Tracers in the Dark: The Global Hunt for the Crime Lords of Cryptocurrency

by Andy Greenberg

Gambaryan had never heard of IRS-CI before, but it sounded like everything he’d ever wanted to do in his career, without realizing it: travel internationally, serve search warrants, take down criminals firsthand, and see them prosecuted. “I can use my accounting skills and also put away bad guys,” Gambaryan remembers thinking.

Gambaryan pursued the fraudsters, executed the warrants, made the arrests, but he began to realize that if he didn’t somehow alter his course, he could easily spend the rest of his career assigned to the IRS equivalent of street crime. These were hardly the white-collar kingpins and international mafia figures he dreamed of taking down. So after a couple of years, he made a commitment to himself: He’d no longer settle for whatever investigations fell to him. He’d make cases of his own.

Bitcoin was a new digital currency, and it used a clever system to track who owned which coins: The Bitcoin network stored thousands of copies of a distributed accounting ledger on computers around the world—a ledger known as the blockchain. Many of Bitcoin’s advocates seemed to believe that because no bank or government was necessary for Bitcoin’s operation, no institution could control its payments or identify its users. Transactions flowed from one address to another, with none of the names or other personal details that a bank or payment service like PayPal might collect. “Participants can be anonymous,” read one line in an email sent to a cryptography mailing list by the currency’s mysterious inventor, known as Satoshi Nakamoto.

Who would pay taxes on these “anonymous” transactions? Wouldn’t Bitcoin become the perfect money-laundering tool?

“Participants can be anonymous,” he had read. But if this blockchain truly recorded every transaction in the entire Bitcoin economy, then it sounded like the precise opposite of anonymity: a trail of bread crumbs left behind by every single payment. A forensic accountant’s dream.

The cypherpunks were, as I’d been obsessively researching at the time, a group of radical libertarians who had formed in the 1990s, unified around the grand mission of using unbreakable encryption software to take power away from governments and corporations and give it to individuals.

Julian Assange was an active participant on the Cypherpunks Mailing List, where many of the ideas for WikiLeaks, with its anonymity protections for its sources, were born. The first developers of so-called proxy servers, which offered encrypted and anonymized internet connections—and which would evolve into virtual private networks, or VPNs, in common use today—were core cypherpunk contributors. The creators of the anonymity software Tor, too, were deeply influenced by the discussions they read in the list’s archives.

For ideological libertarians who dreamed of a day when governments could no longer control what they said, what they owned, or what they put in their bodies, encryption tools represented a new sort of untouchability: a future in which communications not only were impervious to eavesdropping but could be carried out behind perfectly unidentifiable and untraceable pseudonyms.

In his most famous essay, “The Crypto Anarchist Manifesto,” May summarized in 1988 the lawless future he both foresaw and, as a kind of absolutist libertarian, largely welcomed. “A specter is haunting the modern world, the specter of crypto anarchy,” May wrote forebodingly, imagining a “CryptoNet” of perfectly private communications and payments. The State will of course try to slow or halt the spread of [encryption] technology, citing national security concerns, use of the technology by drug dealers and tax evaders, and fears of societal disintegration. Many of these concerns will be valid; crypto anarchy will allow national secrets to be traded freely and will allow illicit and stolen materials to be traded. An anonymous computerized market will even make possible abhorrent markets for assassinations and extortion. Various criminal and foreign elements will be active users of CryptoNet. But this will not halt the spread of crypto anarchy.

The Silk Road, I learned, was an e-commerce market on the dark web. In other words, it was one of thousands of specially protected websites that relied on Tor to hide the location of its servers and that could be visited only by someone running Tor on their computer, too. Tor was the dark web’s active ingredient, providing a kind of double-blind anonymity. It was designed so that anyone could visit a dark web site who knew the site’s address—a long and random-seeming string of characters. But no visitor to that site could see where it was physically hosted, nor could the site identify the location of its visitors. Any third party snooping on their connection could learn nothing about the locations of the computers on either end.

It was months later, in February 2012, when the Silk Road went beyond being a faceless marketplace and began to develop a personality. Or rather, a persona. “Silk Road has matured, and I need an identity separate from the site,” the site’s anonymous administrator wrote. “I am Silk Road, the market, the person, the enterprise, everything. But I need a name.” He revealed the one he’d chosen: “Dread Pirate Roberts.”

When I questioned the morality of his booming business, DPR laid out a strict, if somewhat oversimplified, code of ethics: “We don’t allow the sale of anything that’s main purpose is to harm innocent people, or that it was necessary to harm innocent people to bring it to market.” That meant no violent services like hit men or extortion, no child porn, not even counterfeit coupons. The Silk Road had at one point briefly allowed the sale of firearms—DPR argued guns could be used in self-defense—but his code of conduct forbade weapons “that are designed to be used on crowds of people or whole populations.”

But he quickly made clear that it was Bitcoin that he saw as the key that had unlocked the anonymous financial potential of the dark web. “We’ve won the State’s War on Drugs because of Bitcoin, and this is just the beginning,” DPR wrote. “Sector by sector the state is being cut out of the equation and power is being returned to the individual. I don’t think anyone can comprehend the magnitude of the revolution we are in. I think it will be looked back on as an epoch in the evolution of mankind.”

There was a maxim in cryptography, often referred to as Schneier’s law after the cryptographer Bruce Schneier. It asserted that anyone can develop an encryption system clever enough that they can’t themselves think of a way to break it. Yet, like all the best conundrums and mysteries that had fascinated Meiklejohn since childhood, another person with a different way of approaching a cipher could look at that “unbreakable” system and immediately see a way to crack it and unspool a whole world of decrypted revelations.

In fact, eCash was based on a mathematical technique called zero-knowledge proofs, which could establish the validity of a payment without the bank or recipient learning anything else at all about the spender or their money. That mathematical sleight of hand meant that eCash was provably secure. Schneier’s law did not apply: No amount of cleverness or computing power would ever be able to undo its anonymity.

Considering Bitcoin’s mechanics for the first time, Meiklejohn was intrigued. But when she got home from the hike and began poring over Satoshi Nakamoto’s Bitcoin white paper, it immediately became clear to her that Bitcoin’s trade-offs were the exact opposite of the eCash system she knew so well. Fraud was prevented not by a kind of after-the-fact forgery analysis carried out by a bank authority but with an instantaneous check of the blockchain, the unforgeable public record of who possessed every single bitcoin.

But that blockchain ledger system came at an enormous privacy cost: In Bitcoin, for good and for ill, everyone was a witness to every payment.

Unlike eCash, whose privacy protections offered snoops no hint of revealing information to latch onto, Bitcoin offered an enormous collection of data to analyze. Who could say what sorts of patterns might give away users who thought they were cleverer than those watching them?

“And so as a cryptographer, the natural question was, if you can’t prove it’s private, then what attacks are possible? If you don’t get privacy, what do you get?”