Research Reveals a Symbiotic Relationship Between Bitcoins, Hot Wallets and Darknet

bitcoin and darknet

Bitcoin rose on the darknet, where its anonymous nature made it an attractive payment mode mostly by drugs dealers and cybercriminals. An Australian expert led a research in determining insider transactions and trading that quantified the level of illegal activity financed through this world’s fastest-growing digital currency, Bitcoin.

But just how much do we know about these new underground economies? Who is buying and selling – and what? Here’s what available data can tell us about bitcoin on the Darknet. It’s now evident that more than a third of all people using bitcoins are using this digital currency for illegal activities, according to a report titled Drugs and Bitcoins, written by Foley. He found out that more than 35 of 105 million users of bitcoins were using the anonymous cryptocurrency for nefarious activities. A more detailed study carried out in 2015 and 2017 and published in the report showed that Germany, the Netherlands and the United Kingdom are the most prolific sales of drugs on the dark web.

Nearly 6% of the 100,000 consumers who took part in the 2015 Global Drug Survey, said they had bought drugs from the Dark Web in the last 12 months. Results from UK users were over double this. Germany accounted for $31.6 million in sales, the UK accounted for over $24 million; and the Netherlands over $21.2 million in total sales and all these sales were online, secretly on the dark web using bitcoins as the trading currency.

However, this trend was expected given that almost every market in the world usually start with low legal limits and evolve to a point where illegal activities are out shaken by law enforcers who step in. The whole topic of bitcoin revolution will surprise many who are true believers of this cryptocurrency that guarantees anonymity and has no controlling manager.

The use of a bitcoin wallet, for instance, rose for users on the darknet, where its anonymity made it an easier and convenient mode of payment for drugs dealers and cybercriminals, among other criminals. In recent years it has sought to shed this dark image, with many investors now taking the cryptocurrency seriously. But if Bitcoin’s privacy shortcomings drive users away, the currency will quickly lose its value.

However, with the blockchain technology, it’s possible to have records for every transaction that is undertaken. This unique technology has a hugely beneficial outcome for the research by Foley. “This will now help law enforcers combine the information in a public domain and in blockchain technology to analyze the illegal system that has evolved with time in the bitcoin network even in the dark web.”

Although, on the dark web, individual logins and transactions are masked and not indexed, and the public nature of blockchain permits one to be able to link specific bitcoin transactions to specific individuals and analyze the trade network involved in an illegal activity. It is also very much possible to analyze the extent to which one tries to hide and conceal their identity and their transaction records. Using these two methods we are able to tell the approximate size of the dark economy facilitated and associated to illegal activities involved.

 

“The dark web is a network like an internet, but can only be accessed through specific protocols that provide greater anonymity than the internet,” the research paper says. “The dark web has online darknet marketplaces, much like Yahoo, but with anonymous communications, which also make these marketplaces less accessible than online stores on the internet.

“Dark web marketplaces are known particularly for trading goods and services, where the parties involved want to hide their identities, for instance, illegal goods and services. The dark web is estimated to have more than 30,000 domains.”

From the research report a party who wants to buy goods or services on a dark web market has to first acquire digital currency, typically from an online exchange or broker and then deposit this into an address belonging to the dark web market often referred to as a hot wallet.

The other element that has facilitated illegal activity online involving bitcoin, is the Onion Router often termed as TOR which hides the IP address of internet traffic via ‘onion routing’, that typically hides the path and  IP address of a message sent between parties by routing the text via several nodes in the TOR system of networks. TOR has become so popular that even the New York Times recently announced its creation of a New York Times .onion service site.

The study is designed to help law enforcement agencies so as to understand what is expertly required of them in attempting to control and regulate what is fast becoming an accepted asset class for institutional investors. It is true that bitcoin revolution has quickly changed a lot, now from the preferred cryptocurrency for illegal transactions on the dark web to becoming one of the fast growing assets in the world.

It’s now evident from various actions by law enforcers in the U.S., Australia and Europe that bitcoin has been used on the dark web to trade drugs, launder huge amounts of cash and pay for hacking among other illegal activities. The recent global computer Wannacry hacking attack demanded payment for ransom in bitcoins.

The most famous use of bitcoin for illegal purposes was the Silk Road shutdown when it was busted by the FBI and $4 million in bitcoin seized.  The Silk Road shutdown was two years ago but still has made a tremendous impact on the future of darknet trading. These illegal activities have to be put in the context of the potential value that may be incurred by businesses and other institutions that use anonymous blockchain technologies to support bitcoin.

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