Taint Question

[iamnothere12]

So new user but long time reader and I want someone to explain how these analytics firms are alleging that coins may be tainted solely based on being connected to a dark net marketplace? The fact is in the early days of dark net marketplaces when few bitcoin exchanges existed (aside from MtGox) people routinely bought bitcoins on dark nets using money pack cards.  The purchaser of the bitcoins committed no crimes as he is not considered an unlicensed money transmitter, while the seller is consider one.  

People also used dark net marketplaces as mixers themselves transferring coins onto them and then off again.

Under these two scenarios the coins are not involved in criminal activity, however, it seems these analysis firms claim they are criminal solely because they have some connection to an output from a marketplace.  Am I correct that this is what they solely base the taint on when it comes to coins surrounding dark net marketplaces?

[o_e_l_e_o]

Am I correct that this is what they solely base the taint on when it comes to coins surrounding dark net marketplaces?

No one is going to be able to say for sure unless they work for one of these blockchain analysis companies and are familiar with their various algorithms, analyses, and outcomes. What we do know is that some exchanges and blockchain analysis companies label coins as "tainted" for completely trivial reasons. Some say that any coins which have been mixed are tainted. Some say that any coins which have been coinjoined are tainted. Some say that any coins which have come from casinos, or sportsbooks, or darknet markets, etc., are tainted.

As you say, if you trace any bitcoin back far enough, then chances are it has been involved in some kind of activity which would be deemed as "tainted". But again, we don't know how far back these companies look. What if the bitcoin came from a darknet market 10 transactions ago? What about 100? What about 1000? Is it still tainted? What if it has been combined with some "clean" bitcoin in a transaction? Are all the outputs of that transaction now tainted? Or perhaps they are only 50% tainted? What if those outputs and combined again? These analyses are completely arbitrary, and in many cases, completely meaningless.

Often the best answer to a question like this is a practical one - which services or exchange are you trying to use which is passing arbitrary judgement about the "taintedness" of your bitcoin? Can you transition to a different one?

[iamnothere12]

Am I correct that this is what they solely base the taint on when it comes to coins surrounding dark net marketplaces?

No one is going to be able to say for sure unless they work for one of these blockchain analysis companies and are familiar with their various algorithms, analyses, and outcomes. What we do know is that some exchanges and blockchain analysis companies label coins as "tainted" for completely trivial reasons. Some say that any coins which have been mixed are tainted. Some say that any coins which have been coinjoined are tainted. Some say that any coins which have come from casinos, or sportsbooks, or darknet markets, etc., are tainted.

As you say, if you trace any bitcoin back far enough, then chances are it has been involved in some kind of activity which would be deemed as "tainted". But again, we don't know how far back these companies look. What if the bitcoin came from a darknet market 10 transactions ago? What about 100? What about 1000? Is it still tainted? What if it has been combined with some "clean" bitcoin in a transaction? Are all the outputs of that transaction now tainted? Or perhaps they are only 50% tainted? What if those outputs and combined again? These analyses are completely arbitrary, and in many cases, completely meaningless.

Often the best answer to a question like this is a practical one - which services or exchange are you trying to use which is passing arbitrary judgement about the "taintedness" of your bitcoin? Can you transition to a different one?

I think this is a well written reply so thank you.  The problem I see from reading forums is that exchanges have a pattern of locking accounts at time of withdrawal and not being transparent about concerns at time of deposit.

I am no legal expert but for the sake of argument even if your bitcoin was directly from illegal activity these exchanges are not law enforcement.  What legal authority would they have to ever hold someone's funds demanding information as to the source if they are insinuating coins are tainted? AML requires them to collect information but I see no where that authorizes legal authority to withhold funds you deposited until they come to some arbitrary level of satisfaction as to the source of said funds.  As long as they have your identity information then pass it to law enforcement if you think something is criminal but process the withdrawal no the less.

Even if someone was committing tax evasion then they should report it but where does there legal authority arise from to act on these analytics firm taint tools to deny withdrawals..

[odolvlobo]

If the marketplace is committing a crime, then any money or property held or managed by the marketplace would be involved in the crime. While you did not commit a crime and you did not transact directly with the marketplace, the bitcoins you received came from it.

