Crypto's government monitoring is growing, but there are ways to avoid it


A lot of noise has been made on the untraceable qualities of Bitcoin and other cryptocurrencies. Bitcoin "can be used to buy goods anonymously", said early crypto primers, offers users the type of financial privacy that was previously only available from a "Swiss bank account", say the most recent commentators. And given its ability to provide people with a layer of anonymity and privacy, it has been smeared by politicians, experts and traditional journalists as a hiding place for almost all hackers, drug dealers, gang members, terrorists or despots that you might name (even if money is still the preferred financial means of that personae non gratae).

It is therefore not surprising that, for several years, governments have been feverishly trying to trace the circulation of Bitcoin, as well as that of other digital currencies. And despite the popular reputation of most cryptocurrencies as anonymous, they have been helped in this research by the fact that most cryptos are not anonymous, but rather pseudonyms. In other words, by linking transactions to fixed portfolio addresses and keeping a public record of every single transaction ever made on their chains, the most popular cryptocurrencies provide national governments with an almost perfect means of controlling our financial activity.

However, while many governments have begun to exploit this very convenient convenience by building systems that collect transaction data and scrape private information into a single database, most have just begun to move in this direction. And, most importantly, there are a number of private currencies – Monero that is the most important – that do not offer a public record linking transactions to portfolios, while there are also mixing tools to make non-cash transactions private. private. As such, there are still ways to remain anonymous in crypts for those who want to keep a low profile, despite the best efforts of governments in the United States, Russia, Japan and elsewhere.

Japan and Russia

Japan and Russia

As the most recent example of government monitoring of encryption, the National Police Agency (NPA) has announced plans to implement a system that can "track" cryptocurrency transactions within the system. Japan. While the specific technical details are scarce, the software was developed by a private company without a name and will cost the NPA about $ 315,000 for the next year for execution. In particular, its main function will be to trace the transactions reported as "suspicious", linking them together in a view that, in theory, will allow them to identify the sources and destinations of illicit money.

For the most part, it will receive its reports of suspicious activity from the Japanese crypto-trade, which since the introduction of May (by the Financial Services Agency) of anti-money laundering legislation (AML) has sent information on potentially illegal transactions and the accounts associated with them. In fact, this signaling is exactly what makes a "transaction tracking system" possible, rather than the invention of a new cryptographic technology able to break through the pseudonymy / anonymity of most cryptocurrencies. Simply, exchanges are legally bound to follow strict know-your-customer (KYC) policies, which allow them to link real-world identities to addresses and transactions recorded on public blockchains. And since they are providing this information to the NPA, all that the NPA will really do with their system is to feed that information into a database and create views of the crypto stream.

This means that a system of this type is not likely to have direct application to anyone trying to circumscribe (regulated) exchanges when it receives and sends encryption. That said, even if some users move away from Japanese exchanges, they could still be connected to illicit encryption if such cryptography has passed through an exchange and has already raised suspicions. In both cases, another area to which the system does not have many direct applications are coins that allow privacy such as Monero, Zcash and Dash, since rather than attempting to trace such coins, the Japanese authorities have simply decided to prohibit their trade.

A similar story is currently emerging in Russia, where the Federal Financial Monitoring Service (Rosfinmonitoring) has entered into a contract for a system that will collect various sources of information regarding suspects of financial-related offenses. As reported by the BBC Russia service, the system will be used to create profiles for the suspects, to which the authorities will then add all the relevant information that can shimmer on him or her: telephone numbers, bank details, physical addresses and encrypted addresses . Again, the system has not been specifically designed to compromise Bitcoin encryption or any other cryptography, but simply tries to simply add the portfolio information, where available, to any other data that Rosfinmonitoring has suspected.

In this way, the Russian authorities clearly hope to prevent the suspects from laundering illicitly earned money through the crypt, while they also state that they intend to prevent the crypt from being used directly for illegal purposes. "Because of their anonymity and the inability to track them down," a former adviser to Vladimir Putin on Internet development told BBC Klimenko (and head of the cryptocurrency group at the Russian Chamber of Commerce and Industry). "Cryptocurrency is used in gray areas, in the dark web, to buy weapons, drugs or violent videos.The legislators of many countries are wary of this phenomenon: this was confirmed by the analysis we conducted on the president's order. [Putin]".

