Bitcoin- A way for money laundering

8/10/2019 Bitcoin- A way for money laundering

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Table of Contents

Introduction .................................................................................................................................................. 2

What is Bitcoins? ........................................................................................................................................... 3

How Does Bitcoins Work? ............................................................................................................................. 3

Components of Bitcoins system.................................................................................................................... 4

Privacy ........................................................................................................................................................... 5

Cryptography in Bitcoins ............................................................................................................................... 5

Threats to Bitcoins ........................................................................................................................................ 6

Unauthorized Spending ............................................................................................................................ 6

Double Spending ....................................................................................................................................... 7

Race Attacks / Finney Attacks ................................................................................................................... 7

51% Attacks ............................................................................................................................................... 7

Conclusion ..................................................................................................................................................... 8

References .................................................................................................................................................... 9


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Introduction

Ever since internet started to saturate in the daily life of normal users, online shopping and

online transactions have become more habitual. To pay online, people use different means.

Most of the means involve payments through bank or some pre-registered service providers

like PayPal or escrow services. Online payment services providers make it easy to send and

receive money and use the accounts on different web portals. They have an easy to setup

configuration account and takes very less technical details or knowledge to send and receive

amounts to and from desired destination entities. The problem with internet banking is that

every transaction could be traced. Most people on the internet from odd backgrounds intend to

buy illegal things like drugs so they dont want to be traced.Such circumstances raised a need

of a system of online payments which is pure anonymous and couldnt be traced. Bitcoins is one

of those solutions which was developed and launched in 2009. (Yellin, 2012). No doubt it gained

a rapid popularity and was adopted by most of the people in the financial industry who intend

to keep their transactions anonymous. The larger the system went, the more threats it started

to face. The system faced tremendous failures, breakdowns, hacks and vulnerability threats

around the globe. Bitcoins uses mining as preferred way of data storage. The miners are

capable of storing and traversing Bitcoins from and to other Bitcoins agent and system.

Although there is an acute level of security implementation which includes encryption

techniques with most secure cryptography algorithms but still this system is vulnerable to

threats and attacks. Also the network is peer to peer hence is marked as decentralized crypto

currency. This research will briefly discuss about the working of Bitcoins along with its

weaknesses and the threats it has faced so far along with their reasons.


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What is Bitcoins?

Bitcoins is electronic, software based, software managed online payment system. Over the last

couple of years since the first launch of Bitcoins it has been considered as the most widely used

Virtual Currency of the time. It provides a smooth yet anonymous way to create and handle

financial transaction including buying selling or pretty much anything and keeping the real

identity of the transaction initiator anonymous.

How Does Bitcoins Work?

For a fresher to get started with Bitcoins transactions is to accept the payment method of

Bitcoins from the second party and then setting up the Wallet. The wallet is the most important

thing and is the only visible front end accessing interaction interface to the Bitcoins payment

method game. The working of Bitcoins system mostly includes the user wallet, the shared

combined ledger in which the Bitcoins transactions are physically logged in and the coins

repository mostly the Bitcoins mines. All the transactions are logged in the shared ledger which

is terms of defined unit of measurement called Bitcoins itself.


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Once the user have accepted the payment method and created his first wallet, he needs to

convert or purchase the Bitcoins which can be done by going to Bitcoins exchange and

converting the physical currency in Bitcoins. Once the currency is converted, Bitcoins are

generated by the exchange which has Bitcoins software. Once Bitcoins are generated there

address and ownership details are stored in the Bitcoins ledger which is also called the block

chain.

Components of Bitcoins system

Following are the most common components which are the base of a Bitcoins system;

- The Block Chain

-

Ownership

- Transaction

- Mining

- Wallet


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Privacy

The physical data repository of the Bitcoins system is the mine. All the block chains in different

forms are stored in form of blocks in the mines. (Eyal, June 16 2014). These mines blocks are

verified synchronously and follow a very tight algorithm. Because the blocks are in a chain

hence for every block it is important to keep the record of previous block. That record is hashed

by Cryptographic algorithm.

