How much illegal activity is financed through bitcoin?
18 December 2017
Close to half of all transactions in bitcoin are associated with buying and selling illegal goods and services, including drugs, weapons and pirated software, according to new research that uses ground-breaking forensic finance techniques.
“The blockchain technology that underpins bitcoin holds significant promise for revolutionising many industries, but this sort of illegal activity risks stunting the adoption of this technology and limiting the potential benefits to society,” says one of the authors of the study, Professor Talis Putnins of the University of Technology Sydney (UTS).
Professor Putnins and Jonathan Karlsen from UTS Business School, along with Dr Sean Foley from Sydney University, have tracked illegal bitcoin use worldwide using data from 2009 to 2017.
“The aim of our research is to help regulators understand the size of the task they face in attempting to monitor and regulate bitcoin, particularly as it becomes mainstream – for example listing on futures exchanges,” says Professor Putnins.
In their paper titled Sex, Drugs, and Bitcoin, the researchers reveal around one third of bitcoin users are using the digital currency for illegal activity, with close to half of all bitcoin transactions facilitating illegal trade.
“Users involved in illegal activity are very active in terms of buying, selling and trading, whereas legal users are largely buying and holding the cryptocurrency,” says Professor Putnins.
Around one quarter of the total dollar value of transactions in bitcoin is associated with illegal transactions, the research revealed.
“The FBI seizure of more than $4 million in bitcoin from the now defunct online drug marketplace The Silk Road provides some idea of the scale of the problem,” says Professor Putnins.
The researchers developed ground-breaking methods for identifying illegal bitcoin transactions. Their starting point was tracing the activity of bitcoin users who had been caught by the FBI and other authorities in online criminal activity.
“A lot of people think bitcoin is highly anonymous and untraceable, that it is outside the view of regulators and authorities, but once you start digging into it it’s surprising how much sense you can make of it,” says Professor Putnins.
From tracking known criminal activity, the researchers then used two methods to quantify the extent of illegal activity, including that yet to be caught by authorities.
The first method involved analysing the trade networks of those known to be involved in illegal activity, using information ‘scraped’ from the dark web – an area of the internet that can’t be found using traditional search engines.
The second method was to uncover user characteristics that distinguish users involved in illegal activity from those involved in legal activity.
For example, the researchers measured the extent to which bitcoin users took actions to conceal their identity and trading records.
“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,” says Professor Putnins.
“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.”
The paper describes how bitcoin has become the ‘PayPal’ of the dark web, which is estimated to contain approximately 30,000 domains.
“Most people don’t know what is going on in the dark web. Now we have hard facts to put to the picture, to inform policy making, regulation and surveillance.”