BitcoinRedux
RossAnderson,IliaShumailov,MansoorAhmed,AlessandroRietmann
Cambridge
WEIS,Innsbruck,June2018
BISAnnualreport,June17th“Cryptocurrenciespromisetoreplacetrustedinstitutionswithdistributedledgertechnology.Yet,lookingbeyondthehype,itishardtoidentifyaspecificeconomicproblemwhichtheycurrentlysolve.Transactionsareslowandcostly,pronetocongestion,andcannotscalewithdemand.Thedecentralisedconsensusbehindthetechnologyisalsofragileandconsumesvastamountsofenergy.Still,distributedledgertechnologycouldhavepromiseinotherapplications.Policyresponsesneedtopreventabuseswhileallowingfurtherexperimentation.”
WEIS,Innsbruck,June2018
Regulationsofar
• Since2013,FinCENinsiststhatexchangesregisterasmoneyservicebusinesses
• Since2017,defaultersgetraided• Needknow-your-customernotjusttochangeBTCfor$,buttochangeBTCforEth
• 2018:EUDirectivePECONS72/12‘tries’toregulatewallethostingserviceproviderstoo
• Somegovernmentshavegonemuchfurther...
WEIS,Innsbruck,June2018
Howcanwetrackstolencoins?
• Over6%ofbitcoinhavebeenreportedstolen• Evenmoremaybeproceedsofothercrimes• Theblockchainispublic,sowhynotjusttrackthemandrecoverthemfromexchanges?
• Möser,Böhme,Breuker:poisonorhaircut?• IfyougetBtc3stolen,thenBtc7legal:– ‘Poison’taintinggivesyouBtc10stolen– ‘Haircut’givesyouBtc10,markedas30%stolen
WEIS,Innsbruck,June2018
WhatEnglishlawactuallysays
• DavidFox:whentrackingfundstowhichtherearemixedclaimsthroughanaccount,youhavetousefirst-in-first-out(FIFO)
• “Clayton’scase”–DevaynesvNoble,35ER767,781(1816)
• ThishasspreadfromEnglandtoCommonwealthjurisdictionslikeCanada
• Sowedecidedtomeasuretheeffect…
WEIS,Innsbruck,June2018
Methodology+sampleresults
• WeranhaircutandFIFOonbitcoinfromthegenesisto2018startingwith56theftreports
• Linode:Btc46,653stolenin2012,haircutnowtaints16,855,619addresses(93%oftotal)
• FIFOonlytaints254,120(1.3%)• Flexcoin:Btc896stolenin2014,haircuttaints10,421,122addresses(57%)
• FIFOtaintsonly15,265
WEIS,Innsbruck,June2018
WhyFIFOisbetter(2)
• Haircuttaintingislossy;can’tgobackwards• FIFOtrackingislosslesssotracingisreversible• YoucangoforwardfromastolencointoallUTXOsittaints,orbackfromaUTXOtoseeitsentireancestry
• Thehandlingoftransactionfeesisverydifferent,asit’sfiddly(butimportant)
• WithFIFO,mostUTXOs(72%)havenotaintfromoursetof56well-publicisedlargethefts
WEIS,Innsbruck,June2018
Nemodatquodnonhabet
• ‘Youcan’tgivewhatyoudon’town’• IfBobstealsAlice’shorseandsellsittoCharlie,thenwhensheseeshimridingitshecandemanditback
• Thereisnostatuteoflimitationsfortheft,solongasbitcoinarejustacommodity
• Bitcoinfolksrelyonthedifficultyoftracing• Theirpolicygoalis‘fungibility’
WEIS,Innsbruck,June2018
Nemodatquodnonhabet(2)
• Englandusedtohavea‘marketovert’loophole,butclosedthatin1995
• Twoexceptionsformoney.Youcanownit– Ifyougotitingoodfaithforvalue– Ifyougotitfromaregulatedbank
• Mighttheseapplyifbitcoinbecomesmoney?• Bitcoinfolkslobbyforbitcointobemoney,orfortheblockchaintoconstituteownership
WEIS,Innsbruck,June2018
Laundries• Whataboutbitcoinmixesorlaundries?• Idea:putonebadcoininabagwithninegoodonesandthenshakeandchooseorchopandchange
• FIFOtaintingmakesthefirstunattractive• Andifyouchopandjointhecoinsintopuffpastry,that’sclearevidenceofbadfaith
• Soevenifbitcoinbecomesmoney,laundriesdon’tworkasadvertised!
WEIS,Innsbruck,June2018
Howdoweimplementtracking?
• Ifbitcoinbecomesmoneyoraregulatedexchangeotherwisegivesgoodtitle,itscustomerswillwantitsaddressespublic
• Butthentheftvictimscansuetheexchangemoreeasily
• Andsellerswillwanttochecktheircoins• Howcanwefixthis?
