WEBVTT - On Background: Bad Actors on the Blockchain 0:00:15.276 --> 0:00:23.116 Pushkin. Hello Against the Rules listeners, it's your long lost host, 0:00:23.156 --> 0:00:26.356 Michael Lewis. I missed you, guys, and it's going to 0:00:26.396 --> 0:00:28.596 be a little while before I come back, and I 0:00:28.596 --> 0:00:32.356 want to explain what we're doing. I'm in the middle 0:00:32.396 --> 0:00:36.716 of a book. It's about FTX, the cryptocurrency exchange that 0:00:37.156 --> 0:00:39.676 has collapsed in the last few months in dramatic fashion, 0:00:40.356 --> 0:00:44.236 and it's taking all my time. But there's this thing 0:00:44.276 --> 0:00:46.716 I do with books. I do a lot of interviewing 0:00:46.876 --> 0:00:50.636 around the book, stuff that's never going to be in print, 0:00:51.556 --> 0:00:55.076 just to educate myself around the boundaries of my subject 0:00:55.596 --> 0:00:58.116 and talk to a lot of interesting people. For this, 0:00:58.676 --> 0:01:01.316 all the stuff winds up on the cutting room floor, 0:01:02.076 --> 0:01:04.676 except in this case. So what we're gonna do is 0:01:04.676 --> 0:01:07.196 basically call up a bunch of experts and talk to 0:01:07.236 --> 0:01:09.916 them about what they know. You'll be getting the same 0:01:09.996 --> 0:01:12.996 kind of education I get before I put words on paper. 0:01:14.156 --> 0:01:16.036 I hope you find these people as interesting as I do, 0:01:16.476 --> 0:01:19.476 and you can hold your breath until Against the Rules 0:01:19.596 --> 0:01:24.036 is back out towards the end of the year. So 0:01:24.116 --> 0:01:28.436 welcome to on background from Against the Rules. I'm Michael Lewis. 0:01:29.356 --> 0:01:32.236 So the cryptocurrency movement arose on the back end of 0:01:32.276 --> 0:01:35.396 the two thousand and eight financial crisis in response to 0:01:35.436 --> 0:01:39.356 the crisis, in response to the perceived injustices of the 0:01:39.396 --> 0:01:44.716 global financial system. The transparency, decentralization, and global nature of 0:01:44.716 --> 0:01:46.836 the blockchain are supposed to have made it safer for 0:01:46.876 --> 0:01:51.036 cryptocurrency traders and investors, but it also makes it easier 0:01:51.316 --> 0:01:55.116 for bad actors to hide illicit activity. How much illicit 0:01:55.116 --> 0:02:00.036 activity is there? The cryptocurrency analysis from Chain Analysis estimated 0:02:00.076 --> 0:02:03.516 that there were fourteen billion dollars worth of shady dealings 0:02:03.516 --> 0:02:07.836 in two twenty one alone. Tracking cryptocrimes could be a nightmare, 0:02:07.876 --> 0:02:10.596 but there is a way, and I need to understand 0:02:10.596 --> 0:02:14.076 the nitty gritty of how it's done. So I called 0:02:14.156 --> 0:02:17.756 up Andy Greenberg, who's the senior cybersecurity writer for Wired, 0:02:17.836 --> 0:02:20.596 an author of the new book Tracers in the Dark, 0:02:21.076 --> 0:02:25.156 The Global Hunt for the Crime Lords of Cryptocurrency. I 0:02:25.236 --> 0:02:28.156 love the book. It's a series of stories case studies 0:02:28.676 --> 0:02:33.516 of cracking crypto crimes. It make a wonderful like episodic 0:02:33.676 --> 0:02:38.756 television drama, and it explores the growth of illicit commerce 0:02:38.796 --> 0:02:42.836 with crypto. Andy also follows some US law enforcement agents 0:02:42.876 --> 0:02:45.956 who tracked illegal transactions around the world to figure out 0:02:46.316 --> 0:02:50.796 how they did it. It reads like a thriller. You know, 0:02:50.876 --> 0:02:54.156 I mentioned that I'm I've gotten very interested in the 0:02:54.196 --> 0:02:57.076 FTX story, and I'm curious do you share an interest? 