While Russia has not introduced regulations requiring trade to comply with strict AML and KYC policies, the State Duma is negotiating a digital activity law that would do just that. And once this bill is passed, the Russian authorities – like their Japanese counterparts – will have access to information on the identity of portfolio holders. As a result, the Rosfinmonitoring service will be able to enter this information in the near future system (coming in late 2018), which will allow it to link transactions, portfolios and identities with each other.

But since this system will make use of crypto-exchange records rather than a new "cryptographic-hacking" technology, it is likely that it will not apply to all cryptocurrencies and to all cryptocurrency users. Some experts even believe that it will have a largely counterproductive effect, forcing many cryptocurrencies and their users to become more intractable.

"If you look at the entire volume of recycled funds, the amount that is recycled through the cryptocurrency is very small," said Anton Merkurov, a consultant to the Free Russia Foundation based in the United States. "Let's say that the business turnover of the local exchange is about a billion rubles [around $14.7 million] a week. This, in fact, is not much. Instead of taking the proverbial Colonel Zakharchenko [a former anti-corruption officer who was caught with around $140 million in bribe money in 2016], the authorities are trying to find a microbe under a microscope in a drop of water. This should not be a priority. And most importantly, start pressing there and the opposition will start, you will think of real recycling tools. "

The United States

The United States

While the systems launched by Japan and Russia largely depend on cooperation between crypto-exchanges and the collection of disparate information sources, some signals indicate that some governments have at least adopted a more direct approach to identify crypt users.

The United States, to make the most striking and disconcerting example, has developed a hidden technology that can effectively extract raw data from fiber optic cables to identify the IP addresses and IDs of those who send and receive Bitcoins. According to documents obtained from the informer Edward Snowden in 2013 and published by Intercept in March 2018, the technology in question is a program developed by the National Security Agency (NSA) and known as OAKSTAR. Masquerading as a piece of virtual private network (VPN) and downloaded by about 16,000 users in countries such as China and Iran, the program picks up data from an "unspecified" site of foreign fiber cables " , according to the Intercept.

Using this data, the NSA can then extract such information from Bitcoin users such as their password information, their Internet browsing activity and their MAC address, while some computer documents also discuss extracting internet addresses, date and time and ports. user network. In fact, OAKSTAR can be used to collect much more information than necessary to identify someone and link it to specific Bitcoin addresses and transactions, and can do so without having to rely on crypto-exchanges.

This is a blow to Bitcoin's privacy. As the professor at Cornell University, Emin Gün Sirer, told Intercept:

"Privacy-conscious people will switch to privacy-oriented coins […] when the model of the adversary involves the NSA, the pseudonymy disappears. You should really lower your privacy expectations on this network. "

Similarly, Matthew Green – an assistant prof. to the Information Security Institute of Johns Hopkins University (and a key developer of Zcash) – he explained to Intercept that the companies of the NSA are "bad news for privacy, because it means that in addition to the really difficult problem of doing [crypto] private transactions […] you must also ensure all network connections [are private]".

Equally as alarming as OAKSTAR and its surrounding business, no new information has emerged recently to indicate that the NSA has extended its efforts to trace Bitcoin to other cryptocurrencies. It is also the fact that his ability to connect certain people with Bitcoin portfolios is based on the fact that these people unintentionally unload a piece of software that secretly extracts their Internet data (while claiming to provide other services). As a result, if users stick to VPN (and other software) packages they know and trust, they are likely to avoid the long claws of the NSA.

Apart from this reassurance, there is still the predictable reality that the US government has been looking for user data from the cryptocurrency trade and has done so for longer than the Japanese or Russian governments. In November 2016, for example, he submitted a legal summons that required Coinbase to provide the Inland Revenue Service (IRS) with the identities of an unknown number of individuals associated with a number of cryptocurrency portfolios. As Cointelegraph reported at that time, this convocation was significant not so much in itself, but because it indicated that the IRS had been able to track certain portfolios sufficiently to determine that they had been involved in the violation of tax legislation. Likewise, he also indicated that the IRS had been able to determine that the portfolios were linked to Coinbase.

