How Prosecutors Might Nail Ross Ulbricht Using The Supposedly Anonymous Bitcoin

Post written by Nicholas Weaver

Nicholas Weaver is computersecurity researcherat theInternational Computer Science Institute in Berkeley

Many have quipped that the cryptocurrency known as bitcoin are really prosecution futures, because rather than being anonymous, bitcoins can be remarkably easyto trace since every transaction between pseudonymous addresses ispublicly recorded. With the ongoing trial of Ross Ulbrichtoverallegations that he was the kingpin known as the Dread Pirate Roberts behind the Silk Road onlinedrug marketplace, this may be put to the test.

When the FBI arrested Ulbricht, they also captured his bitcoin stash.For the moment, let us assume that Ulbricht is (or at least asignificant version of) the Dread Pirate Roberts. How can the prosecution seek touse these bitcoin to prove that Ulbricht was the brains behind theSilk Road?

When the FBI seized the Silk Road server and the associated bitcoinwallets, they didnt just gain the ability to movethe bitcoins, they also gained an index into history. The privatekeys contained in this file can generate a near infinite universe ofdistinct public addresses, but capturing the private key enablescomputing all these addresses.This acts as an index into the blockchain, the public ledger whichrecords every bitcoin transaction. By seizing the wallet, the FBInow knows every bitcoin transaction involving the Silk Road wallets:payments sent, payments received, and even internaltransactions designed to confuse outside analysis.

The same applies to Ross Ulbrichts bitcoins. The wallets seized fromUlbrichts laptop not only allowed the FBI to capture 144,000bitcoinsfrom Mr. Ulbricht, but also provides an index to every bitcoin transaction he made, both legitimate and potentially illegal.The final piece of the puzzle is redandwhite, the allegedhitman/scammer who was supposedly hired by the Dread Pirate fora considerable sum.

The first step in tying Ulbricht to either Silk Road or redandwhiteis to search for any direct transactions. Having identified everyaddress belonging to either Ulbricht or Silk Road with the seized wallets, the FBIsimply has to look for all direct payments in the blockchain. If so, the prosecution torpedoes the Good Ship Revengethen and there: Ulbricht has already claimed the bitcoins are his.

Yet for the moment assume that Ulbricht was also careful, and used abitcoin tumbler, also known as a bitcoin money laundering service.Tumblers promise some anonymity: a user deposits a given amount intoone address and a few hours later a supposedly unrelated address thencreates a final payment, deducting the tumblers fee.

Such tumblers do a very poor job of hiding transactions,especially when dealing with a thousand or a hundred thousand bitcoins. The simplest approach is to simply lookfor common flow patterns. If 1.2 bitcoin left Silk Road to anunknown address, and Ulbricht received 1.1752157 bitcoin five hours later, this is suggestive. Add in thousands of such coincidentaltransactions and a pattern will emerge.

Evenmore sophisticated analysesare possible. These tumblers formclusters,a group of independent addresses that are identifiable with a singleowner. Even if a tumbler uses multiple independent pools of bitcoin,each pool can be identified.