Are Blockchain Transactions Traceable? Why This Matters

Bitcoin has become the most popular and valuable cryptocurrency in the world. But beyond its popularity as a form of currency, Bitcoin introduced the world to a new system for making secure transactions: the blockchain.

Since then, many people have used the cryptocurrency for its investment potential, privacy benefits, and decentralized nature. Some, however, have used bitcoin for more nefarious purposes. Cryptocurrency, transferred through the blockchain, has been used for all kinds of illegal online transactions, including drug sales and terrorist activity.

Blockchains are known for being much more secure than other types of digital transfer systems because they are set up in a shared ledger format. Instead of being stored in one place that could be easily compromised if hacked, the information is distributed and is therefore much harder to hack into.

Within a blockchain system, information about each transaction is recorded and kept in a public ledger. If someone tried to change the transaction records, all the other locations where the record was stored would flag the change as fraudulent. For this reason, blockchain technology is frequently used in industries requiring high levels of security, such as finance.

Although the information on a blockchain is public, transactions involving bitcoin are technically anonymous. A bitcoin wallet is a person’s blockchain address, and unless that address can be linked to a piece of identifying information, transactions are essentially anonymous.

Knowing that all information on the blockchain is public, does that mean blockchain transactions can be traced? Can law enforcement “follow the money” to solve crimes and capture criminals?

When bitcoin first emerged, it was extremely difficult to track who was moving money around on the blockchain. But since the arrest of Ross Ulbricht in 2015, who used bitcoin on his marketplace Silk Road to allow the sale of drugs, it’s become clear that these transactions can often be traced with the right knowledge and techniques.

These arrests show why being able to trace blockchain transactions is so important. A person’s identity might be anonymous throughout these transactions, but there are plenty of breadcrumbs to follow. With all the
public data available on blockchains, it’s getting harder for criminals to use
cryptocurrency as a means of financing illegal activity and laundering money.

Now that so many of our transactions take place online, cybercrime is a growing problem. There are many different types of cybercrimes, ranging from identity theft to extortion to collaboration on crimes taking place offline, such as human trafficking, drug sales, and terrorism.

In many cases, cryptocurrency is simply used as a medium to transfer funds outside of the banking system. These transactions often take place on the “dark web,” a heavily encrypted and decentralized network of websites that can’t be accessed by standard browsers or search engines. It is designed to provide privacy and protect anonymity.

Although the dark web was first designed by Navy researchers, it has a reputation for criminal activity. Many cybercriminals use it for its enhanced privacy and the ability to hide one’s identity and activity. Tracking activity on the dark web is difficult, allowing many cybercrimes to go unpunished.  

In other cybercrimes, bitcoin is the currency of choice for its anonymity and ease of transfer. Some scams involve hackers impersonating a celebrity and tricking people into sending money via bitcoin. Once the money is sent, it’s nearly impossible to retrieve unless the owner of the cryptocurrency wallet can be identified.

In many ways, cryptocurrency is ideally suited to criminal activity. It’s not controlled by a bank or nation, and it’s all digital, meaning that funds can be transferred quickly all over the world. The fact that a digital wallet is the only real identifier for the transaction means that criminals have some level of anonymity when sending or receiving money.

However, that’s a false sense of security. Law enforcement is becoming savvier about cybercrime all the time and agencies like the FBI have successfully tracked down high-profile cybercriminals using public blockchain records.

Cryptocurrency might seem like a safe bet for cybercriminals, but there are still ways they can be identified and caught with the help of their illicit transactions. If a cryptocurrency wallet is linked to another piece of information, like an IP address or an email address, it becomes fairly easy to trace all the other transactions that person has made. Once that information is exposed, there’s a trail of digital evidence that can be used to arrest and convict someone for their crimes.

Because online criminal activity is still fairly new, the field of digital forensics is still a growing field that is coming into its own. However, the use of blockchains for illegal financial activity is providing some opportunities to track where the money is going and learn more about how criminals operate.

Once a law enforcement agency is able to link a cryptocurrency wallet to another piece of identifying information, they can begin to track people who are engaging in criminal activity online. This is extremely valuable for gaining insights into how cybercriminals operate, and can even allow law enforcement to learn more about the habits of terrorist groups and human traffickers.

Some hackers and criminals are smarter than others. In some cases, it may be nearly impossible to catch someone by linking their wallet address to an IP address or email account. However, growing knowledge of cybercrime and the advancement of digital forensics is making it much harder for people to get away with shady dark web transactions on the blockchain.

Just as physical crime scene investigation was revolutionized by first fingerprint analysis, then other forensic techniques and DNA, we are starting to see the power of digital evidence in solving cybercrimes. Although there are lots of people who are still getting away with a lot from the safety of their own homes, the goal is to observe these criminals and understand them so that law enforcement can work toward stopping illicit dark web transactions altogether.