One interesting bit of complexity comes from the fact that once a UTXO is spent, the bitcoins in it can no longer be distinguished from other bitcoins. That is why "taint" is always a percentage. This is similar to the problem of identifying tainted money in a bank account. However, while money is legally fungible (in the U.S.), bitcoins are not, and so they must be treated differently. I look forward to seeing how laws are applied and misapplied to this situation.

[iamnothere12]

If the marketplace is committing a crime, then any money or property held or managed by the marketplace would be involved in the crime. While you might not have transacted directly with the marketplace, the bitcoins you received came from it.

One interesting bit of complexity comes from the fact that once a UTXO is spent, the bitcoins in it can no longer be distinguished from other bitcoins. That is why "taint" is always a percentage. This is similar to the problem of identifying tainted money in a bank account. However, while money is legally fungible (in the U.S.), bitcoins are not, and so they must be treated differently. I look forward to seeing how laws are applied and misapplied to this situation.

Not sure I would fully agree with that statement but respect your thoughts. At least in the United States there is two primary paths the government can take to forfeit funds. One being a criminal forfeiture meaning you would have had to been convicted of a crime and purchasing bitcoins on a darknet is not criminal under any statute.  The second is a civil forfeiture which requires that the property (seized funds) is directly "traceable" to a "specified unlawful activity". There is a list of those activities in the statutes but again those activities are crimes.

Your analysis would then say if a bank was committing a crime your funds being held at that bank can now be forfeited.

[o_e_l_e_o]

The probably I see from reading forums is that exchanges have a pattern of locking accounts at time of withdrawal and not being transparent about concerns at time of deposit.

This is exactly the case, and it even extends beyond that. You can deposit coins freely, and you can even trade coins indefinitely, making the exchange money via maker, taker, and other trading fees. It is only when you come to withdraw your coins that you are suddenly hit with locked accounts and invasive KYC requests. We see the same pattern of activity across multiple exchanges over and over again. The only way to be sure of avoiding it is to avoid these centralized exchanges altogether.

What legal authority would they have to ever hold someone's funds demanding information as to the source if they are insinuating coins are tainted?

Every centralized exchange will have something buried in their Terms of Service saying that if you trigger some unspecified automatic algorithm which they will never provide any details of, then your account will be frozen/locked/suspended pending review and/or you handing over ridiculous amounts of private information. By signing up to the exchange, you signal your acceptance of these terms, and grant the exchange the ability to do whatever they like to you, your account, and your coins.

[iamnothere12]

Every centralized exchange will have something buried in their Terms of Service saying that if you trigger some unspecified automatic algorithm which they will never provide any details of, then your account will be frozen/locked/suspended pending review and/or you handing over ridiculous amounts of private information. By signing up to the exchange, you signal your acceptance of these terms, and grant the exchange the ability to do whatever they like to you, your account, and your coins.

Forgot about the TOS.  I will have to go read one at a major exchange and see what is buried within it.
Thank you

[odolvlobo]

If the marketplace is committing a crime, then any money or property held or managed by the marketplace would be involved in the crime. While you might not have transacted directly with the marketplace, the bitcoins you received came from it.

One interesting bit of complexity comes from the fact that once a UTXO is spent, the bitcoins in it can no longer be distinguished from other bitcoins. That is why "taint" is always a percentage. This is similar to the problem of identifying tainted money in a bank account. However, while money is legally fungible (in the U.S.), bitcoins are not, and so they must be treated differently. I look forward to seeing how laws are applied and misapplied to this situation.

Not sure I would fully agree with that statement but respect your thoughts. At least in the United States there is two primary paths the government can take to forfeit funds. One being a criminal forfeiture meaning you would have had to been convicted of a crime and purchasing bitcoins on a darknet is not criminal under any statute.  The second is a civil forfeiture which requires that the property (seized funds) is directly "traceable" to a "specified unlawful activity". There is a list of those activities in the statutes but again those activities are crimes.

Your analysis would then say if a bank was committing a crime your funds being held at that bank can now be forfeited.

I'm not a lawyer or an expert, but I think my statement explains why funds held by Silk Road were confiscated and not returned to their owners. In the U.S., your property can be confiscated if it is involved in crime whether you are involved in the crime or not. Maybe banks are a special case and maybe not, or maybe it would be political suicide to confiscate the assets of a bank so it isn't done.

The United States successfully convinced a federal judge that the Silk Road bitcoins are traceable to criminal activity, simply through the bitcoins’ presence on a site associated with the transacting of illegal goods.

