DavidBalaban

David Balaban is a computer security researcher with over 10 years of experience in malware analysis and antivirus software evaluation. David runs the Privacy-PC.com project which presents expert opinions on the contemporary information security matters, including social engineering, penetration testing, threat intelligence, online privacy and white hat hacking. As part of his work at Privacy-PC, Mr. Balaban has interviewed such security celebrities as Dave Kennedy, Jay Jacobs and Robert David Steele to get firsthand perspectives on hot InfoSec issues. David has a strong malware troubleshooting background, with the recent focus on ransomware countermeasures.

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Bitcoin is generally considered as a method for transacting anonymously. But the question remains how anonymous it is.

Anonymity and privacy

Firstly, it is vital to know the basic difference between anonymity and privacy with respect to financial transactions. We refer a transaction as anonymous if no person has any knowledge about your identity. We will refer to a transaction as private if the things you buy, and for what price, are not known.

Let us imagine a simple matrix and find the distinct types of financial transactions inside it. Barter and cash are the most internally anonymous and private mechanisms of transactions.

In the opposite end are transactions that are not anonymous or private at all. This covers, for instance, campaign donations above a certain limit. We can certainly include in this part credit card transactions. Your identity is connected with every transaction you make, and this data is there for the credit card company, merchant, the issuing bank, and if asked for by court orders – law enforcement.

A few financial exchanges that are private might not fulfill the criteria for anonymity; for instance, the donation wall at the nearby museum, which has the names of those who donated but not the amount donated.

Bitcoin, however, can be considered as anonymous but not as private. No Bitcoin protocol stores identities in itself, but each transaction taking place can be seen on the distributed computerized public ledger referred to as the Blockchain. More on evaluating user privacy in Bitcoin.

The anonymity given by Bitcoin is now a point of fascination and a hurdle for financial policies and regulations. As the speed of recipiency of the currency quickens and as it falls under analysis by the financial and legal authorities, especially with respect to agreement with the applicable anti-money laundering laws and know-your-customer regulations, its actual level of anonymity will turn into a very closely studied matter.

For a lot of Bitcoin users who are using it via one of the famous online platforms that fall under the category of wallet exchanges, their use of these services includes connecting their own personal ID to their Bitcoin property. Bitcoin for such clients is actually as anonymous as a bank account, though this deprivation of anonymity happens at the entry point into using the currency and is not a characteristic feature of the Bitcoin.

People who want to make use of Bitcoin’s inherent anonymity, have to find a separate entry point, such as obtaining a Bitcoin through a private exchange, or as payment for services and goods, or as payment for mining. Further Bitcoin exchanges are then capable of being anonymous since the personally identifying info is not a part of the Blockchain ledger. The sole identifying data stored there is the Bitcoin address, and the related private keys are possessed by the proprietors as confirmation of ownership.

Keeping your anonymity after this moment is not assured in any manner. Even assuming someone manages to get Bitcoins without providing his personal data, his real identity can still be unearthed while passaging of Bitcoins inside its network. Let’s now see how this can take place.

Talking in a broad fashion, de-anonymization methodologies follow one of the two paths related to the public properties of the transactional ledger and also with the probability of exposing the network IP addresses of the machines initiating the transactions.

The transactional records and anonymity

No upper limit exists to the volume of address that a Bitcoin owner can manage. All of a person’s Bitcoins are capable of being stored in the same address, or they may be distributed between thousands of separate addresses. Contrary to this, a recommended practice dictates that each address should be used just one time. Any remaining change from a specific transaction is not to be stored in the past address but is to be transferred to a fresh one. This expansion of addresses obscures the ones that are in control of one individual at one point in time and makes it tougher to follow the money that is controlled by the specific individual at all times.

However, one can take advantage of the transparency that is provided by the Bitcoin ledger and find usage patterns that are present and bundle several addresses based on spending patterns. This is the field of transaction graph analytics.

Transaction graph analytics

Transactional graph analytics makes use of some tricks and some informed guesswork to connect the almost 58 million exchanges happening among 62 million addresses to a part of the distinct owners of Bitcoin. It then permits for transactional relations among the Bitcoin owners to be tracked and mapped.

  • A simple technique of analyzing exchange graphs includes transactions that have two or more input addresses. Technically such inputs are in control of the same individual. If any of those addresses can be found anywhere else in the Blockchain, then the related transactions may also be mapped to the same individual.
  • Another technique makes use of the Bitcoin good practices. In case one of those output addresses inside a transaction has never appeared in the Blockchain earlier, then it’s a fair bet that the recent address is just the change address.
  • One more technique considers the numerical accuracy of sums associated with the transaction. For instance, if a transaction involves two output addresses relating to two newly seen Bitcoin addresses, with one output is 3 BTC and another is 0.235459 BTC, there exist high chances that the first amount corresponds to the receiver and the second amount corresponds to the change. What is the possibility that the change happens to come up with a precise figure? The address initiating the transaction can be related to the change address. A similar analysis can be duplicated after transforming to major currencies like the EUR and USD to look for “whole amounts” that might else be lost in a Bitcoin nominated deals and thus it is possible to distinguish the sender from the receiver.

