Investigating Cryptocurrencies

Understanding, Extracting, and Analyzing Blockchain Evidence

Nick Furneaux

• Publisher: Wiley
• Year: 2018
• ISBN:
  9781119480563
• Edition: 1
• Topic: Computer Science
• Subtopic: Cryptography
• Index: Computer Science

Investigate crimes involving cryptocurrencies and other blockchain technologies

Bitcoin has traditionally been the payment system of choice for a criminal trading on the Dark Web, and now many other blockchain cryptocurrencies are entering the mainstream as traders are accepting them from low-end investors putting their money into the market. Worse still, the blockchain can even be used to hide information and covert messaging, unknown to most investigators.

Investigating Cryptocurrencies is the first book to help corporate, law enforcement, and other investigators understand the technical concepts and the techniques for investigating crimes utilizing the blockchain and related digital currencies such as Bitcoin and Ethereum.

• Understand blockchain and transaction technologies
• Set up and run cryptocurrency accounts
• Build information about specific addresses
• Access raw data on blockchain ledgers
• Identify users of cryptocurrencies
• Extracting cryptocurrency data from live and imaged computers
• Following the money

With nearly $150 billion in cryptocurrency circulating and $3 billion changing hands daily, crimes committed with or paid for with digital cash are a serious business. Luckily, Investigating Cryptocurrencies Forensics shows you how to detect it and, more importantly, stop it in its tracks.

Part I
Understanding the Technology

As digital investigators, we have a tendency to want to get straight to the proverbial coal face and start looking at the data. However, with cryptocurrencies, it is important to understand the underlying technologies and how blockchains function to be able to effectively and accurately investigate the evidence.

CHAPTER 1
What Is a Cryptocurrency?

Over the past few years, the term cryptocurrency has become a well-used term in financial circles, new business plans, and news headlines. Often the term is associated with criminal activity on the so-called “dark web,” but more recently with the increasing value of currencies like Bitcoin, the word, concept, and products are entering mainstream consciousness.

But what really is a cryptocurrency and how does it work? In this chapter, we will examine the concept, the history, and the uses for cryptocurrencies and look at how to set up a Bitcoin trading node.

Why does an investigator need to know this? Understanding the concept of these online currencies can help you form a good foundation to build a more comprehensive technical understanding. It can also help you to see the criminal uses of these currencies.

A New Concept?

In the far western Pacific region of Micronesia is a tiny cluster of islands named Yap. Conspicuous against the deep blue of the ocean, this tiny group of “high islands” comprises rolling hills covered with dense, lush forest. The islands share a coral reef that provides sustenance for the islanders from the fish that seek protection from ocean predators.

As far back as the thirteenth century, the sultan of Egypt referenced islands at the far east of the Persian Empire, where the only currency was millstones. This was later confirmed by the Spanish when they “discovered” the island group in 1528. If you visit today, you can still see the stone coins that made up the primary currency of the islanders for many centuries; in fact, they are still used today in trades involving land or marriages.

The stones are a variety of sizes—some as small as 3.5 centimeters—but the ones that draw the most attention are up to 4 meters in diameter (see Figure 1-1). The Internet boasts many pictures of tourists standing next to these vast doughnut-shaped disks of calcite named Rai coins.

Figure 1-1: Stone money of Yap.

The stones do not originate on Yap but are mined and shipped from other islands such as Palau, which is 450 kilometers away. For centuries, these coins were loaded onto sail-driven rafts, and brought across the open ocean to the island, unloaded, and moved to a location somewhere on the island where they would generally stay put forever.

You may be wondering: How do the islanders use such huge coins in actual transactions? How do they value them? How do they know who owns each coin?

The Rai coins are interesting because they almost exactly prefigured the way a blockchain in a cryptocurrency works—in fact, similar questions can be asked about a cryptocurrency. How can you trade something that doesn't really exist, such as a Bitcoin? How is a blockchain-based coin valued, and how can you know who owns a coin with no central bank controlling the movement of funds? Examining the Yapese currency helps us to understand the blockchain currency concept.

So why does a large stone disk have value? Let's say that Bob from Yap wants a 3-meter coin. First, the coin must be mined. Consider the difficulty involved. Workers have to be employed and sent in boats to an island 450 kilometers away. Calcite must then be mined, and the resulting stone carved into the distinctive doughnut shape. This final “coin” must then be loaded onto a boat and sailed back across the stretch of Pacific Ocean with its obvious dangers. The work and considerable expense involved to mine the coin are what gives it its perceived and agreed value to the islanders. Indeed, the bigger the coin, the higher the difficulty—so the value is commensurately greater.

One of the first questions I am asked about cryptocurrencies is where does the money come from? The answer, of course, is that the money comes from nowhere, but that is not really a fair answer. If you know anything about any cryptocurrency, you will know that new coins are “mined.” This concept will be discussed later, but in simple terms, computers work to solve really, really hard mathematical problems, and when they find a solution, they are rewarded with “new” coins. But just like mining a Yapese Rai coin, work is involved that carries a very real cost. Although Bitcoin miners, for example, are not chartering a ship and crossing oceans, they must spend real money on expensive, specialized custom ASICs (application specific integrated circuits) capable of carrying out trillions of calculations a second. They must then spend money on providing considerable amounts of electricity for running the computers and keeping them cool. Just like their stone counterparts, it's difficult and expensive to mine cryptocurrency coins, which gives them a perceived and generally agreed value due to their scarcit...