are published into this big database that anyone can download. And I can actually show you what that looks like - if you go to our 'block explorer'...

Phil - Okay, you've brought up a website, and it looks like a table of a lot of numbers and stuff that I don't recognise.

Philip - So that's the source of the Bitcoin, the address that it's coming from; and it has the destination, the people that are receiving it. And some of these we've actually already identified, and there's some others that we haven't identified. And that's probably because they actually belong to private individuals.

Phil - You can identify the exchanges, but not the people?

Philip - Yeah, that's right.

Eva - Curious!

Phil - What they can do is effectively group a bunch of addresses into a group that they think is one source. And if they think that source is an exchange...

Philip - We'll actually have to go and send some Bitcoin to that business, and then we'll see the address that it gets deposited in. And that'll help us connect that address to all of the other addresses that that business controls.

Phil - Oh, sneaky. You're kind of infiltrating!

Philip - Well, we're just using it like any normal customer would.

Phil - The problem is though that you've still got these anonymous people. So how can you find that it's an illicit source in the first place?

Philip - Illicit sources, they often actually need to communicate their addresses, right? If you're a darknet market, you need to open up your platform to let your people come and buy and sell the goods that are there. And we can then, in the same way we interact with an exchange, we can go interact with that darknet market and map it in the same way.

Phil - And how effective is this? How much of this stuff are you catching?

Philip - Well, you never know how much you're catching, because you don't know how much you're not catching. But the stuff that we know is related to illicit activity is actually only around 1% of all the value that's sent on the blockchain.

Eva - Isn't that the opposite of what the point of it was though? The whole point of having your special public key is that no one knows it's you. It's not really 'crypto' anymore.

Phil - I mean, it's an excellent point.

Philip - There's been a lot of debate aruond this. My perspective is: if tools like this aren't available then the laws of the land can't really be obeyed. And then actually cryptocurrency doesn't grow, it doesn't become mainstream. Banks don't give bank licenses to cryptocurrency businesses, and normal people don't want to get involved in something that's kind of shady or murky.

Phil - And overall, today, cryptocurrencies like Bitcoin are much more mainstream.