It is possible to destroy address de-anonymization by transmitting Bitcoins via tumblers or mixtures. They grab a set of Bitcoins and give back a different set of similar value (deducting a processing fee) with their individual addresses and transaction records, thus laundering the coins. However, these programs come with significant disadvantages:

  • Clients have to give the full control over their Bitcoins and rely on the company to give back the money.
  • Analyzing the transaction graph may help you to spot the usage of mixing services and thus mark the user as presumably doubtful.
  • Mixers do not suit well for big sums, except when there are people with equally large sums mixing their Bitcoins at the same point in time.
  • Quite a few mixing providers do not function the way they are advertised and can possible be reverse-engineered.
  • Mixers that work as per the law have to keep details of the way by which coins were intermingled; that could later be compromised or asked for by the law enforcement.
  • And the newly obtained Bitcoins may themselves be related to unlawful activities.

Linking real-world identifies to Bitcoin addresses

Analyzing the transaction graph on its own uncovers only the mark of an individual inside the Blockchain. It does not uncover any real names and identities. To have this data, it is important to refer to the info not present in the Blockchain.

A huge chunk of data that connects Bitcoins with real people can be found and is publicly available information. Companies accepting BTC may position a QR code close to their cash counter and also have it on their webpage.

Many others might label their Bitcoin addresses on sites like Blockchain.info which identify the proprietors of a lot of addresses. Plenty of addresses can be obtained from public discussion boards where people add the personal Bitcoin address to signature lines.

This limited but huge database of personal information can be coupled with the transaction graph for de-anonymizing a great deal of the ledger.

The above info may also help to find even the exact geolocation. Imagine a small local consumer electronics store allows Bitcoin payments and utilizes the real address for its off the shelf purchases. If you are an owner of that store, your transactions become associated with your identity and even current whereabouts.

On the contrary, assume somebody needed to connect your identity and your Bitcoin address. Imagine you say to somebody or share via social networks that you bought a silver iPhone 6S on some particular day at that very store. Somebody can take a look at the Bitcoin address utilized by the store, discover the set of exchanges involving silver iPhones 6S, filter transaction by price and item number from their website, and the odds of making an effective match are high.

Detailed data from the transaction ledger allows any pieces of evidence found later – be subsequently added, permitting further parts of the personality riddle to be dropped onto spot continuously and whenever you want. Only one small disclosure of a tiny bit of personally identifiable info, even many years before or after, and each move done at that address and even connected addresses – are sacrificed.

IP address factors

A supplementary source of conceivably de-anonymizing data is accessible to each PC that partakes in the decentralized system by facilitating a Bitcoin node. This data is the arrangement of IP addresses of the PCs that declare new Bitcoin exchanges.

There are thousands of nodes that accept inbound internet connections and maybe several times over that quantity which don’t accept requests.

Both groups produce transactions. Transaction locomotion throughout the node system starts with the PC that first telecasts the event to its associates, which later pass the event to their peers, forming an info avalanche that touches each node in the system in the course of few moments.

The basic observation that may be taken advantage of is that, as long as you can find a method to connect to nearly all of nodes, possibly by managing a synchronized sub-network of nodes stretch over numerous machines, the number one node to carry a transaction is typically the source of the transaction.

The chance decreases in case several transactions are passed from the identical IP address. Although a tiny sporadic holdup is put into the transaction routine propagation to maintain the anonymity of the initial sender, with the appropriate procedures plenty of indicators are available throughout the noise to determine right IP address on most occasions.

Although the usage of a TOR router provides a certain level of protection against IP address detection, it exposes users to many other possible attacks. An illustration of this type of IP address de-anonymization made publically available is Blockchain.info, which discloses the IP address of the initial node to document a transaction to its web servers.

Conclusion

Is Bitcoin anonymous these days? Ordinary people should know it is definitely less anonymous compared to cash. However, committed end users prepared to move through not very easy ways will find opportunities to buy and spend Bitcoins anonymously. But the open environment of the transaction ledger preserves the likelihood that activities and identities once viewed as completely safe and secure can be exposed one day in the future.

Because Bitcoin adoption increases day-to-day, it is quite possible that tech wars may start between anonymizers and de-anonymizers. From one side significantly innovative data mining techniques are going to be introduced, perhaps blending transaction graph examination with IP address detection. On the other side, enhanced tactics will be created to much better hide personal identity and activities.

There are many unknowns. Will the primary Bitcoin code be revised for the sake of additional anonymity protection or will it be revised to simplify and assist in regulations? Will Bitcoin mixers grow and become prevalent and safe? Will transaction graph examination achieve a level of sophistication when the majority of user actions may be successfully traced? Will a different electronic currencies or additional chains appear which shift the balance for or against anonymity? All we are able to state now is the fact that Bitcoin continues to be in its early stages and that current thinking and methods in the field of anonymity are also primitive. What we see is just a beginning, the main game awaits ahead.