Australian researchers say nearly half of all Bitcoin transactions are for illegal activity

Bitcoin ATMs pictured in Hong Kong Photo: Anthony Wallace / AFP / Getty Images

  • Australian researchers used forensic finance techniques to investigate what Bitcoin is used for.
  • Despite hype around the supposed anonymity of cryptocurrencies, they say “once you start digging… it’s surprising how much sense you can make of it”.
  • They find half of transactions facilitate illegal trade, while legal users are mainly buying and holding the currency.

Almost half of all transactions in bitcoin are associated with buying and selling illegal goods and services, including drugs, weapons and pirated software, according to analysis using forensic finance techniques.

Talis Putnins, a Professor at the University of Technology Sydney, says blockchain technology underpinning bitcoin holds significant promise for revolutionising many industries.

“But this sort of illegal activity risks stunting the adoption of this technology and limiting the potential benefits to society,” he says.

Putnins and Jonathan Karlsen from UTS Business School, along with Dr Sean Foley from Sydney University, tracked illegal bitcoin use worldwide using data from 2009 to 2017.

In their soon to be published paper — Sex, Drugs, and Bitcoin — the researchers say around one third of bitcoin users are using the digital currency for illegal activity, with close to half of all bitcoin transactions, and about one quarter of the total dollar value, facilitating illegal trade.

“The aim of our research is to help regulators understand the size of the task they face in attempting to monitor and regulate bitcoin, particularly as it becomes mainstream – for example listing on futures exchanges,” says Putnins.

“Users involved in illegal activity are very active in terms of buying, selling and trading, whereas legal users are largely buying and holding the cryptocurrency.”

The researchers developed ground-breaking methods for identifying illegal bitcoin transactions. Their starting point was tracing the activity of bitcoin users who had been caught by the FBI and other authorities in online criminal activity.

“A lot of people think bitcoin is highly anonymous and untraceable, that it is outside the view of regulators and authorities, but once you start digging into it it’s surprising how much sense you can make of it,” says Professor Putnins.

The researchers first analysed the trade networks of those known to be involved in illegal activity, using information scraped from the dark web — an area of the internet that can’t be found using traditional search engines.

They then looked at user characteristics that distinguish users involved in illegal activity from those involved in legal activity.

One of these indicators is how far someone will go to conceal their identity and trading records.

“The techniques we have developed can be used by legal authorities in surveillance activities, but more broadly, much of what we develop is transferable to analysing other blockchains,” says Professor Putnins.

“In the hands of regulators or federal police, our methods potentially provide a lot of value in understanding what is going on – and cracking down on it.”

The paper describes how bitcoin has become the PayPal of the dark web, which is estimated to contain 30,000 domains.