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Snowden Leak Suggests NSA Is Extensively Tracking Bitcoin Users

The U.S. National Security Agency (NSA) has been reportedly monitoring the bitcoin blockchain with an eye on identifying users on the distributed network.

According to a report by the Intercept on Tuesday, the media outlet has obtained classified documents from the U.S. whistleblower Edward Snowden which indicate bitcoin surveillance remains a top priority for the agency.

The news comes at a time when the U.S government has voiced concerns via lawmakers and law enforcement agencies over the illicit use of cryptocurrencies in terrorism financing and money laundering.

Documents further hint that the NSA’s agenda may go beyond just tracking the bitcoin public ledger with a target to locate users with the agency actively analyzing global internet traffic and using scraping softwares that offer anonymity to internet users.

For instance, one memo from the NSA, the report cited, suggested the agency has collected more private information such as bitcoin user passwords, internet activity and device identifiers.

According to the report, the NSA has been monitoring the internet activities of bitcoin users since 2013 through a program with codename as OAKSTAR. And yet the new leak suggested that with MONKEYROCKET, another sub-program under OAKSTAR, the NSA may be moving closer to pinpoint users who initiate a cryptocurrency transaction.

“SSG11 analysts have found value in the MONKEYROCKET access to help track down senders and receivers of bitcoin,” one memo reads.

Leaked documents also hinted that the NSA may have been using the XKeyScore system to investigate bitcoin users’ information – a powerful global internet monitoring system that was first exposed in 2013 when Snowden disclosed classified documents about the NSA’s surveillance activity. 

The latest leak shows that the agency has stored this information in a file called, “Provider user full.csv,” and passages detail analysts discussing identifying transaction timestamps and users’ internet address in bid to locate the targets. 

NSA image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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The Downside of Tracking Bitcoin on the Blockchain

Marc Hochstein is the managing editor of CoinDesk. The views expressed here are his own, so don’t blame his co-workers.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.


Picture two $1 bills. One is crisp and immaculate, newly arrived from the U.S. Mint. The other is crumpled and covered with crumbs and boogers.

Each is worth exactly the same as the other. It doesn’t matter if the crumply one previously belonged to a coke dealer or a Koch brother. It’s still good for bus fare.

That’s fungibility. It’s one of the essential properties of money that we take for granted. But in cryptocurrency, fungibility is at risk, thanks in part to the transparent nature of the blockchain, where wallet addresses are pseudonymous but the flows of funds between them are exposed for all to see.

Last week brought a reminder of that risk when Bitfury, a startup, introduced Crystal, a set of software tools to help track illicit activity on bitcoin’s public ledger.

As CoinDesk’s Michael del Castillo reported, the platform is Bitfury’s attempt “to help bitcoin once and for all move past its association with black market transactions.” Valery Vavilov, Bitfury’s CEO, said Crystal will enable users to “see if this bitcoin address that you’re getting money from is green or black.”

Stepping back, Bitfury, which started as a mining operation, is not the first company to offer this sort of snooping service – as CoinDesk’s article noted, Chainalysis, Elliptic, and Skry (now a part of Bloq) are already in the market.

And to be sure, catching criminals, all else equal, is a worthy goal. (For the sake of argument, let’s assume that all the “crimes” being solved here are actual crimes, the kind with victims.)

Further, the surveillance provided by these companies may produce another benefit by helping other startups get or keep accounts with traditional financial institutions. Banks have been reluctant to serve the sector because of its association with illegal activities. If they could demonstrate that their clients aren’t moving “dirty” money, they might get their regulators comfortable with the industry.

But the use of the blockchain in this manner could also have perverse effects.

Blacklisted balances

As Chris Burniske and Jack Tatar write in their book “Cryptoassets“:

“A danger for bitcoin, especially for balances known to have been used for illegal activity, is that if an exchange or other service blacklists that balance, then that balance becomes illiquid and arguably less valuable than other balances of bitcoin.”

Woe to the merchant who sells a pair of alpaca socks to a drug pusher and then can’t spend the tainted coins.

