Follow the bitcoin
You’ve probably heard a lot about bitcoin and blockchain. Maybe you’ve heard that one of the advantages of bitcoin is that it provides a level of anonymity. Not unconnected from that fact, it is used for various forms of illegal activities. Maybe you’ve also heard that once any transaction happens, it is added to the blockchain forever.
For your amusement and to illustrate this, I'll show you how this looks in the world of online scams.
In October 2018, I got an email with the subject line, 'You are my victim' - and the message began like this: “I write you since I put a malware on the web page with porn which you have viewed.”
There was much more information about what I did wrong and about how much my machine was now infected. But more importantly, there was a digital wallet address to which I was told I should immediately deposit $600. The clock was ticking! (Technically, it’s still ticking.)
It is May, 2022 and as blockchain’s popularity has been growing, I got curious about what has happened since then. Did anyone pay? How did the Bitcoin payments travel around?
In the good old pre-bitcoin blockchain days, you would be asked to bring a suitcase of unmarked twenties to a back alley. Now, we have technology for frictionless transactions. We can easily transact and track it all.
The address to send the payment was 1Lj2TVzMeKHewh7HwJXMTEbYqjqt4pXECu. I checked: it is labeled as a criminal address used for email extortion.
I saw that there were 6 transactions in October, 2018. Three transactions were inbound and three were outbound. The total amount of bitcoin was 0.02316980 BTC. At $30k per BTC, that's about $700. You can trace the addresses where the bitcoin was deposited. But let's see where the money went from this address.
One address the bitcoin was sent to is13PNCgG95XPhkLhtUPLYCnhrzH8H8KmT5B. I’m sure you won’t be surprised to learn that this address is also labeled as an address associated with criminal activities.
The interesting thing is that along with the transaction coming from the address 1Lj2TVzMeKHewh7HwJXMTEbYqjqt4pXECu, there were transactions that came from 5 other addresses. This time 0.15980574 BTC was received and was immediately sent out. We are now closer to $5k.
Another few hops and the transactions are leading to an exchange called HydraMarket2, located in Russia. Recently, OFAC has released a sanction list with this entity on it as well as all crypto addresses that are associated with this organization.
Another address where a transaction came from was 1Lj2TVzMeKHewh7HwJXMTEbYqjqt4pXECu. The address it went to is 1Ngtmun4TaFTaVX3AVWNeKsCgPs3ZVxLSg. The story is very similar. In the span of a few months, transactions have flown in and out. The address is empty and abandoned.
But here is the important thing. Any transaction associated with this address is never forgotten. It is always on the blockchain for anybody to see and trace.
The tracing leads you to addresses with hundreds or even thousands of bitcoins.
There are ways of obfuscating the flow by using bitcoin mixers or tumblers. However these entities are easily identified.
It would be easy to draw a conclusion from the above that this whole 'bitcoin’ thing is used for illegal activities. The fact that it is used that way is correct. But (according to many reports) this type of activity represents less than 1% (0.34% - 0.62%) of all transactions.
The other thing to consider is that in order to buy things with bitcoin, you need to convert that bitcoin to fiat currency using an exchange like Gemini, FTX, Coinbase or many others. These organizations are licensed and regulated by government agencies in their respective jurisdictions. The exchanges have to demonstrate that they have Know Your Customer (KYC) and Anti-Money Laundering (AML) processes in place. And since everything is now on blockchain, it is very easy to inspect and verify every transaction in real time. You also get notified when somebody is trying to move bitcoin from a suspicious address.
Yes, there are people and organizations sitting on large amounts of bitcoin. But their ability to use it or change it to fiat currency is getting more and more difficult. The network for storing and trading bitcoin (and other digital assets) is growing and getting more transparent. Some see it as a good thing; some as a betrayal of the promise of anonymity, privacy and decentralization.
One way or another, this technology is here to stay. It will mature and will become part of our daily lives. Another recurrent pattern happening in front of our eyes.