Around October 27th 2017 agents with Homeland Security arrested Bradley Anthony Stetkiw, a 52-year-old Michigan man. No, Stetkiew was not part of a sleeper cell. Actually by all accounts Stetkiew was not suspected of any terrorist related activity. Stetkiew was arrested for selling bitcoins. John Steckroth reported in his news story: “According to the indictment, Stetkiw went by the name “SaltandPepper” on a website called LocalBitcoins and would meet customers at a Tim Hortons restaurant and sell bitcoins at a premium.” Yes. his crime was merely accepting fiat currency in exchange for sending a random mash of digital hashes to another party.
Steve Francis, Special Agent in Charge of HSI Detroit (3/9/2017)
The complaint charges Stetkiew with “Operating an Unlicensed Money Transferring Business.” Indeed according to footnotes found in this affidavit “In 2013, the Financial Crimes Enforcement Network (FinCEN) determined ‘persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies’ are subjected to the regulations contained within the Bank Secrecy Act.”
FinCEN’s declaration is apparently very broad. In theory, if you accept bitcoins as payments for a completely legitimate business; you, according to FinCEN, are to comply with the Bank Secrecy Act. If you send obtain bitcoins, regardless of the manner, you subject yourself to compliance with the Bank Secrecy Act.
Stetkiew is just one example of what seems to be a growing pattern of federal agents targeting individuals for solely engaging in the trading of bitcoins. The logic which is used is based largely on what would seem to be bitcoin’s pseudo-anonymous design. However, the logic fails as there are many things with prescribed value which are regularly traded among individuals for fiat currency. For example, jewelry grade diamonds only command a high price, because we as a collective have determined they are worth more than say other minerals. Like bitcoins certain diamond command a high price because of collective demand. However, if I were to post an on a forum and sell a diamond (which I had legally acquired) for fiat currency… well let’s just say I can find no articles about someone in such a said situation being charged with Operating an Unlicensed Money Transferring Business.
On the other hand, it is undeniable, that bitcoin (and other cryptocurrency) have been and continues to grow as a prime tool for black market operators. To that end, and regardless of personal beliefs, it would seem government focus on bitcoins is not going anywhere anytime soon.
Tools of the Trade:
So how does the federal government break through the layers of privacy which is built into the bitcoin network? Studying court documents have given some insight into how agents can use various techniques to unmask someone behind a digital wallet.
Homeland Security Director Matthew C. Allen (March 2017)
According to this 2017 presentation by the The Blockchain Alliance there mission (among other things) is to “…provide a public-private forum for open dialogue between industry and law enforcement and regulatory agencies, in order to help combat criminal activity on the blockchain …The Blockchain Alliance provides education, technical assistance, and periodic informational sessions regarding Bitcoin and other digital currencies, as well as other uses of the blockchain and distributed ledger technology.”
The Blockchain Alliance touts it’s members to include some of the biggest names in bitcoin trading such as: coinbase, bitfurry, bitpay and virtually every major federal agency and some foreign agencies as well.
The Law Enforcement Request System (LERS) is a project run by the Blockchain Alliance. It exists to aid law enforcement it getting account data on wallet holders. Yes, your wallet is a random address, however, if you host your wallet with Coinbase; they require identifying information. If a suspected transaction points to your wallet, in theory, agents could get records from Coinbase that would unmask you.
According to this 2016 research paper Jay Palmer Fawcett writes:
Blockchain analysis tools for investigators. The partnership between DHS and Sandia National Laboratories dispelled the belief that bitcoin transactions provide absolute anonymity. The partnership exploited bitcoin transaction data stored in the blockchain for use in forensic investigations involving illicit bitcoin wallets. The new software intends to identify patterns in bitcoin payments and trace transactions to bitcoin wallets.
Chainalysis is another blockchain exploiting software utilized in investigations in a similar fashion to the Sandia product. Chainalysis has been successful in prior federal digital currency investigations. Block Seer, Ledger Labs, and Elliptic also offer competing blockchain analysis products and assist law enforcement with investigations (Redman, 2016a). The blockchain analysis products are congruent with DHS recommendations in regards to the need for advanced technologies in digital currency investigations. DHS also recommends storage of software solutions and accumulated data in a centralized data warehouse and liberal information sharing with law enforcement (DHS, 2014)
It would seem someone took the recommendation in the above 2016 research paper to heart. I base this on Homeland Security Director Matthew C. Allen March 2017 statement to the US Congress Committee on Energy and Commerce:
In targeting virtual currency transactions of heroin and illicit fentanyl, ICE uses blockchain analysis to track transactions between criminal parties. Blockchain is a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publically. ICE has seen a substantial increase in cases in which private parties are acting as money service businesses to exchange digital currencies into fiat currency to enjoy the illicit proceeds of narcotics smuggling. The IFPCU also utilizes resources provided by the Treasury Executive Office for Asset Forfeiture’s Third-Party Money Laundering Initiative to support complex financial investigations. ICE’s Bulk Cash Smuggling Center also supports investigations through counter money laundering efforts that target TCOs that supply heroin and fentanyl. (p. 5 emphasis added)
In simple terms, if an investigation unmasks who owns one address then the transactions contained in the bitcoin ledger points to other addresses. You may not know who owns those addresses initially but you can see who those address pay. As was the case with the take down of The Silk Road and Alpha Bay, agents used undercover agents to place orders on the site. They could then track known payments to the site and thus who the site paid. Say if an undercover agent spent 0.023431 btc, they could track that to the site, they then could track 0.023431 btc being paid to someone. If that wallet is hosted by Coinbase, a court order then could get the account user email address, etc. The postal system could help track where the order was shipped from and not before too long, over time and several orders, using those tools a real person likely can be uncovered.
In Stetkiew case he seemed to give out his real cell phone number. Agents managed to get records from his cellphone company. Once he was unmasked they were able to determine how many trades / transaction Stetkiew conducted. They were able to link the undercover buys to his wallet and well him being arrested speaks for itself.
“Homeland Security Investigations and our partners are at the tip of the spear in the effort against illicit activities and financial crimes associated with virtual currency systems,” said Steve Francis, Acting Special Agent in Charge of HSI Detroit. “Criminals have the false impression that their black markets activity using digital currency like Bitcoin are avoiding scrutiny. The reality is that these activities do not escape the reach of law enforcement.” (emphasis added).
It would seem with the apparent rash of arrests relating to bitcoin trading that law enforcement is quickly catching up and developing tools and techniques to uncover the anonymity bitcoin once promised to deliver. Existing laws are being applied, and stretched, to cover the gap.