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Posted on 25 November 2015 | 6:59 am
ISIS parks its cash in Bitcoin, experts sayFox News
Just days after the hacker group Anonymous pledged to hunt down Islamic State members and launch cyberattacks against their accounts, a separate group of techies claims it has identified a key funding avenue for the terror network – bitcoin
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Posted on 25 November 2015 | 5:12 am
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Posted on 24 November 2015 | 8:44 pm
Visa Europe discusses why it is using the bitcoin blockchain as part of its new proof-of-concept for the remittance market.
Posted on 25 November 2015 | 7:00 am
Post-trade services firm Kynetix is seeking to assemble a consortium of commodities market stakeholders to explore the use of blockchain tech.
Posted on 24 November 2015 | 12:05 pm
Microsoft has added a new decentralized application to its Ethereum blockchain-as-a-service toolkit introduced in October.
Posted on 23 November 2015 | 3:04 pm
Digital currencies could disrupt the ability to central banks to oversee the economy or issue money should global adoption take place, says the BIS.
Posted on 23 November 2015 | 1:51 pm
Australian bitcoin firm Bitcoin Group is hiring a bitcoin expert after the country's top regulator raised concerns about its forthcoming IPO.
Posted on 23 November 2015 | 10:51 am
Europol wants an intern with blockchain analysis skills for an open source intelligence project.
Posted on 23 November 2015 | 9:10 am
Wealthcoin founder Simon Burns discusses what he's learned trying to raise seed capital for his latest bitcoin startup.
Posted on 22 November 2015 | 8:01 am
CoinDesk goes under the hood of Nasdaq's first blockchain product Linq, a platform for private shares trading.
Posted on 21 November 2015 | 7:57 am
An insurance company sued by BitPay following a claim dispute has fired back, denying the bitcoin payment processor’s allegations in a new filing.
Posted on 20 November 2015 | 3:46 pm
Bitcoin became embroiled in a debate about the financing of terrorism following the Paris attacks which resulted in over 100 deaths.
Posted on 20 November 2015 | 12:00 pm
Brazil’s House of Representatives held a hearing this week to discuss a bill that would give the central bank oversight of digital currencies.
Posted on 20 November 2015 | 11:20 am
Former Federal Reserve chairman Ben Bernanke offered both muted praise and criticism when discussing bitcoin in a new interview.
Posted on 19 November 2015 | 2:11 pm
Bitcoin payroll startup Bitwage has wrapped up a period of fundraising during which it brought in a total of $760,000.
Posted on 19 November 2015 | 10:24 am
BNP Paribas, Canadian Imperial Bank of Commerce, ING, MacQuarie and Wells Fargo are the latest financial institutions to partner with R3CEV.
Posted on 19 November 2015 | 7:42 am
Countries in the EU are reportedly planning to crack down on virtual currencies such as bitcoin in an attempt to tackle the financing of terrorism.
Posted on 19 November 2015 | 5:30 am
The Commonwealth Bank of Australia will host a two-day blockchain conference in Sydney next month in an attempt to explore the technology's potential.
Posted on 19 November 2015 | 4:32 am
Digital currencies were deemed a “low” risk for money laundering and terrorism financing in a report published last month by the UK government.
Posted on 18 November 2015 | 1:20 pm
Coinbase has introduced the first U.S.-issued bitcoin debit card, the Shift Card, in partnership with Shift Payments. The Shift Card is a Visa debit card that currently allows Coinbase users in 24 states to spend bitcoin both online and at physical points of sale at more than 38 million merchants worldwide.
“Merchant adoption has come a long way over the past few years, but it’s still difficult for people to make regular purchases with bitcoin,” notes the Coinbase announcement. “Buying gas at a local gas station or groceries at a neighborhood grocery store with bitcoin has not been possible in most cities in the U.S. Thanks to Shift Payments, it’s now possible to use bitcoin to buy gas, groceries, and much more. With the Shift Card, you can now spend bitcoin anywhere in the world that Visa is accepted.”
Coinbase users living in the states where the service is available can order a Shift debit card for $10 and link it to a Coinbase wallet. When the Shift debit card is used to make a purchase, the equivalent value of bitcoin (based on the current spot price of bitcoin on Coinbase) is debited from the user’s Coinbase bitcoin wallet. For certain transactions, such as gas purchases and dinner bills, Shift will debit more than the purchase amount, and refund the remainder to the user when the final payment amount is settled.
