Illicit Use of Bitcoins

1. Illicit Use of Bitcoins By, Scott Amack

2. Agenda • Government View • Silk Road • Bitcoin Laundering • Malware and Hacks • Botnets • Exchanges • Illegal Mining • Recent Opinions

3. FBI Definition • “Bitcoin – a decetralized, peer-to-peer (P2P) network-based virtual currency --- provides a venue for individuals to generate, transfer, launder, and steal illicit funds with some anonymity”.

4. FBI Concerns • Popular payment method • Will be used to launder money • Criminals will exploit bitcoin users • Used to fund criminal enterprises • Hard to find “owner” unless converted to cash

5. Is Bitcoin Anonymous • Transactions are posted online with your IP • Keys are public • With IP Data, keys, and transaction history can find owner

6. FBI “Tips” for being Anonymous • Use new bitcoin address for every transaction • Use an anonymizer for all bitcoin traffic • Combine balances after each transaction • Use money laundering service • Use third party e-wallet service • Bitcoin clients can be made to increase anonymity

7. IRS View • Bitcoin income is taxable • Getting your wallet stolen and losing income is not claimable • Rules for digital currencies are unclear • Tax Preparers do not understand digital currencies • Bitcoin on foreign servers is foreign currency… or is it • Recognizes that laws need to be clarified

8. Silk Road • Revealed in a June 2011 Article by Gawker • The Underground Website Where You Can Buy Any Drug Imaginable

9. Silk Road • Story dramatized the acid buying experience • Gave positive spin on site, called it the Amazon of the drug world • Silk Road only allowed purchase with Bitcoin • March 2013 70% of product offered was illegal drugs • Site earned 614,305 BTC in commission $79.8 million • Had 146,947 buyers 30% based in the U.S. • 3877 Vendors • Site shutdown by FBI October 2013

10. How is Bitcoin Laundered • Bitcoin is used to purchase virtual game currency • Virtual game currency is used to purchase game items • Game items are sold to other players for real money • Online games are a common laundering service for illegal money

11. Bitcoin Tumbling • Tumblers Mix Coins with others • The mixed coins are randomly redistributed • Stolen Coin is potentially transferred to a new owner • If the tumbler is flooded you will just get your own coin back • Need to distribute the coin amongst a lot of different tumblers

12. Infostealer.Coinbit • Malware created to steal your bitcoin wallet • Takes advantage of unencrypted wallets • Stolen coin cannot be recovered

13. Google “Hacks” for wallets • Make it easy to search for web servers to steal wallets • intitle:index.of"wallet.dat” • Intitle:indox.of wallet filetype:dat • Encrypt your wallets!

14. Zeus Botnet • Only Accepted Payment with Bitcoin • Botnet was used to steal banking information • Used keylogger and form grabbing

15. Zeroaccess Botnet • Discovered July 2011 • Microsoft attempted to destroy in 2013 • Estimated to have infected 2 million plus • Estimated to generate 2.7 million in Bitcoin per year • Botnet is still in operation and evolving

16. MtGox • Launched in 2010 • 2013 Handled 70% of Bitcointransactions • 2011 Breach of Credentials caused value to dip • March 2013 Transaction log split into two causing two different rule sets to exist • April 2013 Trading Suspended for “Market Cooldown” • June 2013 Withdrawals suspended • August 2013 Announced significant losses from crediting deposits which had not actually cleared • November 2013 users complaining that withdrawals were taking weeks to months • Filed for bankruptcy protection 2014 • “Lost” 850,000 BTC - $450 Million

17. MtGox Drama Continues

18. Flexcoin Hacked • 896 Bitcoin “Stolen” from “Hot” Wallet • Took advantage of bad code that did not verify balance of account • Still have coins safe in “Cold” Wallet • Was supposed to be a safe wallet • Users will have coins returned that were in cold wallet • Company is shutting down as a result

19. Poloniex Hacked • Lost 12.3% of total supply • Code vulnerability used to hack them • “Borrowing” 12.3% of each users balance • Will repay after it makes up the balance • “Temporarily” raising transaction fees to makeup loss