And that’s not the half of it. Burniske and Tatar go on:

“While subtle, losing fungibility could be the demise of a digital and distributed currency, hurting the value of all units, not just the ones used for illegal activities.”

Cryptocurrency developers are well aware of this danger and have been working for years to strengthen user privacy, which in turn would preserve (or restore) fungibility.

Some of these techniques, such as zk-snarks and ring signatures, have been pioneered on altcoins like zcash and monero, respectively. (Loss of fungibility, Burniske and Tatar write, “is one problem that monero does not have to deal with.”) Other privacy enhancements, such as TumbleBit, are being developed for bitcoin itself.

“Ultimately I think the challenge will be for any analytics tool to keep up with the variations on cryptocurrencies, with a particular emphasis on the challenges posed by those that appear designed for anonymity,” said Jason Weinstein, a strategic advisor to Bitfury and former 15-year veteran of the U.S. Department of Justice who now practices law at Steptoe & Johnson LLP

Yet these enhancements may compound the regulatory challenges.

“If you make the accounting layer as private as zcash, you might sacrifice an entire market,” said Charles Hoskinson, founder and chief executive of IOHK, a company developing several blockchain projects including Cardano.

For example, Japan’s Financial Services Agency, which must approve cryptocurrencies before they are listed on the country’s licensed exchanges, “may never whitelist a token that’s high-privacy,” he said.

On the other hand, “if you don’t build these types of features,” once de-anonymized, a user’s “entire financial history from the beginning of time” will be exposed.

“That’s worse than the conventional banking system,” Hoskinson said.

Double standard?

All told, it seems that cryptocurrency is being held to a higher standard for “clean money” than fiat, at least the physical version. Very few people are reading serial numbers on dollar bills. (To be fair, the comparison isn’t apples-to-apples, since you can’t zap a briefcase full of banknotes across the globe.)

Satoshi created bitcoin so people who don’t trust each other could transact over the internet. Exposing all transactions on the blockchain was the price paid for trust in the system, and he (or she, or they) thought pseudonymous addresses would mitigate the privacy leak.

Radical transparency is often touted as a feature of blockchain technology, which it may well be for enterprises and governments. And in bitcoin, it produces secondary benefits for ordinary users as well. For example, keeping an eye on withdrawals from an exchange’s wallet may help spot a run.

But in the use case of money, the blockchain’s openness could also turn out to be a bug. Even for law-abiding citizens.

Dirty money image via Shutterstock.

The leader in blockchain news, CoinDesk strives to offer an open platform for dialogue and discussion on all things blockchain by encouraging contributed articles. As such, the opinions expressed in this article are the author’s own and do not necessarily reflect the view of CoinDesk.

For more details on how you can submit an opinion or analysis article, view our Editorial Collaboration Guide or email news@coindesk.com.

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Japan Bitcoin Exchanges to be Overlooked – Officials Surveillance

From Oct 1, Japan’s Bitcoin exchanges will face preparation for authority surveillance in a complete and constant scene.

In accordance with laws legalizing Bitcoin in April, Japanese exchanges must register with the country’s Financial Services Authority (FSA) by the end of September.

Licensing new exchanges has picked up pace since news of the law surfaced, with over 50 licensees going through the pipeline, and 18 in the first month alone.

“If necessary” physical inspection and controlled environment will be in need as reported by local news and media for the authorities.

One spokesman for the FSA commenting to Japan Times, remained ambiguous to the method of actions according to the plans.

“We pursue both market fostering and regulation enforcement,” he said.

A 30-member team was created by FSA on August which had the task of making sure that exchanges did go on to abide the new requirements.

This will include, Japan Times reiterates, “checking whether virtual currency exchanges manage customer assets separately from their own assets and whether they have appropriate risk management measures, including how to respond to cyberattacks, in place.”

The tables towards the digital currency’s favor have been turning rapidly recently for the general mood in Japan’s 70 percent cash economy.

Lastly, This week the countries bank sector did announce plans for a could be national currency called J-Coin with the target of taking the place of cash transaction withing 2-3 years.

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