17 Sep

Bitcoin and the Darknet

Nikolay Korinets

Anonymous nature of cryptocurrency and the lack of crypto expertise amongst law enforcement authorities made bitcoin flourish on the darknet back in the early 2010s.

Anonymous nature of cryptocurrency and the lack of crypto expertise amongst law enforcement authorities made bitcoin flourish on the darknet back in the early 2010s.

It brought Bitcoin into a spotlight but also affected the reputation of the first cryptocurrency. To this day, the community is still facing allegations that Bitcoin is used exclusively for criminal purposes.

The darknet websites that are not indexed by search engines such as Google are only available to a specific group of people and accessible via authorization and certain software configurations. As the name suggests, the darknet is used for all sorts of illicit activities such as trading forbidden substances, weapon, porn and many more. We will provide a little background on the most prominent cases.

Silk Road was the first online black markets for selling illegal drugs. Users were able to browse anonymously without their traffic being monitored. The Silk Road was launched in 2011 and shut down by FBI two years later. The FBI arrested the founder of the website Ross Ulbricht, also known as “Dread Pirate Roberts.”

Craig Wright who claims to be Bitcoin founder Satoshi Nakamoto has accused his peers Martti Malmi, an early Bitcoin developer and Michael Marquardt, a Bitcoin.org / BitcoinTalk administrator of being co-founders of the Silk Road as well as Hydra and several other darker websites. However, he provided no evidence to support this.

But even more unusual in the Silk Road case was the involvement of two corrupt law enforcement agents. Secret Service agent Shaun Bridges had stolen hundreds of thousands of dollars worth of bitcoin from the Silk Road. Agent Carl Mark Force attempted to blackmail Ross Ulbricht and even sold him secret information related to the Silk Road investigation.

Eventually, Silk Road was shut down in 2013 and thanks to that bitcoin has become well known outside the cyberpunk network.

That wasn’t the end of the darknet though; the marketplaces quickly re-arranged themselves and users migrated to the new platforms. Silk Road successors Cloud 9, Hydra and Silk Road 2.0 didn’t last long either. They were shortly tracked down and closed by police forces who started to keep up with the fast-developing online industry.

Another major website the Dream Market looked a lot like Amazon except you need a TOR browser to get there. In March 2019 the marketplace was allegedly seized by law enforcement officials. A message was posted on Twitter warning users not to log in to Dream Market since the police can secretly control the marketplace 30 days after seizing it and obtain the data on all customers and transactions.

They used a similar scheme with Hansa in 2017 when German police arrested the administrators of then huge European illicit goods market. Interestingly both were arrested for selling pirated ebooks and audiobooks which had nothing to do with Hansa.

Dutch police who also had them both on the radar decided to take advantage of the absence of both marketplace admins. They were able to take complete control of the Hansa website and to impersonate both administrators while collecting the data and tracking down the major sellers. Ironically the customers of Hansa praised the improved quality of tech support and service while police officers ran the website.

At about the same time another massive marketplace AlphaBay was closed down by police. So the Dutch law enforcement assumed that majority of the users would soon migrate to Hansa, which is exactly what happened. Police were able to get access to an even bigger chunk of the darknet users.

As a result of Hansa operation, local cyber crime police have obtained the data on 420,000 users of the marketplace, including at least 10,000 home addresses, which they passed to Europol.

The law enforcement has seized 1,200 bitcoins from Hansa, worth about $12 million. Since Hansa used bitcoin’s multi-signature transaction feature to protect funds, the confiscation was only possible because Dutch police had taken over the site. They adjusted its code to disable that feature during Hansa’s last month online.

Of course, significant operations like that bring the name of bitcoin to mass media and again it is associated with illicit activities.

To those of us who have limited knowledge about crypto, it may look like Bitcoin is mainly used for illicit purposes.

However, based on recent studies, cryptocurrency activity on darknet markets is less than 2 % of the total value of Bitcoin transactions.

MIT Lab recently analyzed over 200,000 of bitcoin transactions using Chainalysis, and only 2% of them were found ‘Illicit’. Blockchain analytics company Elliptic collaborated with researchers from the MIT and IBM to reveal a public dataset of bitcoin transactions associated with illicit activity. The group used machine learning software to analyze bitcoin node transactions, estimated roughly $6 billion in total.

This result is more or less in line with another study conducted by competing firm Chainalysis, which estimated just 1% of bitcoin transactions in 2019 associated with illicit activity.

Since both firms are frequently hired by law enforcement agencies to identify illegal activities using cryptocurrency, this research was supposed to find patterns that can help distinguish illicit cases of bitcoin usage from the lawful ones using artificial intelligence. Sometimes the software was able to find patterns that would be difficult to justify yet still matched with known criminal cases and entities, based on the existing dataset from darknet markets. Following the study, the same datasets were made public to encourage open-source contributions.

The study also identifies the trends in the way new darknet platforms are created and run in the aftermath of previous marketplaces being shut down. So law enforcement agencies spend less and less time tracking down illicit transactions via blockchain and new operations on the darknet.

Worth mentioning that the study was only possible thanks to the availability of all information on bitcoin transactions. So decentralized nature of crypto is not so criminal friendly after all.

It looks like the existing offshore infrastructure is still way more suitable for money laundering and terrorist financing than a decentralized bitcoin network.

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