There are no annual fees, no bitcoin-to-dollar conversion fees, and no domestic transaction fees. Coinbase says there are no domestic transaction fees “for a limited time,” which seems to indicate that domestic transaction fees could be added in the future. There is a $2.50 ATM fee and a 3 percent international transaction fee. The daily ATM withdrawal limit is $200, and the default daily spending limit is $1,000.
The card isn’t available to users in New York, Florida, and many other states. Coinbase and Shift Payments say that they are working through legal and regulatory matters in the states where the Shift Card is not yet available.
Shift Payments wants to integrate all payment options available to a user in one debit card. Users can connect a Shift Card to multiple accounts to seamlessly spend all supported payment means, including digital currencies, with the same card.
“The Shift Card works like any debit card today,” notes the Shift website. “Connect your existing accounts and spend Coinbase or Dwolla, immediately and directly, everywhere Visa is accepted.”
The Shift card isn’t the first bitcoin debit card, but the availability of a Visa-branded bitcoin debit card from a major bitcoin exchange and wallet operator is likely to represent a quantum leap in the space.
“At the end of the day, what we’re trying to do is make bitcoin easy to use,” Coinbase vice president of business development and strategy Adam White, told Wired. “We want to make it easy to buy and sell bitcoin, and we want to make it easy to spend. A mainstream debit card based on bitcoin is a key element.”
Of course all U.S. bitcoin users already can spend their bitcoin by converting them to dollars and sending the dollars to their bank accounts, but the process is lengthy and probably overly complex for some users.
Therefore, the Shift Card is likely to make Bitcoin much more useful in daily life.
Wired notes that existing Coinbase customers are now likely to start spending more of their bitcoin, rather than just speculating, and new customers will be attracted to the digital currency because they can more easily spend it. Then, merchants will be more motivated to start accepting bitcoin, which could start a runaway feedback loop that will boost the Bitcoin ecosystem.
The post Coinbase and Shift Payments Introduce a Visa-branded Bitcoin Debit Card That Works Everywhere Visa is Accepted appeared first on Bitcoin Magazine.
In September Bitcoin Magazine reported that nine global banks were pooling resources to fund R3, a next-generation global financial services company focused on applications of cryptographic technology and distributed ledger-based protocols within global financial markets.
R3 will seek to establish consistent standards and protocols for this emerging technology across the financial industry in order to facilitate broader adoption and gain a network effect, according to an R3 press release.
Several other top banks joined R3 soon thereafter.
Now, five more banks – ING, BNP Paribas, Wells Fargo, MacQuarie and the Canadian Imperial Bank of Commerce – are joining R3, Reuters reports. R3, now supported by most of the world’s major banks (with notable exceptions in China), represents the first high-profile collaborative project to find out how blockchain technology can be used in finance.
Thirty banks across the world are now partnering with R3, signaling a significant commitment to collaboratively evaluate and apply this emerging technology to the global financial system.
“The combined strength of our technology team and the diverse global footprint of our member banks clearly differentiates us and puts us in a unique and exciting position within the distributed ledger space,” said R3's CEO David Rutter. “The R3 collaborative model is the best way to quickly, efficiently and cost-effectively deliver these new technologies to global financial markets. We look forward to welcoming more players to our growing team as the initiative continues to develop and evolve.”
Richard Gendal Brown, IBM's former executive architect of banking innovation, joined R3 in September as chief technology officer. In a recent post on his personal blog, he introduced his senior leadership team, which includes James Carlyle, formerly chief engineer at Barclays Personal and Corporate Bank, who joined R3 as chief engineer, and Bitcoin code developer Mike Hearn, who joined R3 as lead platform engineer. Ian Grigg joined R3 as architecture consultant, and Tim Swanson joined R3 as head of research.
Gendal Brown’s team will focus on the basics of fintech applications for banks and financial firms: “[W]hat properties does a technology platform need to possess if it is going to enable the world’s banks – and other firms – to deploy shared platforms to record, manage and report on their contractual agreements with each other and with their customers? What is the irreducible set of functional requirements we must provide? What are the non-negotiable non-functional requirements?”
A press release on ING Bank's website announced that, by joining R3, ING is taking the next step with blockchain technology to collaborate on research, design, and engineering that will advance innovative solutions for clients that meet banking requirements for security, reliability, performance, scalability, and auditing. ING Group, a Dutch multinational banking and financial services corporation headquartered in Amsterdam, had more than 48 million individual and institutional clients in more than 40 countries in 2013.
