Even though bitcoin was initially thought of as a totally anonymous cruptocurrency, blockchain analysis and internet traffic tracing have made it possible to identify the origin of a large number of bitcoin transactions, but is it possible to trace back and identify the IP address of the individual sending a bitcoin transaction under all circumstances? Do blockchain analysis and internet traffic tracing techniques always work?
A recently published paper attempted to answer this question via critically analyzing research studies that delved into the anonymity of bitcoin transactions, in order to measure the feasibility of tracing back illicit bitcoin transactions to their senders’ real life identities by law enforcement agencies.
The paper was designed to follow on the approach adopted by Reid and Harrigan (2013), throughout their paper titled “An Analysis of Anonymity in the Bitcoin System”, in determining if personal identification info could be collated with external data sources of data to pinpoint the location of individual users. The study did not only undergo a thorough literature review, regarding the anonymity of bitcoin users and the potential ability to trace back transactions via blockchain analysis, but it also examined four bitcoin exchanges to check if the info provided during the sign-up procedure is sufficient and reliable enough for verification. As such, the study examined the ability of law enforcement agencies to rely on such info when attempting to prosecute users sending and/or receiving illicit bitcoin transactions. Moreover, via submission of fake verification info, the researchers examined the plausibility of bitcoin exchanges accepting illegitimate or fraudulent info.
Can All Bitcoin Transactions Be Traced Back To Their Senders’ Real Life Identities?
The results of this study are very interesting. It is non-arguably possible to identify and prosecute illicit actors via transaction analysis tracing back to transactions linked to a bitcoin exchange. Nevertheless, compliance and strictness of implementation of AML (Anti-money laundering) legislation and the security standards of customer identification procedures are insufficiently deployed within the context of some bitcoin exchanges which opens the door to tech savvy, well funded, criminal actors to bypass identification control procedures and get involved in bitcoin transactions without having to reveal their real identities.
Full compliance with know-your-customer KYC and due diligence regulations is mandatory if law enforcement agencies are to be able to precisely depend on information obtained by a bitcoin exchange. The paper highlighted the need for investigating the means via which criminals overcome identity control and thus, finance their illegal activities.
The researchers managed to use fraudulent identity info to create accounts and engage in bitcoin transactions on 2 bitcoin exchanges (the researchers did not point out exactly the names of these two exchanges).
More importantly, even though bitcoin transactions can be theoretically traced back and linked to the real world’s identity of the senders; this is not practically possible in 100% of cases, especially that monitoring of transactions is not possible in real time; instead, blockchain analysis and internet traffic monitoring takes place in a retrospective manner. The paper concluded that it highly depends on bitcoin exchanges to implement more strict identification procedures to increase the percentage of bitcoin transactions that could be traced back to their original real life senders.