0:02:57.116 --> 0:02:59.196 Have you been following it? Oh? Yeah, I mean I'm 0:02:59.236 --> 0:03:02.396 interested in it, but like largely from the sidelines, because 0:03:02.396 --> 0:03:05.316 it's not like a crypto crime story. It's not my 0:03:05.676 --> 0:03:08.836 kind of story exactly, except for this one element of it. 0:03:09.356 --> 0:03:13.916 Just after FTX declared bankruptcy, something like half a billion 0:03:13.956 --> 0:03:16.956 dollars worth of cryptocurrency was pulled out of its accounts 0:03:16.996 --> 0:03:20.996 by an unknown person, and that appears to have been 0:03:20.996 --> 0:03:24.716 a much more traditional kind of straight up theft by 0:03:24.756 --> 0:03:26.996 you know, we don't know who, like an insider, perhaps 0:03:27.036 --> 0:03:30.476 Sam Bankman freed himself maybe, or you know, was it 0:03:30.596 --> 0:03:34.196 hackers who just seized on the chaos of this meltdown 0:03:34.516 --> 0:03:37.436 to try to pull off a big heist. It's precisely 0:03:37.476 --> 0:03:42.516 the kind of heist that that your book suggests is 0:03:43.156 --> 0:03:46.436 a fool's errand because that bitcoin, that crypto is going 0:03:46.516 --> 0:03:48.916 to be traced and follow wherever it goes. Right, So, 0:03:48.956 --> 0:03:50.956 as soon as this happened, you know, I started calling 0:03:51.516 --> 0:03:55.876 my tracer friends and sources, I should say, and you 0:03:55.876 --> 0:03:58.596 know they were following this money in real time as 0:03:58.636 --> 0:04:00.756 it was being stolen. Basically, I mean, this is the 0:04:00.796 --> 0:04:05.076 crazy thing about cryptocurrency, which is that like, even if 0:04:05.076 --> 0:04:08.236 you can steal it, everybody can watch your getaway car 0:04:08.716 --> 0:04:12.036 make every turn, you know, through the city map, and 0:04:12.116 --> 0:04:14.636 like they're just waiting for you to try to get 0:04:14.676 --> 0:04:17.956 out and cash that stolen money in somewhere at a 0:04:17.996 --> 0:04:20.116 bank or whatever. I don't know what the end of 0:04:20.156 --> 0:04:23.116 this metaphor is, but but they can follow you as 0:04:23.556 --> 0:04:25.916 you do it, and it's going to be extremely hard 0:04:26.516 --> 0:04:30.596 for whoever took that money to liquidate it, to use 0:04:30.636 --> 0:04:32.836 it in any way without being identified, and then we'll 0:04:32.876 --> 0:04:36.516 find out if it was an insider or a thief. 0:04:37.796 --> 0:04:41.956 When you first got interested in crypto, in bitcoin, and 0:04:42.116 --> 0:04:45.476 you know, a completely innocent person asked you to explain 0:04:45.516 --> 0:04:50.156 to them what crypto was, what was your go to explanation? 0:04:50.636 --> 0:04:53.676 I think I would have described it as just digital cash, 0:04:53.836 --> 0:04:56.356 and in the sense that you can keep it under 0:04:56.356 --> 0:04:58.516 your mattress, you can keep it on your computer and 0:04:58.556 --> 0:05:01.596 nobody else has to know about that, and you can 0:05:02.116 --> 0:05:06.036 spend this digital cash. This cryptocurrency in a dark alleyway, 0:05:06.436 --> 0:05:09.956 without anybody, including the person you're sending it to, knowing 0:05:09.996 --> 0:05:14.076 who you are. Right, that was pretty much the opposite 0:05:14.196 --> 0:05:17.476 of correct. It turns out, you know, I now have 0:05:17.596 --> 0:05:21.716 kind of realized, in this slow motion epiphany that cryptocurrency 0:05:22.316 --> 0:05:27.036 is extremely traceable. I can remember the proselytizers coming on 0:05:27.116 --> 0:05:28.436 to me and saying, you've got to write a book 0:05:28.436 --> 0:05:32.276 about bitcoin because it's it's better money. And then you 0:05:32.356 --> 0:05:34.116 went to go try to use bitcoin, and it was 0:05:34.116 --> 0:05:36.636 clearly not better money. It wasn't you know, it makes 0:05:36.636 --> 0:05:39.516 you long for dollar bills if you tried to spend bitcoin, 0:05:39.716 --> 0:05:41.596 but that was what was in the air. You're sort 0:05:41.636 --> 0:05:44.116 of like if you were hanging out with anybody who 0:05:44.196 --> 0:05:46.596 knew anything about bitcoin, they said these things and you just, 0:05:46.956 --> 0:05:49.996 you know, why not believe them? And it seems, you know, 0:05:50.076 --> 0:05:52.636 looking back, like, you know, who could be this foolish? 