[LeGaulois]

In the near future, the vast majority of bitcoins in circulation will be considered "tainted". We could somehow compare this with the banknotes contaminated with cocaine that are now in circulation in the hands of people who have nothing to do with it (Contaminated currency).

It will then be inevitable that exchanges will receive BTC tainted. This is why I have always found it absurd. It's like if they shot themselves in the foot, and many people will end up going elsewhere.

By the way, that's also why freshly mined bitcoins can have a premium price since they are "virgin" of any transaction

Nowadays exchanges have more or less the same obligations as banks with regard to AML, KYC, and others.
If it is usual for a bank to ask for the source of funds (and it is), the same applies to an exchange. Despite this fact, people might think that they don't have more authority than banks, but both are at the same level now.

...But again, we don't know how far back these companies look....

6 transactions for a company, 12 for a government.
It's not something official, of course, I don't remember where I heard that, I might be able to find the source eventually. Maybe in a video by Andreas about Coinjoin, or tainted bitcoins.

[o_e_l_e_o]

In the near future, the vast majority of bitcoins in circulation will be considered "tainted". We could somehow compare this with the banknotes contaminated with cocaine that are now in circulation in the hands of people who have nothing to do with it (Contaminated currency).

It's even worse than that for bitcoin. If I hand over five $10 bills and one is "tainted", then the recipient receives four "clean" bills and one "tainted" bill. If I pay five 0.01 BTC inputs and one is "tainted", then the recipient receives one "tainted" 0.05 BTC output. For this reason, as you say, almost every bitcoin in active circulation can be deemed to be "tainted" in one way or another.

6 transactions for a company, 12 for a government.

Which, just like the example above, makes it completely arbitrary. Let's say I have some bitcoin which are a result of illegal money laundering. I could perform an honest trade with an honest user, and now they have tainted bitcoin in their possession despite doing nothing illegal. On the other hand, I could bounce these coins around between my own addresses 12 times and now they are clean again?

The whole "tainted" bitcoin thing is a scam invented by governments to exercise control over us. We shouldn't accept it.

[coolcoinz]

One being a criminal forfeiture meaning you would have had to been convicted of a crime and purchasing bitcoins on a darknet is not criminal under any statute.  The second is a civil forfeiture which requires that the property (seized funds) is directly "traceable" to a "specified unlawful activity". There is a list of those activities in the statutes but again those activities are crimes.

Your analysis would then say if a bank was committing a crime your funds being held at that bank can now be forfeited.

Fun fact about forfeiture is that the government usually does whatever it wants. I know cases where people had their money seized and effectively stolen by the government, even when they had not enough evidence to warrant forfeiture. They simply seized what they could and never gave it back. The money was, depending on the case, locked on the account for years, taken as evidence and never given back or "misplaced". They often take so long to give it back that the owner dies before he sees the money again.

As for the taint, it only works if all exchanges agree not to trade tainted coins, but then they risk that one day all coins will be tainted and they'll have to close business. Most cash in circulation has at some point been used to pay for semi-legal or illegal stuff. Dollar bills contain traces of drugs, blood, semen, you name it. Even a dirty dollar bill is rarely rejected by stores, therefore taint won't work in the long run. It can be a scare for new users, that's it.

[o_e_l_e_o]

Suppose you  construct transaction with two inputs and one outputs. One of those  inputs  is tainted  and very small in value (say a few sat) but the other one is a big and "virgin". Regarding output, should it be considered as tainted?

Should it be? Obviously not. Will it be? Maybe.

We have no idea what metrics or benchmarks different exchanges, chain analysis companies, governments, etc., are using to deem coins "tainted" or not. Some will decide that that output is completed tainted. Some will decide it is clean. Some might decide it has some percentage taint to it, which if you deposit it to an exchange account, may rack up some red marks next to your account.

Centralized exchanges set these arbitrary rules, don't tell anyone what they are, expect users to blindly play by them, and then punish them when they trip up, usually through no fault or dishonesty of their own.

[iamnothere12]

I'm not a lawyer or an expert, but I think my statement explains why funds held by Silk Road were confiscated and not returned to their owners. In the U.S., your property can be confiscated if it is involved in crime whether you are involved in the crime or not. Maybe banks are a special case and maybe not, or maybe it would be political suicide to confiscate the assets of a bank so it isn't done.

