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

by Andy Greenberg

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,” 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.

Bitcoin, Andresen explained, was a “new kind of money,” one that allowed anyone to spend cash-like currency from their computer while using cryptography to ensure that no one could create counterfeit coins or fraudulently spend someone else’s. It had been invented by someone named Satoshi Nakamoto a few years earlier, he said, not long after the 2008 financial crisis, and it had been designed so that anyone could generate these bitcoins, too. They just had to run a so-called mining program on their own computer, performing calculations that entered them into a kind of automated lottery that distributed bitcoins to the winning computer every ten minutes. This kind of computational effort was the only way anyone could “mine” new bitcoins, and they could do it only at a predefined, globally limited rate. That scarcity made it the perfect currency for anyone suspicious of how governments control money—their ability to print cash willy-nilly, to fund wars, or to hand money to corporate friends. “With the global financial crisis and bank bailouts all over the world, a lot of us are starting to wonder: Can we really trust the people who control our money?” Andresen explained in his Ignite talk. “Satoshi didn’t. So he created Bitcoin.”

Cypherpunks envisioned a world where free cryptographic programs in the hands of everyday internet users promised total secrecy—from hackers, snoops, law enforcement, and even intelligence agencies. 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. And if anonymous and untraceable digital communications were possible, the cypherpunks believed, it followed that anonymous and untraceable online payments must be, too—an innovation that was sure to unlock both a new era of financial privacy and a vast, flourishing black market on the internet.

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.

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.

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. Yes, identities behind those payments were obscured by pseudonymous addresses, long strings of between twenty-six and thirty-five characters. But to Meiklejohn, this seemed like an inherently dangerous sort of fig leaf to hide behind. 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?

In the final draft of the paper Meiklejohn and her co-authors put together, they definitively stated conclusions—based for the first time on solid, empirical evidence—that flew in the face of what many Bitcoin users believed at the time: Far from being untraceable, they wrote, the blockchain was an open book that could identify vast swaths of transactions between people, many of whom thought they were acting anonymously. “Even our relatively small experiment demonstrates that this approach can shed considerable light on the structure of the Bitcoin economy, how it is used, and those organizations who are party to it,” the paper read. “We demonstrate that an agency with subpoena power would be well placed to identify who is paying money to whom. Indeed, we argue that the increasing dominance of a small number of Bitcoin institutions (most notably services that perform currency exchange), coupled with the public nature of transactions and our ability to label monetary flows to major institutions, ultimately makes Bitcoin unattractive today for high-volume illicit use such as money laundering.”

In their nearly four weeks of running Hansa, the Dutch had surveilled twenty-seven thousand transactions. After shutting down the site, they seized 1,200 bitcoins from Hansa, worth tens of millions of dollars as of this writing, thanks in part to silently sabotaging the site’s implementation of a Bitcoin feature called multi-signature transactions, designed to make that sort of simple confiscation impossible. They had collected at least some amount of data on a staggering total of 420,000 users, including more than 10,000 home addresses.

One study, at least, suggested that the AlphaBay and Hansa busts had lasting effects. The Netherlands Organisation for Applied Scientific Research, which goes by the acronym TNO, found that together the results of that combined takeover-takedown were different from previous dark web busts. When other markets had been seized, like the Silk Road or Silk Road 2, most of their drug vendors soon showed up again on other dark web drug sites. But the TNO study found that vendors who fled Hansa didn’t reappear, or if they did, they had been forced to scrub their identities and reputations, re-creating themselves from scratch.

Gambaryan’s wife, Yuki, says that the Welcome to Video case was the only time that her hard-shelled, Soviet-born husband ever discussed a case with her and confessed that it had gotten to him—that he was struggling with it emotionally. Gambaryan says that it was, in particular, the sheer breadth of the cross section of society that participated in the site’s abuse that still haunts him. “I saw that everybody’s capable of this: doctors, principals, law enforcement,” he reflected. “Whatever you want to call it, evil, or whatever it is: It’s in everybody—or it can be in anybody.”

A panel of appellate judges considered the argument—and rejected it. In a nine-page opinion, they explained their ruling, setting down a precedent that spelled out in glaring terms exactly how far from private they determined Bitcoin’s transactions to be. “Every Bitcoin user has access to the public Bitcoin blockchain and can see every Bitcoin address and its respective transfers. Due to this publicity, it is possible to determine the identities of Bitcoin address owners by analyzing the blockchain,” the ruling read. “There is no intrusion into a constitutionally protected area because there is no constitutional privacy interest in the information on the blockchain.” A search requires a warrant, the American judicial system has long held, only if that search enters into a domain where the defendant has a “reasonable expectation of privacy.” The judges’ ruling argued that no such expectation should have existed here: The HSI agent wasn’t caught in the Welcome to Video dragnet because IRS agents had violated his privacy. He was caught, the judges concluded, because he had mistakenly believed his Bitcoin transactions to have ever been private in the first place.

The trillion-dollar infrastructure funding bill signed by President Joe Biden in November 2021 included two provisions—designed, in theory, to help pay for the bill’s spending—that passed despite their radioactive unpopularity in the cryptocurrency world. These new rules require vaguely defined cryptocurrency “brokers”—or, for that matter, any cryptocurrency business doing a transaction worth more than $10,000—to report the Social Security number of the person on the other side of the transaction to the IRS. “It basically makes it effectively impossible to transact anonymously,” says Marta Belcher, a cryptocurrency-focused attorney and special counsel to the Electronic Frontier Foundation. “It’s a total disaster for civil liberties.”[*] Then in March of 2022, President Biden signed an executive order on “Ensuring Responsible Development of Digital Assets” that also—with little specificity—called for new rules to prevent the use of cryptocurrency for illicit purposes, from human trafficking to terrorism. At the same time, U.S. lawmakers on both sides of the partisan aisle issued public warnings that cryptocurrency could be used to evade the strict new sanctions Western governments imposed on Russia in response to its Ukraine invasion. If that renewed focus on regulating digital money continues to sharpen, Chainalysis may soon be far from the biggest problem for any American seeking to use cryptocurrency anonymously.

“These are, I think, objectively bad things,” she says of the crimes IRS-CI targeted. “So I guess it’s nice to see this is being used to help in these investigations. I feel good about that.” Then she launches into an explanation of why it’s not nearly so simple. Companies like Chainalysis in the budding blockchain analysis industry will make their real money, she speculates, not from contracts with the IRS or the Justice Department but from banks and exchanges who are using their services to “de-risk” their transactions, ranking a certain sum of money’s cleanliness and regulatory liability based on algorithms the public will never see. “Then it gets much sketchier, right?” she says. “That looks much more like surveillance. Your bank is basically spying on you and judging you based on where your money came from. That stuff is not as nice, and it’s not going to make headlines.”

When it comes to cryptocurrency, though, Meiklejohn makes clear that her position is more nuanced than a simple moral opposition to “surveillance” of the blockchain. She’s concerned about a world of total, granular financial tracking, where governments and corporations can see every individual purchase and payment that a person makes. But she frets, too, about a future where a technology like Zcash actually catches on and makes truly untraceable and anonymous finances possible, enabling the sort of perfect money laundering and untouchable black markets that some crypto-anarchists once believed Bitcoin heralded. “We haven’t seen that extreme yet,” she says. “And yeah, I definitely worry about what could happen there.”