Remember the time when experts said that cryptocurrencies are anonymous?
Well…there’s a problem with that statement. In today’s Finshots, we tell you the story of how authorities tracked down someone who stole Bitcoins many many years ago.
The Story
In 2013, Bitcoin had one promise — anonymity.
If you wanted to sell drugs. You could hop onto the dark web and find a buyer. You’d ask them to send the Bitcoins to your wallet. And no one would know who you were. It was like dealing in cash without leaving a trace. And since there were no wads of cash to lug around, it was easy peasy. No one would know what you’d even bought.
And law enforcement had no answers. It was all very new to everyone. Bitcoins and blockchain were exotic words that would cause a headache. So dubious individuals took advantage of this relative anonymity. Drug deals happened
But it looks like they had a little too much faith in the promise of bitcoin. Just ask James Zhong who was sentenced to 1 year and 1 day in prison on Friday.
Nearly a decade ago, Zhong was a 22-year-old college student who wanted to buy some drugs. Cocaine to be specific. So he decided to try out this infamous online marketplace called the Silk Road that everyone was talking about. And since it was a platform for all sorts of nefarious activities, Silk Road only dealt with Bitcoin. You know, for the privilege of promised anonymity.
But while Zhong ventured into the website for drugs, he found a bug instead. A coding error. He tried to withdraw some Bitcoins from his Silk Road account and he inadvertently double-clicked the ‘withdraw’ button. Silk Road glitched and processed the transaction twice. Even though he didn’t have that many Bitcoins in the account in the first place.
Zhong found that he could simply steal Bitcoins directly from Silk Road’s wallet. And as per US Law Enforcement, once Zhong realized what was happening, he quickly created 9 different accounts on Silk Road. All for the purpose of exploiting this bug. He went on a double-clicking spree and managed to get hold of 50,000 Bitcoins. Which is worth a whopping $1.5 billion in today’s value by the way.
Now, Silk Road was shut down in 2013. The US authorities went after the founder for abetting illegal activities. But no one knew Zhong. Even though the Silk Road computers that were seized had all the records. People knew that Bitcoin had been stolen. But nothing revealed Zhong’s identity. And for 8 years, he kept moving money from one account to another.
And he could spend the money willy-nilly too. He spent $16 million hosting parties on chartered planes and boats. Took people to sporting events and hotels. He was living the high life. Oh, he even bought himself a Lamborghini.
So, how was Zhong trapped in the end?
A classic slip-up. Zhong transferred some of his ill-gotten Bitcoins to another account where he held legitimate funds.
But wait…how did authorities know that Zhong had actually stolen those Bitcoins in the first place?
Ah, that’s the part about anonymity. See, there are a couple of things that people like Zhong forget.
Firstly, there are some very smart people in the world who like to solve really hard problems. And one of those problems was about how to crack the anonymity of Bitcoins. There was no precedent. No course they could watch on YouTube. They just had to figure it out on their own.
Take researcher, Sarah Meiklejohn for instance. In 2013, she was one of the first people in the world to go down a rabbit hole to figure out if the blockchain was really anonymous. She got a massive data dump and started to work. She wanted to find patterns. She figured out ways to cluster these addresses for transactions.
She went undercover. Got involved in a few illegal transactions on Silk Road too. And then, when she had to make a Bitcoin transfer, she’d know the address of the person she interacted with. She’d go back, look at her dump of data and find it within a cluster. Voila!
After this, it was just about following the money trail. Watch it move from one address to another.
And then, wait for the owners to cash out their Bitcoins. Because at some point, they can’t simply keep dealing in Bitcons. They need to convert it into hard cash. Into dollars. And they typically need a crypto exchange to do the deed. Now, since exchanges take a lot of Know Your Customer (KYC) information these days, once you have a solid money trail linked to a suspect Bitcoin deal, you simply pounce when they cash out.
In fact, tracking Bitcoins and other cryptocurrencies used in nefarious activities is such a booming business now that one of the largest in the space is a company called Chainalysis that’s valued at a whopping $8.6 billion. Law enforcement is in love with them too.
And finally, people forget that the blockchain is forever. Those transactions from 2013? That’ll be available for the public to see for eternity. So if anything even smells a little bit funny, the cops can simply go back in time and track down all these dubious transactions.
It’s not like cash at all. Oops.
Anyway, with Zhong, once law enforcement knew that there was a link between the Silk Road bitcoins and this separate wallet, they simply asked the Bitcoin exchange for the IP address. They tracked it down. And knocked down the door to find his loot all stashed away inside digital devices. Even in a tin of popcorn!
So is the promise of cryptocurrency anonymity over then?
Well, clearly it’s not as robust as people originally believed. Bitcoin is part of a much larger ecosystem with multiple intermediaries who all have flaws in them. So perhaps true anonymity will always remain a distant dream.
But there are others slowly trying to tighten the screws. For instance, there’s a cryptocurrency called monero that argues it’s more private than Bitcoin. And the new hot thing is another currency called zcash which claims it uses advanced tech to make sure that detecting ownership is nearly impossible.
See, this is like a cat-and-mouse game. Regulators devise ingenious ways to break anonymity and track users. And then someone creates another crypto that’s one step ahead of the tracking tech. The cycle will continue
But here’s a warning to anyone thinking of using monero or zcash for illicit gains. Remember — nothing is private forever. Today it might be. Tomorrow it might not be. And when the authorities go digging into the past. You’ll likely be found out.
Until then…
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There’s another reason why millennials should probably consider looking at a term plan — Debt. Most people we spoke to have home loans, education loans and other personal loans with a considerable interest burden. In their absence, this burden would shift to their dependents. It’s not something most people think of, but it happens all the time.
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