Cryptography in Bitcoins

The Bitcoins blocks are hashed by SHA256 cryptographic algorithm which is top listing

cryptographic algorithm and is virtually impossible to break (NIST, July 2012). Theoretically, to

break this algorithm a lot of computing power is required which is far more expensive for a

normal hacker to manage at his premises. The overall block which is saved in the mines consists

of the proof of work which is divided into two numbers; the difficulty target and the nonce. The

other part where encryption is used in Bitcoins system is the ownership and the wallet. The

ownership of the Bitcoins needs the payer to digitally sign a certificate corresponding to a

certain private key. This method is used to prevent unauthorized access. On the other hand the

network uses the public key encryption. The public key encryption combines both public and

private keys in order to ensure the authorized access of the Bitcoins owner. The ownership of

the Bitcoins block is the actual private key whereas the address of the Bitcoins is the hash of the

Public key taken from the cryptography algorithm SHA256. The core theory behind securing a

transaction in the Bitcoins system is to keep the identity of the owner of the transaction

anonymous and due to the anonymity those transactions could be linked to individuals or

companies. Despite of using the most secure Cryptographic system, Bitcoins still faced a lot of


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security threats which makes it vulnerable. The known threats which users have face in past

couple of years caused a lot of damage and have caused a vital loss to the individuals and the

companies being entertained with Bitcoins payment system.

Threats to Bitcoins

This section will list the possible threats which Bitcoins system has to face and how the

remedies are placed in action to avoid these kinds of threats. The very first threat which is the

most important one is the existence of the Private Key of the Bitcoins wallet or account owner.

The private key which is generated by public key encryption method is the key to access and

own the Bitcoins wallet and transactions. A theft of this key or loss of this key could end up in

the wallet being in compromised state. Stats have been reported of Private Key theft and loss

which caused heavy financial loss to the users. The only way for Bitcoins system to recognize

the Bitcoins is by the Private Key. With efforts over the past couple of years, these keys now

exist in physical rather only in electronic format. The other known threats are listed below;

Unauthorized spending

Double Spending

Race Attacks / Finney Attacks

51% Attack

Unauthorized Spending

Unauthorized spending means spending a Bitcoins without the intention or knowledge of the

owner of the Bitcoins wallet. Assume that the transaction initiating user sends some Bitcoins to

another user and during the session of communication, the packets get sniffed and some sniffer

gets to the address of the Bitcoins of that user. Still he will not be able to use them because; the


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only person who can use those coins is the one who knows the Private Key. In case the private

key is compromised then there is no way stop money theft.

Double Spending

Double spending means sending a same Bitcoins to multiple destinations or users. This method

is also a threat but is cured by the block chain where every transaction is logged as unique

transaction. Hence one Bitcoins cannot be used again.

Race Attacks / Finney Attacks

A plain race attack is could be defined assuming an example as user1 offers user2 some

payment against some services or products. At the same time the user either willingly or not

knowingly creates another transaction with the same Bitcoins. To address this kind of attack,

Bitcoins rules says only one transaction would be accepted. In this case the user2 should make

sure not to deliver goods or services unless the payment is listed in the block chain which is

available for public view to all subscribers. (Denova, September 07, 2014)

51% Attacks

For every transaction added in block chain in form of block it is called a confirmation. More

transactions a merchant makes, more blocks are listed and so are confirmations. For an

attacker to roll back and track the transactions it is very complex unless the hacker controls

more than half of the network which is called 51% attack. (Farivar, June 17 2014) The

theoretical possibility of an attacker to hack a merchant even if he has more than 10%

calculation of the entire Bitcoins network is less than 0.1%. Yet selfish miners could still pose a

vital threat to Bitcoins security as they dont advertise their blocks at first and when done in

bulks could cause heavy loss to honest miners.


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Conclusion

Bitcoins is no doubt becoming one of the most legit online payment methods in the current era

and the number of subscribers are enhancing dramatically on yearly basis. The use of Bitcoins

has become easier than it was at the time of launch. The security encryption methodology and

the cryptographic algorithm used by Bitcoins makes it very secure. The threats are however

meant to be studied by all Bitcoins users and should take precautionary measures to ensure

safety and legitimacy of their financial transactions by Bitcoins.


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References

Denova, H. (September 07, 2014). Bitcoiner of the Week. Retrieved from CEX.IO BLOG:

http://blog.cex.io/cryptonews/hal-finney/

Eyal, I. (June 16 2014). How A Mining Monopoly Can Attack Bitcoin. Retrieved from

http://hackingdistributed.com/: http://hackingdistributed.com/2014/06/16/how-a-mining-

monopoly-can-attack-bitcoin/

Farivar, C. (June 17 2014).After reaching 51% network power, Bitcoin mining pool says trust us.

Retrieved from http://arstechnica.com/: http://arstechnica.com/security/2014/06/after-

reaching-51-network-power-bitcoin-mining-pool-says-trust-us/

NIST. (July 2012). Description of SHA-256. Retrieved from NIST Gov:

http://csrc.nist.gov/groups/STM/cavp/documents/shs/sha256-384-512.pdf

Yellin, T. (2012). What is Bitcoin?Retrieved from CNN Money:

http://money.cnn.com/infographic/technology/what-is-bitcoin/

Bitcoin- A way for money laundering

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