Tracking stolen Bitcoins

Surfing the web i stumbled upon a wired.com article, which talked about a research done by Cambridge cybersecurity group, how FIFO (first in, first out) technology could change the game for tracing stolen Bitcoins.

As most of us are aware, the cryptocurrency world, because of it's anonymity, speed of transfers and sometimes loop-holey innovations, is constantly under the attack from various malware, crooks, theives, hackers, who all look to make an easy buck on the expense of others.

Sending hacked Bitcoin to thousands of wallets (Mt. Gox case, for example), then to another set of wallets, then distributing them even more, all serve the purpose of obfuscating the origin of specific Bitcoins in one's wallet.

The paper done by the Cambridge UCL (University Computer Laboratory) aptly points out historic cases like Napster and Uber :) , which have died or are dying down but have paved way for newer and better innovations to come.

In this case, the researchers point out a case from 1816, where a court was struggling to track bad and good funds after a bank went under and a series of transactions had to be traced and correctly sourced.

Enter FIFO. A quick example of trading on a regular exchange that enforces the FIFO rule: You buy currency X, and then open another position on that pair, selling currency X as a hedge. But you cannot close the hedge
(sell trade) first, since it wasn't the first trade that you entered. The Buy trade was - and has to be closed first. That's FIFO - first in, first out.

So the Bitcoin tracing idea would enforce the FIFO rule as well, and it would be quite simple (citing wired.com):

The first coin that leaves a Bitcoin address should be considered the same coin as the first one that went into it, carrying with it all of that coin's criminal history. And if that coin was once stolen from someone, he or she may be allowed to claim it back even after it has passed through multiple addresses.

For example if one stolen Bitcoin and 9 legit Bitcoin would be put into a bowl at a shady exchange, the coins status at going out of the mix would be reflected in the same order as they went in. If the stolen Bitcoin went in as second, the second outgoing coin would be the tainted one as well.

This would create another issue - there could always be some unlucky innocent guy, who would end up holding the stolen Bitcoin. Ross Anderson, a researcher from the team, acknowledges, that this would at first punish some innocent holders, but this would teach and educate legit users to stay away from suspicious exchanges quickly.

Other researchers argue that this would essentially destroy a lot of the privacy of Bitcoin, as legit users might want to put their transactions through laundry services too, just for privacy reasons.

This is an intriguing topic, read the full article on wired.com

or

grab the full research paper here

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