“We are very excited about joining the R3 consortium and taking an important step forward in our payments innovation strategy,” said Mark Buitenhek, ING Global Head of Transaction Services. “We want to make the most of what blockchain technology has to offer our customers and the best way to achieve this is through global collaboration. Working together, we will develop innovative banking solutions for our clients with consistent standards and protocols guaranteeing widespread adoption. We are convinced that this initiative brings together unique sets of expertise and experience in electronic financial markets, distributed ledgers and blockchain technologies.”
The rapid rise of R3 shows that the adoption of blockchain technology in the financial sector is reaching a point of no return. On the other hand, it can also be interpreted in the context of the ongoing trend toward appropriation of blockchain technology by the mainstream financial world, which many early adopters and Bitcoin purists consider a disturbing trend.
The post ING and Other Top Banks Join R3 to Take the Next Step with Blockchain Technology appeared first on Bitcoin Magazine.
In the aftermath of the Paris attack on November 13, the European Union (EU) is looking to crack down on bitcoin with the hope of preventing the financing of future attacks. Regulators and advocacy groups agree, though, that kneejerk regulation is not what is needed; rather, the need is thoughtful regulation and an increase in education.
“There’s nothing wrong with Bitcoin, it just means it’s another part of our financial system,” said Dana Syracuse, managing director and a member in the Anti-Money Laundering (AML) and Regulatory Compliance Practice at K2 Intelligence, in an interview with Bitcoin Magazine.
K2 Intelligence is an investigative, compliance, and cyber defense services firm. Prior to joining K2 Intelligence, he worked in the New York State Department of Financial Services and was the author of BitLicense.
“As time goes on, Bitcoin’s place is going to grow," Syracuse said. "One of the things that I talk about is, if you look at the story of bitcoin and the kind of enforcement and prosecutorial action, it shows the evolution and growth of the space.”
“Bitcoin is not the problem, and further restrictions on it are not the solution. Criminals and terrorists are using all sorts of technology to try to hide their activities over the Internet, but those who turn to bitcoin as part of that effort are making a big mistake,” said Jason Weinstein, director of the Blockchain Alliance, in an interview with Bitcoin Magazine.
Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network (FinCEN) explained at a Digital Currency Summit held by the Department of Justice that $4 million worth of bitcoin is circulated through regulated entities. Outside the regulated entities, $10 million worth of bitcoin is circulated. At the event, Calvery made clear that her agency didn’t regulate bitcoin; instead, it regulated the financial institutions.
Perianne Boring, the founder and president of the Chamber of Digital Commerce, echoed those thoughts. In an interview with Bitcoin Magazine , she said, “Virtual currency is already highly regulated, especially within the G7 nations. Despite the high degree of regulation, the majority of bitcoin transactions are taking place outside regulated entities, which are mostly outside the G7 nations.”
“Increasing regulation within the G7 would only increase burdens on the companies that are working hard to comply with the Bank Secrecy Act and related regulations and could potentially push more bitcoin into the unregulated entities,” Boring said.
“What is needed is rolling out regulations in a rational, thoughtful, and constructive way,” said Syracuse. “When you regulate in the face of a crisis, there is often a temptation to overcorrect, which you want to guard against. We have to be careful on the back end of a travesty like this not to overregulate.”
Regulation is not the problem; it is education
Fundamentally, it is education that is problem, not regulation. Once regulators have sufficient education, they tend to come to the same conclusion that many others do: Bitcoin is not the problem.
“I’m a little skeptical of what new regulation would exist that would help,” said Vincent D’Agostino, associate managing director in the U.S. Cyber Investigations and Incident Response practice at K2 Intelligence, in an interview with Bitcoin Magazine.
Before joining K2 Intelligence, he was the FBI’s trial agent for Silk Road 1 and the case agent for Silk Road 2.
“If more people on the counter-terrorism side took the time to educate themselves on blockchain technology, so when they did a raid and the first thing they did was take that seized data and identify the public keys so they could start to make links," he said. "They could go, we didn’t know who this linked to, but now we know everything they’ve done. It attaches that person to those wallet files."
“Every financial innovation, every new form of value transfer brings with it its own unique challenges," Syracuse explained. "Bitcoin is not unique in that. Terrorism is a major concern of major financial systems. The use of bitcoin in those kinds of activities is no different than what goes on in the traditional banking system. Education in this space is key, and that is what will lead to rational and productive regulation and communication between the regulators.”
According to a report by the U.K. Treasury, “there is little evidence to indicate that the use of digital currencies has been adopted by criminals involved in terrorist financing, whether as a means by which to raise funds (crowd funding etc.), to pay for infrastructure (e.g. server rental), or to transfer funds.”