The United States successfully convinced a federal judge that the Silk Road bitcoins are traceable to criminal activity, simply through the bitcoins’ presence on a site associated with the transacting of illegal goods.

What the government did there is a civil forfeiture.  In a civil forfeiture the "defendant" is the property - i.e. the bitcoins.  The government only needs probable cause to execute the seizure of the bitcoins.  Then any person who wants to make a claim against the coins must file as an interested party.  I do not know, but seriously doubt, anyone filed as an interested party in an effort to get their coins back.  Those coins seized were ones seized ON silk road as opposed to ones that had already left the market place.  Civil forfeiture has a much lesser burden.  Probable cause to seize but the the burden is on the government to show by preponderance of the evidence the funds are connected to criminal activity should someone claim an interest in the property.  However most of the time no one claims an interest and as in that case the government just wins by default.

[ranochigo]

Well, I asked that because recently I read  ^{one  paper} centered on analysis of tainted  bitcoins authors of which have concluded that using small amounts of "bad" sats criminal may poison  the innocents addresses. Their  thought sounds like this - "a criminal who knows how the approach works might just send tiny fractions of Bitcoins to random addresses to taint them" .  So,  criminals knowing that all their BTC are  tainted and having them in enormous quantity  can intentionally contaminate as many addresses as they want in order to conceal their own addresses among all others.

The definition of 'tainted coins' is not defined strictly. Depends on how you define 'taint', you can classify those addresses which has received tainted coins to be part of that 'taint' or to consider it based solely on whether that specific UTXO has been associated with the tainted coins. Bitcoin addresses are recommended to be a one use address and unless the criminal wants to waste substantial amount of Bitcoins to taint, and AFAIK most don't consider addresses with dust spam UTXOs as tainted, it wouldn't be of much use.

The concept of tainted coins, tainted address is just a way to make Bitcoin less fungible and I do not agree with that concept at all.

[o_e_l_e_o]

So,  criminals knowing that all their BTC are  tainted and having them in enormous quantity  can intentionally contaminate as many addresses as they want in order to conceal their own addresses among all others.

Although I don't think such an attack is practical, as ranochigo has pointed out, I also don't think that such an attack would necessarily be a bad thing. If we reached the point where the vast majority of bitcoin in circulation are "tainted" in one way or another, then the exchanges which are coming up with these arbitrary rules would be forced to either drop them or go out of business, and the only exchanges left would be ones which don't push some ridiculous narrative that one bitcoin is not equal to another bitcoin.

And even without such an attack, I think we are getting to this point more quickly than ever. As exchanges implement more and more invasive KYC requirements (such as requiring KYC for your own wallet), then more and more users are turning to privacy improving services such as mixers and coinjoins, which inevitably end up mixing clean coins and tainted coins together and making the exchanges' analyses moot.

[fiulpro]

So new user but long time reader and I want someone to explain how these analytics firms are alleging that coins may be tainted solely based on being connected to a dark net marketplace? The fact is in the early days of dark net marketplaces when few bitcoin exchanges existed (aside from MtGox) people routinely bought bitcoins on dark nets using money pack cards.  The purchaser of the bitcoins committed no crimes as he is not considered an unlicensed money transmitter, while the seller is consider one.  

People also used dark net marketplaces as mixers themselves transferring coins onto them and then off again.

Under these two scenarios the coins are not involved in criminal activity, however, it seems these analysis firms claim they are criminal solely because they have some connection to an output from a marketplace.  Am I correct that this is what they solely base the taint on when it comes to coins surrounding dark net marketplaces?

Hello

Yes , what you are saying is quite right and at the same time let us remember the fact that , the government published an article where they did note that only "10%" such coins are present in the bitcoin community.

So out of those 10% they didn't ever stop to consider if they are right now still in the black market or if they are with normal people like us who have no idea where they came from. We do not have the resources to track each and every single coin out there.

At the same time the "Virgin Coins" do have different importance just because of this factor. They are sold directly from the miners to the people who want full discretion. ( Makes me wanna believe that Mr. Satoshi have mining machines at his home for sure ) Now these coins are used but cannot be tracked by anyone. But when we are talking about a coin coming out of the black market this is something inevitable.

God Forbid if they started tracking the Fiat , every single one out there will have a very long history.