Is it possible to deanonymize Bitcoin transactions?

Rage Comment : Researchers recently conducted a study on whether it is possible to trace the true identity of the initiator of a Bitcoin transaction and published a research report. The report is based on previous research on the anonymity of the Bitcoin system and conducted research by examining the information identification procedures of Bitcoin exchanges. The final result is that tracing the true identity of the initiator of a Bitcoin transaction is theoretically feasible, but real transactions are often more complicated and there are still loopholes in information identification. It requires joint efforts from multiple parties to further ensure the security of Bitcoin transactions.

Translation: Ina

Even though Bitcoin was originally conceived as a completely anonymous digital currency, block analysis and network traffic tracing have made it possible to determine the origin of a large number of Bitcoin transactions, but can the IP address of the individual who initiated a Bitcoin transaction be traced and identified in all cases? Is block analysis and network traffic tracing technology always possible?

A recently published article attempts to answer this question by critically analyzing research on the anonymity of Bitcoin transactions to gauge the feasibility of law enforcement agencies tracking down the true identities of the initiators of illegal Bitcoin transactions.

Study Design

This paper aims to investigate whether personally identifiable information can be integrated with external data sources to locate individual users, following the approach taken by Reid and Harrigan (2013) in their paper entitled An Analysis of the Anonymity of the Bitcoin System. The research paper not only provides a thorough literature review on the anonymity of Bitcoin users and the possibility of tracing transactions through block analysis, but also examines four Bitcoin exchanges to see if the information provided during the registration process is sufficient and reliable to support verification. Thus, this study examines the ability of law enforcement to rely on such information when attempting to prosecute users who initiate/accept illegal Bitcoin transactions. In addition, by submitting false verification information, the researchers examined whether Bitcoin exchanges would accept illegal or fraudulent information.

Can the true identity of the initiator of a Bitcoin transaction be traced?

The results of this study are very interesting. It is possible to identify and prosecute illegal actors through the analysis of transactions on Bitcoin exchanges. However, compliance and stringency in the enforcement of AML (Anti-Money Laundering) laws and the inadequate deployment of security standards for customer identification procedures in some Bitcoin exchanges allow technologically savvy and well-funded criminal actors to circumvent identification control procedures and participate in Bitcoin transactions without revealing their true identity.

If law enforcement agencies are to rely on information obtained from Bitcoin exchanges, full compliance with KYC (Know Your Customer) policies and due diligence systems will be mandatory. The report highlights the need to investigate the means by which criminals escape identity control and finance their illegal activities.

The researchers managed to create accounts using fraudulent identity information and trade bitcoin on two bitcoin exchanges (the researchers did not name the exchanges).

More importantly, although Bitcoin transactions can theoretically be traced back to the real-world originator, this is not feasible in all cases, especially since it is impossible to monitor transactions in real time; instead, blockchain analysis and network traffic monitoring are performed in a retrospective manner. The report concludes that Bitcoin exchanges need to be highly relied upon to implement stricter identification procedures to increase the percentage of Bitcoin transactions that can be traced back to the real-life originator.