While IRS, of course, did not disclose how it was able to track these portfolios, a 2015 document leaked to the Daily Beast in 2017 revealed that it awarded a contract to Chainalysis, a "blockchain intelligence" provider with based in Switzerland that monitors cryptocurrencies like Bitcoin for compliance reasons. As Cointelegraph reported at the time, Chainalysis uses "data scrapped from public forums, leaked data sources including dark web, exchange deposits and withdrawals to label and identify transactions." Try to combine what is made publicly available on blockchain with personal information not thought up / left carelessly by users encrypted on the web. Thus, it works another system that is less cryptographically penetrating blockchains and more on simply putting together all the disparate threads of information spread over the Internet.

And although the IRS has not explicitly recognized its use of Chainalysis or any other service, it is also interesting to note that the past cases in which a US federal government agency managed to track down crypto users they have potentially involved the input of the NSA. In October 2013, Ross Ulbricht was arrested by the FBI agents in San Francisco and then charged (almost a year later) with conspiracy for narcotics trafficking, money laundering and computer hacking. During the trial, he claimed that his proceeding violated the fourth amendment (ie the right to protection against unjustified searches), since the only way the FBI could identify it was through illegal help of the NSA and its data collection tricks. Needless to say, this defense did not work exactly, yet Intercept noted that the NSA's OAKSTAR project was initiated six months before Ulbricht was arrested. More interestingly, the Web site also published documents classified in November 2017, revealing that the NSA had secretly helped the FBI to guarantee other convictions in the past.

Whatever the truth behind Ulbricht's conviction, it is clear that the NSA has been able to secretly identify Bitcoin users for over five years, while it is also true that other US agencies have followed encrypted transactions (using undisclosed media) . As such, it is a safe bet to say that American crypto users should probably think carefully before engaging in something Uncle Sam would not forgive.

China, India and beyond

China and India

It would seem that few nations can equal the United States to the extent and power of their encryption activities. However, this does not prevent many from trying. In ChinaIn March, it emerged that the PINSS (Public Information Network Security Supervision) agency monitored the foreign cryptocurrencies serving Chinese customers. Although the government has banned internal trade and trade in foreign alternatives, this has not prevented all Chinese traders from seeking the crypt abroad. For this reason, PINSS has monitored foreign trade so as to "prevent illegal money laundering, pyramid schemes" [and] fraud ", according to Yicai.

While Yicai could confirm through PINSS sources that such monitoring had been under way since September 2017, he could not explain what kind of monitoring was being pursued or whether the Chinese government was actively trying to identify the people who traded in the crypt. However, regardless of the extent of surveillance, the awareness that other nations are following the encryption would indicate that Chinese traders should also join the growing list of "people who should be cautious".

So it should too Indian traders, who in January may or may not have known that their government kept them under control for tax purposes. In fact, it is likely that they would know about this, since the Indian tax department has sent notifications to "tens of thousands" of investors (according to Reuters), after conducting national surveys and obtaining data on users from nine grants Indian. This provided a clear signal that the government was effectively tracking cryptocurrency transactions, which it had begun to contemplate in July 2017, when the Supreme Court of India requested information and the Reserve Bank of India on measures taken to ensure that the crypt was not used for illicit purposes.

As reported in July by the Indian news site LiveMint, the system that the government was considering would have involved cooperation between the central bank, the Securities and Exchange Board of India (SEBI) and India's intelligence agencies . However, since the involvement of Indian crypto-exchanges in January's fiscal communications reveals, it is once more probable that the system is currently based on input from these exchanges, rather than on technologies comparable to those of the NSA, for example.

In addition to the prominent examples of Japan, Russian, the United States, China and India, there are few other cases of national governments using crypto-tracking systems (or that are known to be known). . Nonetheless, although there are currently no public records of other governments investigating the potential of tracking systems, it is highly likely that those governments with a significant interest in cryptography have contemplated a tracking system in one form or another. other.

United Kingdom and EU

For example, the UK is European Union governments jointly announced in December 2017 that they are planning a "crackdown" on money laundering and cryptography-enabled tax evasion. Last October, Stephen Barclay, the British Treasury's economic secretary, said:

"The UK government is currently negotiating amendments to the Money Laundering Directive that will bring virtual currency exchange platforms and custody portfolios into the anti-money laundering and counter-terrorism regulation, which will lead to oversight of these businesses' activities. national authorities responsible for these areas. "

Although this does not confirm tracking, this would at least imply that, because the ability to enforce AML legislation implies that government agencies and departments should have some means to detect not only when someone is gaining encryption that must be taxed, but also determinant. Only who is that person So, the UK and EU authorities need to have some kind of localization system, otherwise their "cracking down" threats on money laundering and the like will only mean so much air hot.