The report also explains, “The money laundering risk associated with digital currencies is low, though if the use of digital currencies was to become more prevalent in the U.K. this risk could rise.”
That is because bitcoin is actually an inefficient method for transferring value for illicit purposes since it is a completely public ledger.
“It would be far easier to launder euros or dollars than it would be to launder a decentralized, blockchain-based currency like bitcoin,” said David Long, the principal and senior consultant at the Northern California Fraud Prevention Solutions, in an interview with Bitcoin Magazine . “Though from an initial investigative standpoint, bitcoin might present more of a challenge due to the necessity of uncovering who is actually responsible for a given transaction or transactions. However, once the actor's identity is uncovered, the blockchain makes it possible to uncover most, if not all, of a person's transactions. This capability is without parallel when the subject is dealing in euros or dollars.”
Weinstein further confirmed that point, saying, “Reports of bitcoin’s anonymity are greatly exaggerated. Criminals or terrorists who use bitcoin to facilitate their activities are foolish, because bitcoin is traceable in a way that other payment methods, including cash, are not.”
Bitcoin is pseudonymous in that all that is shown is on the public ledger is a public address. However, once a law enforcement officer is able to identify who owns that public address, he would then be able to track every transaction that went to and from that address. If the Islamic State of Iraq and the Levant (ISIL) were to transfer bitcoin, and a law enforcement officer knew that it was their address, he could track each transaction and start building a case accordingly.
Cash, on the other hand, is completely anonymous. An individual in ISIL could take envelopes of cash across state borders and easily pay for the necessary assets for committing an act of terror. A law enforcement official would have no way of verifying how the funds were used. Long gave an example where a trade-based money-laundering scheme using dollars or euros conducted by professionals could be virtually undetectable.
The problem with this is that more people don’t realize it.
“They [law enforcement] are not using existing bitcoin investigative techniques as much as they should,” D’Agostino said. “There is no doubt that when done correctly, using bitcoin can be extremely anonymous but as long as there are human beings involved in the transfer of bitcoin, the creation and maintenance of those wallets, and the movement of that digital currency, they are going to make a mistake at some point. Those mistakes are typically catastrophic from an anonymity perspective. If it’s a group of people within a terror network moving a high volume of bitcoin both directions, they’re going to make a mistake eventually. They’ll forget to encrypt their wallets or leave their abandoned keys on a piece of discarded or seized digital device. That’ll give you an opening, a crack in the door, to give law enforcement you a chance to exploit that information and connect the subject with a set of address and transactions. So what may have started as completely anonymous set of transactions now has ends up having the opposite desired affect”
The key is educating law enforcement and national security authorities about how the technology works, so they can enhance their ability to use it to follow the money and protect public safety, Weinstein said. "We need more education, not more regulation.”
Jerry Brito, the executive director of Coin Center, explained in a recent blog post why more education is needed: “Overreaction by jittery policymakers in the wake of a crisis is always a concern, which is why education before such crises is so important. We’ve been engaged in just such education for over a year, and we’re hopeful policymakers understand that an overreaction would be counterproductive, whatever the headlines may say."
Brito echoed the point made clear by Boring and Weinstein: "The fact is that regulators understand that digital currencies do not pose the greatest risk for terrorist financing, and to the extent digital currencies pose some risk, a 'crack down' on their use would likely only serve to drive out legitimate players, which in turn would only serve to limit governments’ visibility into illicit uses.”
Bitcoin financial institutions already follow many of the same money transmitter laws that traditional institutions have to follow. Creating further regulation over them will not help prevent further acts of terrorism. Instead, educating law enforcement on the ways in which it can use the blockchain to seek and capture terrorists is one way to prevent future catastrophes.
Photo StockMonkeys.com / Flickr(CC)
Jacob Donnelly is a freelance journalist and a consultant in the bitcoin/blockchain space. He runs a weekly digital currency and blockchain newsletter called Crypto Brief.
The post Law Enforcement and Regulators Agree: Bitcoin Not Useful for Terrorists, Thoughtful Regulation and Education Needed appeared first on Bitcoin Magazine.
Bitcoin is designed as a peer-to-peer network, where nodes randomly connect to other nodes. Transactions and blocks are transmitted over this network by these nodes, until each node receives all the latest transactions and blocks. This works quite well, as the distributed model makes Bitcoin relatively censorship-resistant; there is no central point of control to shut down or pressure into compliance.