WEIS,Innsbruck,June2018
Howdoweimplementtracking?
• Ifbitcoinbecomesmoneyoraregulatedexchangeotherwisegivesgoodtitle,itscustomerswillwantitsaddressespublic
• Butthentheftvictimscansuetheexchangemoreeasily
• Andsellerswillwanttochecktheircoins• Howcanwefixthis?• Comingsoon:apublicTaintchain!
WEIS,Innsbruck,June2018
Tainttrackinginpractice
• WepublicisedourFIFOapproachinMarch(SecurityProtocolsWorkshoppaper,video)
• Wehopedtogetlotsoftheftreportsthatwecouldfollowup
• Whatwefound:almostnoneofthevictimshadeverreallyownedabitcoin!
• StartingwithMt.Gox,exchangeshavebeen‘hosting’customers’wallets
WEIS,Innsbruck,June2018
Howcanyouownanasset?
• Self-hosting:keepyourgoldcoinsunderthebed,orkeepyourprivatekeyonyourlaptop
• Goldmerchant:youbuyagoldbarfor£30,000andthemerchantkeepsitintheirvaultbutwithyournameonit.Iftheygobust,it’sstillyours
• Bank:youdeposititandthebanknowowesyou£30,000.Ifitgoesbust,youstandinline
WEIS,Innsbruck,June2018
Howbitcoinreallyworksnow
• Theexchangessuggestthey’regoldmerchantsbuttheblockchainsuggeststhey’rebanks
• Hugegrowthin‘off-chain’transactionsoverthepast2years;paymentsfastandcheap
• NowmostpeopleinUS,UKuseCoinbase,mostChineseuseBinanceetc
• Theyareactingase-moneyprovidersbutwithoutthelicencesrequiredbyEUlaw
• TheE-MoneyDirectiveisnotbeingenforced
WEIS,Innsbruck,June2018
Howregulationisfailing
• EU:newdefinitionofhostedwallet(aserviceholdingkeys)istwoyearsoutofdate
• Germanyissimilar;closedOneCoinasitwastransferringfundsbyadjustingEurobalances,butignoresoff-chainbitcointransactions
• UK:FinancialConductAuthoritywon’tseepaymentassignificant:bitcoina‘cryptoasset’
• Soitwon’tgivethePaymentServiceRegulatorauthorityovercryptocurrencypayments
WEIS,Innsbruck,June2018
Recommendations
• Firstandmostimportant:EUgovernmentsmustregulateexchangesofferingoff-chainpaymentsundertheE-moneyDirective
• Next,theyshouldregulatetherelationshipbetweentheexchangeanditscustomersunderthe2ndPaymentServicesDirective
• Next,theyshouldstopregulatedexchangesdoingtransfersto/fromunregulatedexchanges(thosenotevencompliantwithFinCEN)
WEIS,Innsbruck,June2018
Recommendations(continued)
• Governmentsshoulddemandthatexchangesmakeclearwhethercustomerassetsarekeptdistinctorpooled,andwho’stheowner,i.e.whethertheyare‘goldmerchants’or‘banks’
• Theyshouldbanexchangesfromdealingincryptocurrenciesspecificallydesignedtoevademoneylaunderingcontrols
• Theyshouldrequireexchangestobeadequatelycapitalised,anddevelopaccountingstandardstosupportthis
WEIS,Innsbruck,June2018
Isthereanupsidetocryptocurrency?
• Ifthereis,it’sprobablyinsmartcontracts• SeeforexampleJPMorganproject(liveblogofFC18keynote,onlightbluetouchpaper.org)
• Ifasmartcontractwerebuiltonabillofexchange,ownershipwouldbelikemoney
• Withcentralbankbacking,evenbetter!• Werecommend:ifanycentralbankissuesacryptocurrency,itshouldsupportsmartcontractsandberedeemableatpar
WEIS,Innsbruck,June2018
Finally–savingtheplanet
• Cryptocurrencyminingnowcostsabout7GW,orasmuchasIsrael
• Itdoesn’thavetobethisway!• Plentyproposalsforproof-of-X• EnterpriseethereumusesByzantinemethods• Oureighthrecommendation:governmentsshouldimposeacarbontaxatleastequivalenttothe€33pertonneflooroftheEUEmissionsTradingScheme
WEIS,Innsbruck,June2018
Conclusions
• Wetriedtounderminebitcoinfungibilitybydevelopingbettertaint-trackingtools
• Wewaitedforbitcointheftvictimstocome• Butalmostnoneofthemeverownedabitcoin!(sothe5thAMLdirectivemissesthemark)
• Therealproblemsarewiththeecosystem• Exchangesactas“banks”,pretendtobe“goldmerchants”,andignorethelaw,withthetacitconnivanceofbankregulators
• Solution:enforcethelawswealreadyhaveWEIS,Innsbruck,June2018