An inquiry into money laundering tools in the Bitcoin ecosystem

TLDR

Bitcoin is often portrayed as an anonymous currency that attracts criminal activity, yet this claim is questionable and several anonymization services such as Bitcoin Fog, BitLaundry, and Blockchain.info’s Send Shared feature have emerged. The study systematically reviews the opportunities and limitations of anti‑money‑laundering in Bitcoin and proposes alternative AML strategies that leverage public transaction‑graph information. The authors reverse‑engineered anonymization services to trace transactions back to probe accounts and outline AML approaches that exploit publicly available graph data. Bitcoin Fog and Blockchain.info effectively anonymize transactions, whereas BitLaundry’s inputs and outputs can be linked; these results suggest that enforcing a Know‑Your‑Customer principle in Bitcoin is unlikely.

Abstract

We provide a first systematic account of opportunities and limitations of anti-money laundering (AML) in Bitcoin, a decentralized cryptographic currency proliferating on the Internet. Our starting point is the observation that Bitcoin attracts criminal activity as many say it is an anonymous transaction system. While this claim does not stand up to scrutiny, several services offering increased transaction anonymization have emerged in the Bitcoin ecosystem - such as Bitcoin Fog, BitLaundry, and the Send Shared functionality of Blockchain.info. Some of these services routinely handle the equivalent of 6-digit dollar amounts. In a series of experiments, we use reverse-engineering methods to understand the mode of operation and try to trace anonymized transactions back to our probe accounts. While Bitcoin Fog and Blockchain.info successfully anonymize our test transactions, we can link the input and output transactions of BitLaundry. Against the backdrop of these findings, it appears unlikely that a Know-Your-Customer principle can be enforced in the Bitcoin system. Hence, we sketch alternative AML strategies accounting for imperfect knowledge of true identities but exploiting public information in the transaction graph, and discuss the implications for Bitcoin as a decentralized currency.