A blockchain provides firm evidence, via thousands of computers on the network, of every transaction that has ever taken place. Unfortunately, a lot of operations that are fed into the super ledger are crimes: Forged deals, money laundering, the list goes on.
Method Could Identify Stolen Bitcoins
However, respite comes from a group of Cambridge cybersecurity researchers, who claim that one can distinguish between the contraband coins from the legit ones by just looking at a blockchain from a different perspective.
In a recently published paper, the team from Cambridge argues that there is a new way of tracing “tainted” coins, especially the ones which have been extorted from the victims and sent through multiple transactions to hide their ill-origins.
This new way derives its inception from a legal case in Britain, way back in the year 1816.
The team put forward the proposition that the first coin that leaves a particular Bitcoin address must be considered the same coin as the first one that went into that address, simultaneously carrying all of that coin’s criminal history.
Also, in case the coin was stolen from a victim, he or she may take it back even after it has passed through a series of transactions.
These curious researchers have also developed a prototype tool, which is scheduled to be released later in 2018. This software can scan the entire blockchain, and beginning from known instances of stolen bitcoins, it can identify the same coins, even if they’ve hopped around the blockchain for multiple years.
“The software we’re going to publish will let you know whether your favorite bitcoin was ever owned by Ross Ulbricht or Mt. Gox,” says Ross Anderson, the computer science professor from Cambridge who leads the research group.
“What we’re providing is software that’s very much better than anything that went before at tracing stolen property that happens to be a cryptocurrency, or if you wish, drug money or the proceeds of money laundering.”
Only Theoretical Discussions for Stolen Bitcoins
The process of tracing bitcoins has theoretically been easy in the past. The blockchain’s public records allow anyone to follow the coins moving from one address to another after they’re spent or stolen.
However, it cannot be determined as to who controls these addresses.
Another issue that pops up is how to determine who should be compensated first in case of theft or laundering. However, the solution to this was pointed out by David Fox, a professor of law at Edinburgh Law School.
Fox returned to an 1816 hearing for Clayton’s Case, which dealt with who should be paid back in case a firm goes bankrupt. The decision made by the judge at that time said that whoever put their money first, must have the right to take it out first as well.
This resulted in the FIFO (first-in-first-out) concept, which then became the standard method to identify the rightful owners of money in cases where assets are mixed-up, to reclaim stolen property, or resolve debts.
When researchers on Bitcoin’s actual blockchain tested the FIFO method, they found that in massive thefts—like the 2012 heist that took 46,653 bitcoins, they could create far tidier answers about where those stolen coins ended up than the haircut method could.