But there are other, more centralized alternatives for transmitting transaction data, too. The best known of these is “the” relay network, introduced in 2014 and maintained by Bitcoin Core developer Matt Corallo: “It's centralizing, but, hopefully, democratizing.”
Corallo's relay network serves two distinct purposes. First, it adds diversity to Bitcoin. Rather than just needing to rely on the peer-to-peer network, Bitcoin users can opt to receive transaction data and blocks through an alternative channel. This makes it harder to successfully attack the Bitcoin network; the relay network functions as a fallback. But the second, and more important reason, is a potential decrease of network latency.
Speaking to Bitcoin Magazine, Corallo explained:
The peer-to-peer code in Bitcoin Core is pretty gnarly. It's stable and it works, but it's not very efficient, and it's not very fast. The resulting network latency is a problem, especially for miners. It can sometimes take 10, 15 seconds before they receive newly mined blocks. If you're a miner, 10 seconds is like 1.5 percent loss in revenue. That is potentially a big deal. You don't want that.”
Some of the bigger miners (typically mining pools) have therefore come up with an alternative solution. Rather than using the peer-to-peer network to transmit new blocks, they have created an alternative – private – network. If one of these miners finds a new block, that miner immediately sends it over to the other miners on their private network, meaning all these miners can start mining on the new block immediately.
The problem, of course, is that this disadvantages all miners not using this private network. When a select group of miners starts mining on a new block faster than other miners this select group gets a head start every time one of them finds a block. This is especially worrisome because it is typically the bigger miners who have the time and resources to set up private networks. Smaller miners might, therefore, become less profitable and eventually drop off the network entirely, which centralizes mining even further.
A Leg Up
Corallo's relay network is essentially a hub-and-spoke network, which consists of servers set up in eight well-connected Internet traffic hubs: New York, Seattle, Amsterdam, Beijing, Tokyo, Singapore, Hong Kong and Novosibirsk (located in central Russia). Additionally, the relay network uses a fairly basic compression algorithm. Any Bitcoin node can connect to the nearest hub on Corallo's relay network, and send and receive transactions and blocks to and from other connected nodes.
But unlike Bitcoin's original peer-to-peer network, Corallo's relay network is centrally controlled: by Corallo. This means that users of the network need to rely on Corallo, most importantly for maintenance. (Though this doesn't stop the peer-to-peer network from propagating transactions and blocks in the mean time, of course.)
The relay network is not the most reliable thing,” Corallo acknowledged. “There is no service-level agreement ... once in a while servers go down and I don't fix it right away... sometimes I'm sleeping, or drunk.”
But absent better alternatives, the relay network can still save small miners on cost, meaning they can increase their profit, and remain competitive, Corallo hopes.
It's democratizing in the sense that larger miners do something like this already,” he said. “The relay network gives smaller miners a leg up, since they don't need to spend a proportionally large portion of their resources to establish these types of relay networks themselves. So it's centralizing in some ways, but, hopefully decentralizing, in others.”
The post How a Bitcoin Backbone Gives Small Miners a Leg Up: Matt Corrallo's Relay Network appeared first on Bitcoin Magazine.
In April, Bitcoin Magazine reported that global payment provider Align Commerce launched a public beta of its payments platform, the first in the industry to use the Bitcoin blockchain transparently to enable faster and cheaper global payments.
Transactions appear as traditional payments at both the sending and the receiving end, but Align Commerce pipes the transfer through the blockchain instead of using several intermediate banking relays, halving both time and cost of traditional international wire transfers.
Now Align Commerce announced that it has raised a $12.5 million Series A round led by Kleiner Perkins Caufield & Byers (KPCB), The Wall Street Journal reports . This is the first investment of the renowned venture capital firm in a blockchain-based fintech company.
Align estimates that small businesses currently pay $50 billion in wire and exchange fees. Forbes notes that, while wire transfers typically incur fees from the initiating bank, intermediaries and the recipient’s bank, plus the foreign exchange fee, Align charges only a low 1.9 percent foreign-exchange rate.
“We were looking for applications of the blockchain for the last couple of years in ways that could build real businesses and add real value that weren’t at the mercy of the currency valuation which will move up and down and all over the place,” said KPCB general partner Randy Komisar, who will join Align’s board, in a statement reported by Forbes . “And of those blockchain companies, we invested in Align, because we believe it’s a market that’s underserved, with a CEO who understood it well and early traction from customers who reinforced that value.”