And in the future, it could become increasingly possible for them or any other government, regardless of technological development, to carry out these threats. In April, a corporate giant, none other than Amazon, received a patent for a "streaming data market" that would allow the combination of multiple data sources, thus enabling real-time monitoring of cryptocurrency transactions and the users involved . As the patent text makes clear, this technology could potentially be offered to governments, which would be able to link cryptographic addresses to official IDs:

"Electronic resellers can combine the shipping address with bitcoin transaction data to create related data and republish the combined data as a combined data stream. A group of telecommunications providers can register downstream to the combined data stream and be able to correlate the IP (Internet Protocol) transaction addresses to the countries of origin. Government agencies may be able to subscribe downstream and correlate tax transaction data to help identify participants in transactions . "

Given the arrival of this technology (and the current existence of companies such as Chainalysis), it is only a matter of time before transactions involving Bitcoin, Ethereum or any other non-private cryptocurrency are systematically de-anonymized. It will take time, especially since the Amazon patent requires its users (such as resellers and telecommunications service providers) to combine separate data to create correlations. However, it is becoming increasingly clear that things are moving in one direction when it comes to privacy and the anonymity of cryptography.

Coins for privacy

And in light of this direction, anyone who wants to keep their chances of being identified as low as possible is advised to migrate to one of the so-called private currencies. Monero is the best known of these, having put on the market the 10 most precious cryptocurrencies since its initial launch in April 2014. More than anything else, what sets it apart from Bitcoin is its CryptoNight work test algorithm , which uses a mix of ringtones and stealth addresses not only to bury the address of the sender of the wallet in those of many other users, but also to hide the exact amount that is transferred.

This is why cryptocurrency has proved popular with those who need to evade the power of the government (for whatever reason), and such is the apparent ability of Monero to preserve the anonymity that his price is increased by about 2,883% between January 1 and December. 31, 2017 (from $ 12.3 to $ 358). In contrast, Bitcoin's 2017 growth rate was slightly lower at 1.357%.

2,883% can be impressive, but it pales compared to the 9,000% growth enjoyed in 2017 by Dash, another altcoin with certain qualities that improve privacy. The 13th most important cryptocurrency by total market capitalization, its PrivateSend feature mixes addresses to obscure the origins and destinations of transactions, making it significantly more difficult for any authority involved to put the pieces together.

This could be one of the reasons why the currency took off so spectacularly in Venezuela, where the government collapsed on such cryptocurrencies, like Bitcoin, in style last year (before showing favoritism towards its Petro currency supported by the 39; oil). The Venezuelans have also increasingly turned to Zcash during this period, which became the 21st largest cryptocurrency since it was launched in October 2016. Based on the architecture of Bitcoin Core and using zero-knowledge evidence , keeps the pseudonyms of the sender and recipient private, also doing the same for the quantity that is treated.

Therefore, a choice of private currencies is available to anyone concerned about the growing ability of governments to monitor encrypted transactions. And even if an encrypted user does not own Monero, Dash or Zcash, they can still take advantage of the various mixing services available for non-private currencies. For example, anonymization protocols are available that, similar to the features available through Monero and Zcash, allow Bitcoin senders and recipients to combine their transactions with those of other senders and recipients, making it very difficult to untangle the various threads involved. These protocols include CoinJoin, Dark Wallet,, SharedCoin and CoinSwap, which also provide Bitcoin and other encryption owners with the ability to make their transactions anonymous.

So even if cryptocurrency monitoring is on the rise, encrypted investors and owners should not be overly fearful of government surveillance. For example, most tracking systems in use or under development are based on input from crypto-exchange, while others (such as those provided by Chainalysis) depend on scavenging data that users may have carelessly left behind. all over the web. Meanwhile, the most direct and intrusive methods refined by the NSA are also based on cryptic users who compromise their Internet connections without knowing it, something that can not be counted on to monitor all cryptocurrency transactions en masse. This is why, in addition to private currencies such as Monero and Zcash, privacy-conscious crypto holders should not be too worried, since there are ways to remain anonymous for those who want it badly enough.

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