0:05:52.676 --> 0:05:55.956 Because the whole idea of bitcoin is that it's not 0:05:56.116 --> 0:05:59.276 sort of guaranteed or like it's it's not accounted for 0:05:59.396 --> 0:06:02.596 by any bank or government. Instead, it's all laid out 0:06:02.636 --> 0:06:06.316 in the blockchain, like every single transaction is recorded in 0:06:06.356 --> 0:06:09.276 the blockchain. And I knew that even back in twenty eleven. 0:06:09.396 --> 0:06:14.716 But the thing that made me and possibly even Sotoshi Nakamoto, 0:06:14.836 --> 0:06:18.756 this mysterious creator of bitcoin, think that it could nonetheless 0:06:18.836 --> 0:06:22.716 be anonymous or untraceable, is that the blockchain only records 0:06:22.756 --> 0:06:26.716 transactions between bitcoin addresses, these long strings of like you know, 0:06:26.916 --> 0:06:29.716 thirty four numbers and characters that seemed meaningless and don't 0:06:29.756 --> 0:06:33.996 seem to be tied to anything identifying at all. So 0:06:34.236 --> 0:06:36.676 there's a distinction that needs to be made between anonymous 0:06:36.676 --> 0:06:39.236 and untraceable. You can keep it secret who you are, 0:06:39.316 --> 0:06:42.076 you just can't keep the transaction secret. I guess the 0:06:42.116 --> 0:06:45.436 best way to describe it is not even anonymous or untraceable, 0:06:45.476 --> 0:06:48.156 but rather pseudonymous if you want to like use the 0:06:48.596 --> 0:06:51.436 nerdy term, which is like that you could send money 0:06:51.476 --> 0:06:54.636 from one pseudonym a bitcoin address to another, and it 0:06:54.676 --> 0:06:56.476 didn't seem like there was any way to kind of 0:06:56.596 --> 0:07:01.396 pierce the veil of who is behind those bitcoin address pseudonyms. 0:07:01.996 --> 0:07:04.276 So even though you could see like exact amounts of 0:07:04.316 --> 0:07:07.516 bitcoin being sent from one pseudonym to the next, is 0:07:07.596 --> 0:07:10.636 still seemed like this kind of you know, just like 0:07:10.676 --> 0:07:14.996 a kind of dark basement full of money changing hands 0:07:15.036 --> 0:07:17.436 but you didn't know between whom, and that seems you 0:07:17.476 --> 0:07:22.076 know secret enough, right, So do you think Setoshi actually 0:07:22.076 --> 0:07:25.716 thought that untraceability was a feature of this There wasn't 0:07:25.716 --> 0:07:28.796 this email that Setoshi sent to a cryptography emailing list. 0:07:28.836 --> 0:07:31.076 It's you know, listed these bullet points of like why 0:07:31.116 --> 0:07:34.596 you should read my white paper basically, which includes participants 0:07:34.636 --> 0:07:37.316 can be anonymous, and just to be fair, you know, 0:07:37.956 --> 0:07:40.396 there is one participant who has remained anonymous, who is 0:07:40.476 --> 0:07:45.276 Sotoshi Nakamoto, which is in itself an amazing story that 0:07:45.756 --> 0:07:48.036 it's the only secret that's left in the universe who 0:07:48.076 --> 0:07:51.236 Setoshi is. So who's the first person who attempts to 0:07:51.316 --> 0:07:56.276 trace bitcoin and identify the people behind the accounts? Yeah, 0:07:56.316 --> 0:07:58.596 I mean this whole story of the ability to trace 0:07:58.916 --> 0:08:02.036 cryptocurrency begins, I would say with Sarah Michael John, this 0:08:02.356 --> 0:08:05.916 graduate researcher at the University of California, San Diego who 0:08:05.996 --> 0:08:07.756 kind of just embarked on it as a kind of 0:08:07.796 --> 0:08:10.396 anthropological study. At first, she wanted to see if she 0:08:10.396 --> 