Chainalysis Blog

Another day, another answer to “What is Bitcoin good for?”

This time the answer is “In case the government of the current global hegemon imposes economic sanctions against your company or your country.” Right now that's the US, but probably ten years from now it will be the People's Republic of China.

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When reading the below, think about this: what has gone wrong with the New York Times that in an hour some random guy in Argentina can put together a much more trustworthy and complete picture of the Russian infotech economy, and its relationship with cryptocurrencies, than a Business-section article by two of their reporters? How did the New York Times fall to a level where it publishes articles that say things like, “blockchain technology, a form of computer code that is publicly viewable by anyone, anywhere”, or quotes an “expert” saying, “A Treasury designation of a crypto wallet address is not foolproof. That designated actor can still open up a new wallet elsewhere. You can do that quite easily,” without even mentioning that normally every Bitcoin transaction creates a new crypto wallet address?

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The ransomware-as-a-source-of-national-revenue thing is a red herring. The article itself says, citing https://blog.chainalysis.com/reports/2022-crypto-crime-report-preview-russia-ransomware-money-laundering/ (use Reader mode):

> Last year, about 74 percent of global ransomware revenue, or more than [US]$400 million worth of cryptocurrency, went to entities…

You realize Bitcoin/Ethereum are simply computer software right?

And you missed the essential caveat; aprox 4.11% of Bitcoin addresses control 96.53% of all BTC in circulation. This is a conservative estimate, as anyone familiar with how Bitcoin addresses and wallets work, would know one user is likely controlling many addresses.

A perfect example of this, is a few days ago 1933phfhK3ZgFQNLGSDXvqCn32k2buXY8a created a script to subdivide 111,114 BTC into several hundred addresses, from 60,000 / 30,000 / 20,000 / 10,000 / 5,000 / 500 and then to 100 BTC accounts, over the course of a few hours. [2] Following the movement here now leads to recent deposits into the Binance and Bitfinex wallets.

And most importantly, on the computer science behind Ethereum - In any DLT network with an adversarial threat model it's impossible to create a smart contract with any functionality relying on external data inputs (betting on the outcome of a sports game, or tracking any real world data input) within the network as there's no way to validate the authenticity of that data unless a trusted 3rd party is designated, at which point the network becomes useless. Not even to mention the question of why anyone would want to use a token with such wildly fluctuating market price, and who's supply is controlled by a small userbase of oligarchs.

Additionally, the entire cryptocoin market has an Achilles' heel.. Tether, and Bitfinex are widely suspected of counterfeiting aprox $4,000,000,000 USD…

We can't secure banking, there are just a lot of undo processes, holds, and internal processes and cross-comms that make it so people don't lose all their money all at once and potential losses can generally be reversed, insured, bailed out, covered by someone else, or balanced out / hedged against. Even with that, fraud is rampant and heists worth billions do still occur digitally[1]. And these are financial systems that evolve constantly over centuries at this point. And the attackers still win sometimes.

The biggest thing the measures do is significantly decrease the known ROI on a target. For example, a credit card can be cancelled. Even if the bank doesn't notice and the person doesn't notice and you do get 100k off it, the fact attackers don't know that still reduces the value of the stolen credit card and therefore the incentive to steal them. Further the gain of 100k by an attacker may be split amongst cardholder, card issued, insurance, merchants, etc. so no one person actually loses 100k. These things all matter when building and securing new systems.

If you look at the cryptocurrency space in general, you can see what happens when you replace a credit card or swift with transactions that are similtaneously immutable, very valuable, and easily anonymous enough. The monetary value on anyone's Coinbase account, let alone all the Coinbase accounts, is so high that we've seen attacks[2] usually reserved for nation-state actors and by actual nation state actors[3],…

The phrase 'according to the treasury' and Ctrl-V are doing a lot of work there. The government says a lot of things. The other day the Secretary of State claimed Tornado Cash was a DPRK sponsored hacking group before deleting the tweet. Not everyone in authority has a real great understanding of the technology involved.

https://web.archive.org/web/20220808155413/https://twitter.com/SecBlinken/status/1556661834287140868

> We are talking about an entity that according to the treasury has laundered more than 7 Billion USD, assisted criminals and neglected complying to...(AML/CFT) obligations willingly and repeatedly.

The Tornado Cash mixer contracts have been immutable since May 2020. It's a dumb piece of software that can't be modified or upgraded. Its authors have no control over who uses it on the blockchain.

https://tornado-cash.medium.com/tornado-cash-is-finally-trustless-a6e119c1d1c2

It's kind of a strange accusation to say that someone has 'willingly and repeatedly' neglected to comply with legal obligations by failing to do something that's technically impossible to accomplish. All the GitHub users did was write code, and simply writing code, while not executing it to do something illegal, seems like it would be pretty well protected by the First Amendment, since code is speech. Turning people's lives to shit over what a software tool they invented gets used for later, after it's completely out of their hands, is pretty wild.

You copied and pasted Brian E.…

The percentage of cash that's used for criminal activity is much smaller than the percentage of BTC that is used for such.

I'm including darknet markets, ransomware, and outright exchange thefts in this.

~170 billion USD worth of BTC exists.

~9 billion USD worth of BTC has been stolen from various exchange hacks.

~140 million USD worth of BTC has been stolen through ransomware attacks.

... And as for commercial transactions:

Darknet markets make up ~40% of all non-theft, non-exchange related BTC commerce. [1]

Cash may rule the drug world in absolute numbers, but in relative numbers, the overwhelming majority of cash is used in the real economy. When nearly half the BTC that's used to transact is used for illegal purposes, it's pretty easy to see why banks aren't interested in touching it. Why risk losing your banking license, for collecting fees from such a tiny market segment?

[1] https://blog.chainalysis.com/reports/darknet-markets-cryptocurrency-2019

> The normies are into crypto because of hype and FOMO.

Hype and FOMO are indeed drivers of growth, but those alone would not explain why rates of crypto adoption are highest in countries with large unbanked populations.

Take a look at this website, which ranks countries by rates of crypto adoption: https://blog.chainalysis.com/reports/2022-global-crypto-adoption-index/

Then compare it to this chart from Statistica, which ranks countries with highest unbanked populations: https://www.statista.com/statistics/1246963/unbanked-population-in-selected-countries/

Notice that there is a lot of overlap.

While Bitcoin adoption in countries with strong national currencies like the US or EU is likely driven by FOMO and hype, its main appeal is as an investment/store-of-value for those who lack access to them otherwise, and that is why Bitcoin adoption is highest in unbanked populations.