AN IDEA FROM 1816 MIGHT BE THE KEY TO TRACING STOLEN BITCOINS
Cambridge researchers are testing a 200-year-old solution
Wired.com’s journalist, Andy Greenberg explains how a legal precedent from 1816 can help tracing “dirty” Bitcoins. Our article below is an edited, short version of Andy Greenberg’s essay published today on wired.com.
Thanks to the blockchain technology there is inalterable evidence, stored on thousands of computers, of every Bitcoin transaction that's ever taken place. Many of the transactions recorded on that distributed ledger are crime-related, like stolen funds and paid ransoms.
Researchers are working on a software tool “that can scan the blockchain and, starting from known instances of Bitcoin theft, theoretically identify the same tainted coins, even if they’ve hopped around the blockchain for years”, explains Andy Greenberg.
The idea of the tracing method is 200 years old.
“Based on a legal precedent from an 1816 British court decision, a group of Cambridge cybersecurity researchers now argue that the first coin that leaves a Bitcoin address should be considered the same coin as the first one that went into it, carrying with it all of that coin's criminal history. And if that coin was once stolen from someone, he or she may be allowed to claim it back even after it has passed through multiple addresses”, Greenberg writes.
Tracing Bitcoins is easy in theory. The trail of the coin can be followed. The problem is that it is not always easy to identify who controls the addresses where a coin’s trail leads. It is in cases when Bitcoin users move their coins on purpose through a "mix" or "laundry" service.
“David Fox, a professor of law at Edinburgh Law School, pointed out that there was /…/ an 1816 precedent known as Clayton's Case, which dealt with who should be paid back from the remaining funds of a bankrupted financial firm. The answer, according to the presiding judge, was that whoever put their money in first should take it out first. The resulting first-in-first-out—or FIFO—rule became the standard way under British law to identify whose money is whose in mixed-up assets, whether to resolve debts or reclaim stolen property.”
The researchers started investigating how that rule could be applied to Bitcoin's blockchain: “Mix up a dirty coin and nine clean ones in a laundry address or exchange, and all 10 coins that came out would be defined by the same order they went in—even if that order was just a millisecond's difference in which transaction was written to the blockchain's record first. If the first bitcoin to go into the mix were stolen, the first to come out of the mix would be considered that same coin, and thus still stolen.”
If this tracing solution is accepted as an official tracing method, certain Bitcoin users can end up having their coins claimed as stolen property.
Ross Anderson, the Cambridge computer science professor who leads the research group says, examining the possible consequences of their suggested solution: "Some people will sue regulated Bitcoin exchanges and say, 'You’ve been receiving stolen goods and they were mine. Kindly compensate me,'" Anderson says. "When the first such case hits a sufficiently senior court for it to set a precedent, that will be of enormous importance to the entire cryptocurrency world."