0:08:13.276 could figure out how many people are using bitcoin, how 0:08:13.276 --> 0:08:16.756 many people are kind of like hiding behind these millions 0:08:16.876 --> 0:08:21.476 of bitcoin addresses. But she very quickly began to see 0:08:21.516 --> 0:08:24.236 that she could actually develop techniques to first just to 0:08:24.356 --> 0:08:29.076 cluster these addresses to show that sometimes you know, dozens 0:08:29.156 --> 0:08:32.996 or hundreds or sometimes even millions of these addresses belonged 0:08:33.076 --> 0:08:37.196 to a single person or service or even like a 0:08:37.316 --> 0:08:40.996 dark web marketplace. How did she do that? The first 0:08:40.996 --> 0:08:44.876 trick is, sorry, this sound's really technical, but it's pretty simple, 0:08:44.956 --> 0:08:49.036 which is that a so called multi input transaction, to 0:08:49.116 --> 0:08:51.316 spend bitcoins from an address, you've got to control the 0:08:51.316 --> 0:08:54.516 private key for that address. So if you're sending bitcoins 0:08:54.556 --> 0:08:57.756 in one transaction from lots of addresses, you must control 0:08:57.796 --> 0:08:59.916 the keys for all those addresses. And that proves that 0:09:00.636 --> 0:09:05.236 one person or one organization, one service controlled all those addresses. 0:09:05.276 --> 0:09:08.196 So you know, you can kind of go back in 0:09:08.276 --> 0:09:10.676 time then and say, oh, all those addresses must have 0:09:10.836 --> 0:09:15.876 belonged to this one cluster, like all those addresses were 0:09:15.956 --> 0:09:19.476 one person or you know, one service. That's one trick, 0:09:19.996 --> 0:09:24.316 and so this is Sarah Michael john Is is deducing this, Yeah, exactly. 0:09:24.356 --> 0:09:27.916 And that's that's maybe the easiest trick that she It 0:09:27.956 --> 0:09:30.236 was sort of like kind of an open secret that 0:09:30.436 --> 0:09:32.716 was kind of a problem, but she was she kind 0:09:32.716 --> 0:09:37.476 of applied it across the whole blockchain and immediately was 0:09:37.516 --> 0:09:41.636 able to cut in half the number of possible identities 0:09:41.636 --> 0:09:44.436 and show that you could cluster enough of these addresses 0:09:44.476 --> 0:09:48.156 that immediately could see that there were only half as 0:09:48.156 --> 0:09:52.076 many clusters as there were Bitcoin addresses, just with that 0:09:52.116 --> 0:09:56.596 one trick. And her first question was how many people 0:09:56.596 --> 0:10:00.476 are actually using bitcoin? As opposed to I wonder if 0:10:00.476 --> 0:10:03.036 you can actually trace the transactions? I think so. I mean, 0:10:03.116 --> 0:10:05.556 I think she really approached this as a researcher, like, 0:10:05.796 --> 0:10:08.196 this is an interesting world, Let's see what we can 0:10:08.276 --> 0:10:10.676 learn about it, and who these people are and how 0:10:10.676 --> 0:10:12.596 many of them are. It is just the most basic question. 0:10:12.676 --> 0:10:15.836 Perhaps that kind of multi input transaction trick was really 0:10:15.876 --> 0:10:18.516 just one clustering technique. She came up with another one 0:10:18.796 --> 0:10:23.316 that was based on change making in the bitcoin transactions. 0:10:23.316 --> 0:10:25.796 This is like another weird feature of bitcoin, at least 0:10:25.796 --> 0:10:28.156 with a lot of WATS software, is that when you 0:10:28.276 --> 0:10:31.436 want to spend bitcoins from a bitcoin address, you can't 0:10:31.436 --> 0:10:33.396 just spend like part of them. You have to crack 0:10:33.436 --> 0:10:35.956 open the whole piggy bank and then basically send all 0:10:35.956 --> 0:10:38.316 the money at that address and then get back the 0:10:38.436 --> 0:10:41.756 change at a different address. So that means that you 0:10:41.796 --> 0:10:44.276 see the money travel from one address to two. You 0:10:44.316 --> 0:10:48.796 can basically follow around this one wad of cash as 0:10:48.836 --> 0:10:51.356 like bills are peeled off of it, and it remains 0:10:51.396 --> 0:10:53.956 the same wad of cash and the same person's possession, 0:10:54.476 --> 0:10:57.956 even as it's kind of like spent slowly. And that's 0:10:57.996 --> 0:10:59.756 another trick that allowed her to see like, oh, that 0:11:00.156 --> 0:11:04.316 money still belongs to the same original person. And then 0:11:04.436 --> 0:11:06.796 sometimes then that wad of cash ends up being sent 0:11:07.036 --> 0:11:10.876 to a cryptocurrency exchange. And even back in twenty thirteen 0:11:10.916 --> 0:11:15.436 when she was writing this, cryptocurrency exchanges were demanding know 0:11:15.556 --> 0:11:19.476 your customer information, like your actual identifying information, and that 0:11:19.556 --> 0:11:22.556 mean you've law enforcement can send a subpoena to that 0:11:22.636 --> 0:11:25.396 exchange and get the identity. So if you can like 0:11:25.556 --> 0:11:29.076 track someone's money, if you can identify a cluster and 0:11:29.076 --> 0:11:32.316 then find the paths from that cluster out to an 0:11:32.316 --> 0:11:35.596 exchange where they want to trade their bitcoins for dollars 0:11:35.676 --> 0:11:38.036 or vice versa. And the other way to do it 0:11:38.076 --> 0:11:40.476 is like and she did this too, you can kind 0:11:40.476 --> 0:11:45.276 of interact undercover with addresses in that cluster and you 0:11:45.316 --> 0:11:48.356 can see, oh, I'm putting money into a drug market 0:11:48.716 --> 0:11:50.716 and this is the address that I am interacting with. 0:11:50.956 --> 0:11:52.996 I know that address, and now I know that that 0:11:53.036 --> 0:11:57.196 address is part of a big cluster. That cluster must 0:11:57.236 --> 0:12:02.196 all belong to a big black market for drugs. I'm 0:12:02.276 --> 0:12:05.516 riveted by her, and I'm interested in the kind of 0:12:05.556 --> 0:12:09.036 responses to her work she might have gotten from other research, 0:12:09.276 --> 0:12:11.756 but also like the crypto community, who must have taken 0:12:11.756 --> 0:12:14.316 it as a full frontal assault. Yeah, I mean, I 0:12:14.356 --> 0:12:15.996 tell these stories in the book. Like she she went 0:12:16.076 --> 0:12:18.916 and spoke at one conference, and just over breakfast that morning, 0:12:18.956 --> 0:12:22.236 she sat down with this kind of cryptocurrency privacy researcher 0:12:22.716 --> 0:12:25.796 and they were kind of talking about, like, what are 0:12:25.796 --> 0:12:29.516 the privacy properties of cryptocurrency as it stands, and this 0:12:29.596 --> 0:12:33.236 cryptographer sort of posited, well, we need to develop systems 0:12:33.356 --> 0:12:38.956 such that law enforcement cannot track these transactions no matter 0:12:39.116 --> 0:12:42.476 what crime may be taking place, you know they're in 0:12:43.036 --> 0:12:47.196 and Sarah responded, well, I don't know about that. There 0:12:47.196 --> 0:12:49.556 are definitely there will be bad things that happen if 0:12:49.596 --> 0:12:53.356 you truly can never trace these transactions. And then he said, 0:12:54.036 --> 0:12:57.476 well you eat babies then, which I was kind of like, wait, 0:12:57.476 --> 0:13:00.996 so there's nothing in between, but that's that is how 0:13:01.036 --> 0:13:03.636 the conversations, and she remembers this very clearly. I mean, 0:13:03.676 --> 0:13:07.476 she was shocked and somewhat offended, and I think only 0:13:07.516 --> 0:13:09.956 then sort of realized that this was not going to 0:13:10.076 --> 0:13:12.876 go over well in the sort of traditional crypto world. 