The Align Commerce platform is targeted at mainstream business-to-business (B2B) payments. The users on both ends don’t have to know that such things as Bitcoin or the blockchain exist; the only thing they have to know is that the platform processes payments faster and cheaper, with a single 1.9 percent fee paid by the party converting the currency.
“The Align Commerce platform is not only a creative and transformative use of the blockchain technology, but a fundamental reimagining of how global payments can and should be done,” said Komisar in an interview quoted by PYMNTS . “We see incredible potential in Align Commerce as a superior digital path to convenient, transparent cross-border transactions.”
If a company located in the United States buys from a seller located in the Eurozone, the seller invoices in Euros, and the buyer pays in U.S. dollars plus the currency conversion fee. The fact that Align Commerce can reduce transaction fees by as much as 50 percent while still making a profit is an indication of the radical change that the blockchain can bring to the financial industry.
Transparency is another important benefit of the Align Commerce platform, which permits real-time tracking of all operations.
“The $24 trillion cross-border payments market is growing at a breakneck pace, expected to eclipse $54 trillion by 2022, despite a highly inefficient and expensive system in which businesses spend over $50 billion on wire and foreign exchange fees, wait up to seven days for transactions to complete, and have no visibility into the process,” said former Western Union executive Marwan Forzley, now founder and CEO of Align Commerce, in April.
“The blockchain offers a ready alternative," Forzley said. "The Align Commerce Payments Platform is the first in the industry to use this global rail to help small and medium-sized businesses quickly collect and receive payments in their local currency while avoiding high wire fees and various hidden fees.”
TechCrunch notes that Align isn’t the only company looking to get into cross-border payments based on blockchain technology and Bitcoin. Uphold -- the re-branded Bitreserve covered by Bitcoin Magazine in October -- also plans to use the blockchain as a transparent layer for cross-border transactions.
The post Align Commerce Raises $12.5 Million, Launches Blockchain-based Cross-border B2B Payment System appeared first on Bitcoin Magazine.
Bitcoin is not anonymous, but, rather, pseudo-anonymous. By now, most Bitcoin veterans know this. It’s less obvious to many, however, why Bitcoin is not really anonymous by default, and what can be done to de-anonymize Bitcoin users – and what Bitcoin users can do to reclaim their privacy.
Below is an advanced beginners guide to get a better understanding of the nuances of Bitcoin and anonymity.
How do Bitcoin transactions work?
To better understand Bitcoin’s anonymity, it's necessary to first understand how Bitcoin works on a basic level.
Most importantly, the Bitcoin protocol effectively consist of a series of transactions. These transactions are basically a package of different kinds of data, among which are transaction inputs and transaction outputs. Inputs refer to Bitcoin addresses used to send bitcoin from, and can only be spent using the private key associated to that address. Outputs effectively refer to addresses used to send bitcoin to. Each Bitcoin transaction transfers bitcoin from one or several inputs to one or several outputs (therefore, transferring bitcoin from one or several addresses to one or several addresses).
It's possible for a transaction to simply have one input and one output. But that is rare, as it would require that the amount of bitcoin to be sent (the output) precisely equal the amount of an earlier amount received (the input).
Instead, it's quite common that a transaction consists of multiple smaller inputs in order to make for one larger transaction. If someone, for instance, controls three different inputs of one bitcoin each, and needs to send 2.5 bitcoin to an online store, the software will merge all three inputs into a single transaction.
And it's even more common that a transaction consists of multiple outputs. This is because Bitcoin uses change addresses. Change addresses allow users to create a transaction that returns the excess amount of bitcoin from one or several inputs back to the original sender. So in the example above, the software will typically create two outputs. One output attributes 2.5 bitcoin to the address belonging to the online store, while another output will attribute .5 bitcoin back to the newly generated (change) address controlled by the sender.
What makes bitcoin 'anonymous'?
There are generally three reasons why bitcoin is sometimes regarded as anonymous.
First, unlike bank accounts and most other payment systems, Bitcoin addresses are not tied to the identity of users on a protocol level. Anyone can create a new and completely random Bitcoin address (and the associated private key) at any time, without the need to submit any personal information to anyone.
Second, transactions are not tied to the identity of users either. As such, (and as long as a miner includes the transaction in a block) anyone can effectively transfer bitcoin from any address to which it controls the (private) keys, to any other address, with no need to reveal any personal information at all. Like physical cash, not even the receiver needs to know the identity of the sender.