20. Silk Road 2 Hacked • Lost 4776 Bitcoins ($2.6 million) • Transaction Malleability Hack Utilized • Alice runs an exchange the Eve has money on • Eve requests coins from Alice • Alice Sends Eve Coins • Eve pretends Alice did not send them by changing the transaction ID • Eve retransmits the transaction • If the network confirms Eve’s new transaction it will be assumed to be valid and wont record Alice’s transaction • Eve then complains about the missing coin Alice wont see her transaction in the blockchain (since Eve’s transaction was placed first) • Alice Resend the Bitcoins • This is repeated until Alice has no Bitcoin • Silk Road is planning on paying back all lost coins

21. Illegal Mining • Using Dorm Rooms for mining • Apartments that include electricity • Plugging in miners at work • Using Academic Super Computers • Using School Computer Labs for mining • Penn State Bitcoin Club

22. Economist NourielRoubini • Predicted 2008 Financial Crisis • Calls Bitcoin a Ponzi Scheme • Ponzi scheme is where you payback investors with money borrowed from future investors.

23. Mr. Roubini Cont.

24. Is Mr. Roubini Right?

25. Marc Cuban • Interview at SXSW on Mar 9 2014

26. Bill Gates • Reddit AMA

27. Big Fish Games • Will start accepting bitcoin for all of their titles • Stated it will be a fun project • Considered keeping 8% of transactions for investment • Will convert coin to cash immediately

28. Patrick Byrne • CEO of overstock.com • “the zombie apocalypse is coming, and there's one thing that can save us: bitcoin” • Overstock.com is going to start accepting bitcoin as payment • Feels economy should be controlled by the people not government • Has invested personal funds into bitcoin • Company does not state if they are holding coins or are converting to a fiat currency

29. Questions?

30. References • http://cryptome.org/2012/05/fbi-bitcoin.pdf • Reid, F.; Harrigan, M., "An Analysis of Anonymity in the Bitcoin System," Privacy, security, risk and trust (passat), 2011 ieee third international conference on and 2011 ieee third international conference on social computing (socialcom) , vol., no., pp.1318,1326, 9-11 Oct. 2011 • http://resources.infosecinstitute.com/botnets-unearthed-the-zeus-bot/ • http://www.zdnet.com/blog/security/new-bitcoin-malware-steals-bitcoin-wallets-infostealer-coinbit/8804 • http://www.symantec.com/connect/blogs/bitcoin-botnet-mining • http://www.sophos.com/en-us/medialibrary/PDFs/technical%20papers/Sophos_ZeroAccess_Botnet.pdf • http://blog.turbotax.intuit.com/2011/07/18/bitcoins-the-taxless-currency/ • http://www.irs.gov/pub/irs-pdf/p2104.pdf • http://www.coindesk.com/bitcoin-bank-flexcoin-close-600000-bitcoin-theft/ • http://www.coindesk.com/silk-road-2-loses-bitcoins-hack/ • http://www.wired.com/wiredenterprise/2014/03/bitcoin-exchange/ • http://gawker.com/the-underground-website-where-you-can-buy-any-drug-imag-30818160 • http://en.wikipedia.org/wiki/Silk_road_website • http://www.theverge.com/2013/12/19/5183356/how-to-steal-bitcoin-in-three-easy-steps • http://blog.magicaltux.net • http://blogs.wsj.com/moneybeat/2014/03/10/nouriel-roubini-bitcoin-is-a-ponzi-game/ • http://www.usatoday.com/story/tech/columnist/baig/2014/03/09/mark-cuban-cyber-dust-sxsw/6226925/ • http://invezz.com/news/forex/8778-bitcoin-usd-bill-gates-doesnt-thinks-digital-money-is-about-bitcoin • http://venturebeat.com/2014/03/11/big-fish-games-partners-with-coinbase-to-accept-bitcoin-payments-for-games/ • http://www.overstock.com/80786/static.html?ehid=EF916438FE97B21EE040010A249C4B4A