Tracking digital footprints: anonymity within the bitcoin system

Date02 May 2017
Published date02 May 2017
AuthorPerri Reynolds,Angela S.M. Irwin
Subject MatterAccounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime
Tracking digital footprints:
anonymity within the bitcoin
Perri Reynolds and Angela S.M. Irwin
Department of Security Studies and Criminology, Macquarie University,
Sydney, Australia
Purpose The purpose of this paper is to critically analyse research surrounding the anonymity of online
transactions using Bitcoin and report on the feasibility of law enforcement bodies tracing illicit transactions
back to a user’s real-life identity.
Design/methodology/approach The design of this paper follows on from the approach taken by Reid
and Harrigan (2013) in determining whether identifying information may be collated with external sources of
data to identify individual users. In addition to conducting a detailed literature review surrounding the
anonymity of users, and the potential ability to track transactions through the blockchain, four Bitcoin
exchange services are examined to ascertain whether information provided at the sign-up stage is sufciently
veried and reliable. By doing so, this research tests the ability for law enforcement to reasonably rely upon
this information when attempting to prosecute individuals. Additionally, by submitting fake information for
verication, the plausibility of these services accepting fraudulent or illegitimate information is also tested.
Findings It may be possible to identify and prosecute bad actors through the analysis of transaction
histories by tracing them back to an interaction with a Bitcoin exchange. However, the compliance and
implementation of anti-money laundering legislation and customer identication security standards are
insufciently used within some exchange services, resulting in more technologically adept, or well-funded,
criminals being able to circumvent identication controls and continue to transact without revealing their
identities. The introduction of and compliance with know-your customer and customer due diligence
legislation is required before law enforcement bodies may be able to accurately rely on information provided
to a Bitcoin exchange. This paper highlights the need for research to be undertaken to examine the ways in
which criminals are circumventing identity controls and, consequently, nancing their illicit activities.
Originality/value By ascertaining the types of information submitted by users when exchanging real
currency for virtual currency, and seeing whether this information may be accepted despite being fraudulent
in nature, this paper elucidates the reliability of information that law enforcement bodies may be able to access
when tracing transactions back to an individual actor.
Keywords Cybercrime, Bitcoin, Anonymity, Terrorism nancing, Cryptocurrency, Digital currency
Paper type Research paper
1. Introduction
In response to a new technological shift, criminals and consumers alike are increasingly
nding new ways to evolve. To keep up with a rapidly expanding global environment, and
with the gap between the “global” and the “local” becoming smaller, criminals are adopting
new forms of currency, such as cryptocurrency, to increase the level of anonymity afforded
to their illicit activities. This may, as a consequence, result in the development of an
underground criminal economy (Masciandaro, 1999) allowing the proceeds of crime to evade
regulation surrounding online nancial environments (Schneider and Windischbauer, 2008).
The ability of cryptocurrencies to enable anonymous transactions allows users to trade
virtual currency regardless of their geographic location, without revealing either the
real-world source of their income or their own identity. However, the exact degree of
anonymity afforded by cryptocurrencies is subject to much debate (Gross and Acquisti,
The current issue and full text archive of this journal is available on Emerald Insight at:
Journalof Money Laundering
Vol.20 No. 2, 2017
©Emerald Publishing Limited
DOI 10.1108/JMLC-07-2016-0027
2005;Androulaki et al., 2013;Meiklejohn, 2013;Reid and Harrigan, 2013). Cryptocurrencies,
such as Bitcoin, rely on a de-centralised system based on peer-to-peer public key addresses,
rather than having a central regulating body, such as a nancial institution or bank, which
reviews and monitors transactions. This allows potential criminal transactions to be
processed through cryptocurrencies, as the process of moving money is quicker and more
efcient due to the bypassing of the regulatory controls that third-party institutions, such as
banks, are legally bound to perform.
2. Structure
This paper will survey and critically analyse the literature surrounding the anonymity of
cryptocurrencies. The paper is divided into two sections. The rst section conducts a
thorough literature review surrounding the current discourse and research in the eld of
cyber security and cryptocurrencies, and aims to highlight their high potential for misuse by
criminal actors. This section aims to acknowledge past attempts at de-anonymising
transactions made using cryptocurrencies and expand upon their results through verifying
their practicability. The second section involves an experimental research element which
aims to elucidate whether the implementation level of anti-money laundering and
counter-terrorism nancing processes within cryptocurrency systems are procient in their
practical application or whether the processes in place are fundamentally inadequate,
allowing higher levels of anonymity to be afforded to potentially illicit transactions.
Focusing specically on the Bitcoin system, as it is the largest and the most widely
adopted cryptocurrency to date, this paper reports on the conclusions and ndings of
whether online nancial providers such as Bitcoin exchanges have sufcient forms of
anti-money laundering/counter terrorism nancing securities and regulatory barriers to
conrm user identities. To date, there is currently no universal regulation specifying that any
Bitcoin exchange must comply with anti-money laundering and counter terrorism nancing
regulations. As a consequence, Bitcoin exchange services may be misused for illicit purposes
due to the ability to create accounts using falsied information. Although legislation and
regulation is currently under consideration to avoid illicit use of cryptocurrencies and
enforce taxation compliance, the global nature of these forms of currency makes adherence to
this legislation difcult without universal adoption of these measures.
In addition, the current legislative and law enforcement landscape of cryptocurrencies
will be examined and contrasted against the current literature surrounding the feasibility of
using cryptocurrencies for the funding of illicit activities. Finally, this paper will ascertain
whether the information provided to online nancial providers is sufcient for effective
tracking of illicit transactions and terrorist nancing activities by law enforcement bodies.
3. A brief introduction to cryptocurrencies
Virtual currency refers to a form of digital representation of value that can be traded through
digital means (Department of the Treasury Financial Crimes Enforcement Network, 2013). In
comparison to the traditional denition of currency, comprising exchanging units or tokens
as a means of value within a country, typically represented by physical coins or paper which
circulates as legal tender within a particular jurisdiction, virtual currency moves between
multiple jurisdictions through the aid of Internet platforms. The traditional conception of
currency, that of tactile units or tokens of exchange, is termed as “real” currency, and
includes the aspect of being supported and legitimized by each jurisdiction’s respective
government, and is, thus, intrinsically tied to the restriction and introduction of supply by
governments that affect its overall value within the market.
In contrast, virtual currencies have no such dependency, instead having their value tied to
the acceptance of individuals. A virtual currency is neither issued by any one jurisdiction nor

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