And third, Bitcoin transaction data is transmitted and forwarded by nodes to a random set of nodes on the peer-to-peer network. While Bitcoin nodes do connect to each other using IP-addresses, it's not necessarily clear for nodes whether the transaction data they received was created by the node they connect to, or if that node merely forwarded that data.
How is anonymity defeated?
There are basically three ways to de-anonymize Bitcoin users.
First of all, even though Bitcoin transactions are randomly transmitted over the peer-to-peer network, this system is not airtight. If an attacker, for instance, has the means to connect multiple nodes to the Bitcoin network, the combined data collected from these different nodes might be enough to determine where a transaction originated.
Second, Bitcoin addresses can be linked to real identities if these real identities are used in combination with the Bitcoin addresses in some way. This includes addresses used to deposit or withdraw money to or from a (regulated) exchange or wallet service, publicly exposed donation addresses, or addresses simply used to send bitcoin to someone (including the online store) when using a real identity.
But perhaps most importantly, all transactions over the Bitcoin network are completely transparent and traceable by anyone. It's typically this complete transparency that allows multiple Bitcoin addresses to be clustered together, and be tied to the same user. Therefore, if just one of these clustered addresses is linked to a real-world identity through one or several of the other de-anonymizing methods, all clustered addresses can be.
What is clustering?
Let’s take a closer look at clustering.
A very basic clustering method is the analysis of transactions networks. In its most basic form, this refers to the several inputs combined into a single transaction. While these inputs could have originated from different addresses, the fact that they were combined into a single transaction suggests that all these inputs – and therefore all related addresses – are controlled by the same user.
Similarly, there are various methods to identify change addresses as being change addresses, which links them to the sender of the transaction. This is fairly straightforward when receiving bitcoin; the output that is not attributed to you is typically (though not always) attributed to the change address controlled by the sender. In addition, some Bitcoin software, reveals the change address to attentive onlookers, too. It does so, for instance, by always creating a change address as thelast output of a transaction. The use of multisig-addresses can be a giveaway as well.
Another clustering method is taint analysis. Taint analysis is fairly straightforward, too, and is even offered by several freely accessible block explorers. Basically, taint analysis calculates what percentage of bitcoin on a specific address originated from another specific address, whether the addresses are one transaction separated from each other – or more.
And then there's amount analysis and timing analysis. Amount analysis, as the name suggests, doesn't track specific transactions, but rather specific amounts. Similarly, timing analysis tracks specific times. If, for example, one input is exactly 2.6539924 bitcoin, and an unrelated output is exactly 2.6539924 (minus fee) one block later, it suggests that the sending and receiving addresses belong to someone using some kind of mixer (see below).
What can be done to reclaim privacy?
Bitcoin privacy is still very much an arms race. While progress is being made to improve Bitcoin anonymity on one hand, possible methods to de-anonymize users are often established on the other. And while it is beyond the scope of this article to explore all potential future possibilities to improve anonymity, there are some basic methods to increase privacy on the Bitcoin network available right now.
One such a straightforward solution is using TOR or other methods to hide IP addresses. If Bitcoin transactions are transmitted over TOR, there is no way to determine where they originated from (granted that TOR itself does as promised, of course).
Another basic solution to increase privacy is creating a new address for each transaction. Creating a new address for each transaction makes it harder to link addresses to real identities, as it would at the very least require more clustering to do so. An increasing number of Bitcoin wallets do this automatically using hierarchical deterministic (HD) wallet software.
A slightly more advanced method to gain privacy is the use of mixers. Mixers exist in multiple shapes and forms, but they basically enable that everyone using the mixer receives each others' bitcoin. If done well, mixing counters the analysis of transaction networks as well as taint analysis. And for improved results, mixing can be repeated.
One example of such a mixing strategy is CoinJoin, which merges inputs from and outputs to several users into one transaction – breaking the assumption that all inputs belong to the same user. CoinJoin does not, however, remove all taint from a Bitcoin address, since the inputs and outputs are still connected to some degree.
Alternatively, some mixers can remove all taint, as they return unrelated bitcoin from completely different addresses belonging to the mixer. However, these mixers are typically centralized, and as such will know the sending and receiving Bitcoin addresses belonging to users.
Additionally, to counter amount analysis, mixers can require all users to submit the same amount into the mix. Alternatively, mixing services can charge a random fee, making it harder for an outsider to link the amount of bitcoin sent to the amount returned. Furthermore, it's possible to break up the amount mixed, further obfuscating the coins, while smaller amounts are easier lost in “the crowd” of transactions.
To counter timing analysis, moreover, mixers can wait some random time before they send coins back; the longer this range, the harder it becomes to link transactions. Furthermore, extending the mixing time increases the likelihood of transactions to be obfuscated with normal transactions.
But in the end, Bitcoin privacy is still a sliding scale – not a binary problem. Rather than being either completely anonymous or not at all, Bitcoin users enjoy a certain level of privacy, depending on how much of their identity they reveal, which of the anonymizing techniques they apply, how many, and how often.
N.b.: For specific examples of mixing techniques, see the research paper cited below.
The article is largely based on 'Research on Anonymization and De-anonymization in the Bitcoin System', an ATR Defense Science & Technology Lab. paper by QingChun ShenTu and JianPing Yu from Bitbank Research Labs, published by Shenzhen University. Additional thanks go to Bitsquare developer Manfred Karrer and Blocktrail co-founder Jop Hartog for providing feedback on an earlier draft of this article.
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The leading stock exchange Nasdaq is no newcomer to the brave new world of blockchain technology. In May, Bitcoin Magazine reported that Nasdaq would begin experimenting with the blockchain technology that powers Bitcoin, starting with a pilot project in Nasdaq Private Market , a marketplace that handles pre-IPO trading among private companies.
Interestingly, Nasdaq didn’t plan to develop an alternative blockchain. Rather, the company said that it would leverage the colored coin protocol Open Assets, which works on the original Bitcoin blockchain. In June, Nasdaq partnered with San Francisco-based bitcoin API startup Chain to implement the Bitcoin blockchain technology.
Nasdaq is scheduled to launch the pilot project operationally later this year, helping companies keep track of the shares they issue and enabling them to almost instantaneously settle transactions, Nasdaq Co-President Hans-Ole Jochumsen, said in an interview reported by Reuters.
Jochumsen added that Nasdaq is planning to develop several blockchain applications through its operations in Estonia. Nasdaq owns the Tallinn Stock Exchange, Estonia's only regulated secondary securities market, as well as the Estonian Central Securities Depository (ECSD).
The ECSD administers share registers for all joint stock companies operating in Estonia, as well as all securities and pension accounts opened in the country and other electronic securities, such as private company shares, bonds and securities transactions histories. The ECSD also provides clearing and settlement services for securities trading, payments of corporate dividends and interest, and other securities-related services.
"[Estonia is] a smaller country, so it's not very complex in size, and there is a government that is very keen to use technology,” said Jochumsen. “They claim that they are in the forefront of using technology in the public center worldwide."
Estonia is, indeed, a leader in deploying advanced communication technologies in the administration and public services sectors. In 2014, Estonia invited anyone, anywhere, to become an e-citizen of the Estonian digital society, open a bank account in Estonia, or start a business. The Estonian e-Residency program, launched on December 1, 2014, is an innovative and potentially disruptive initiative that enables anyone with an Internet connection to establish a financial base in Estonia, with no need of being physically present.
Banks and startups in Estonia are developing financial service applications based on the blockchain, which use the same technology – colored coins on the Bitcoin blockchain – selected by Nasdaq, and could be related to Nasdaq’s initiatives in Estonia.
In particular, LHV Bank is developing CUBER (Cryptographic Universal Blockchain Entered Receivables), a new kind of certificate of deposit designed to be used to store or generate value, transfer value, manage liquidity and automate transactions between machines, which can be used as a building block for innovative financial products, Finextra reported in June. LHV claims it is the first bank in the world to experiment with real programmable money, issuing receivables in the form of colored coins.
In parallel, LHV Bank set up fintech technology startup Cuber Technology, which together with Swedish “blockchain 2.0” company ChromaWay is developing the IOS and Android app Cuber Wallet for fast, free, peer-to-peer (P2P) mobile fiat currency payment.
Both CUBER and Cuber Wallet are built on top of open colored coins technological standard and at the moment use the bitcoin blockchain as a database.
“The potential of CUBER is huge – think telecommunication industry developments last 20 years,” said Rain Lõhmus, CEO of Cuber Technology. “How many new cool applications we are daily using have come out from Development Departments of telecom companies. No, they are coming from startups. This is possible due to the widespread usage of decentralized TCP/IP protocols. We hope CUBER can do something similar to financial industry – liberate innovation from organizational borders, truly decentralize it. And true innovation in financial sector will flourish.”
“Our partnership with LHV Bank and the product Cuber is a milestone,” notes the Chromaway website. “[It] is the first time an established financial [institution] issues assets on the blockchain.”
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