0:13:14.836 --> 0:13:21.076 There's something bizarre and wonderful about lots of basically guys 0:13:21.676 --> 0:13:26.276 who think they're very smart, who have a perverse longing 0:13:26.356 --> 0:13:31.036 for secrecy, who believe they have created an or encouraged 0:13:31.076 --> 0:13:37.156 a technology that enables the secrecy being totally exposed by 0:13:37.436 --> 0:13:42.996 just truth seeking young female academic. Absolutely, I mean, but 0:13:42.996 --> 0:13:47.556 then she remains deeply ambivalent about it for her whole career. 0:13:47.596 --> 0:13:49.636 I mean, you said, it's like a perverse instinct to 0:13:49.676 --> 0:13:52.116 try to maintain secrecy, But there are good reasons for 0:13:52.156 --> 0:13:55.916 financial privacy too, and financial surveillance is not always a 0:13:55.956 --> 0:13:59.676 wonderful thing. And you know, I was lucky in a 0:13:59.716 --> 0:14:02.676 way that like Sarah is the person who represents that 0:14:02.996 --> 0:14:07.596 nuance and that complexity of the morality of surveillance. Basically 0:14:07.636 --> 0:14:10.836 throughout the story, she actually like finds some of the 0:14:10.876 --> 0:14:14.996 early big bitcoin thefts and then traces them and sometimes 0:14:14.996 --> 0:14:17.596 shows that that money ends up at an exchange and 0:14:18.116 --> 0:14:20.796 for a law enforcement agency with subpoena power, they could 0:14:20.796 --> 0:14:23.516 go solve that crime right now, and she puts that 0:14:23.596 --> 0:14:26.316 in the paper basically, so of course this gets the 0:14:26.316 --> 0:14:30.596 attention of law enforcement, and she soon after has this 0:14:30.756 --> 0:14:34.436 meeting with a federal agency, and she finds herself very 0:14:34.476 --> 0:14:37.236 turned off by the way that they are talking about 0:14:37.396 --> 0:14:43.156 privacy technologies and the dark web and cryptocurrency, and also 0:14:43.236 --> 0:14:46.756 her advisor kind of jokes that she's become this cybernarc, 0:14:46.796 --> 0:14:52.676 as he puts it. She finds herself torn between the 0:14:52.716 --> 0:14:57.916 privacy community who doesn't particularly like love her research, and 0:14:58.276 --> 0:15:03.956 the law enforcement agencies who she doesn't entirely want to 0:15:04.036 --> 0:15:08.516 be a part of. On background, will be right back. 0:15:14.916 --> 0:15:17.476 It's amazing to me that it takes five years from 0:15:17.516 --> 0:15:22.156 the time Satoshi creates bitcoin for anybody, let alone an 0:15:22.156 --> 0:15:25.516 academic at UCSD named Sarah Michael John to figure out 0:15:25.596 --> 0:15:28.716 that bitcoin is actually traceable, and a whole other year 0:15:28.956 --> 0:15:31.956 for Michael Groneger to create a business called chain analysis. 0:15:32.436 --> 0:15:35.116 I mean, Michael was reluctant to kind of say to me, like, oh, 0:15:35.436 --> 0:15:38.636 I just took all of Sarah's tricks, but he nonetheless says, yeah, 0:15:38.636 --> 0:15:41.836 I read Sarah's paper it was fantastic. So I think 0:15:41.836 --> 0:15:44.596 Michael Groneger would say, like, by then, certainly I would 0:15:44.596 --> 0:15:48.876 have not only come up with these tricks, but as 0:15:48.876 --> 0:15:52.836 he did, like built them into a polished, automated piece 0:15:52.876 --> 0:15:55.876 of software that he could then sell to law enforcement. 0:15:57.316 --> 0:16:01.316 So we're now onto like the real world applications of 0:16:01.356 --> 0:16:06.236 Sarah's work and who takes it into the world. What's 0:16:06.236 --> 0:16:10.716 the first big case where it's because of the kind 0:16:10.716 --> 0:16:13.396 of tricks that Sarah turned up. Well, ch Green Dambarian 0:16:13.636 --> 0:16:16.636 is in some ways like the real protagonist of my book, 0:16:16.636 --> 0:16:19.076 and he is this like kind of fascinating character. He's 0:16:19.116 --> 0:16:23.716 a criminal investigator for the IRS and a forensic accountant 0:16:23.716 --> 0:16:25.796 and but also a computer nerd. And he had looked 0:16:25.796 --> 0:16:29.116 at bitcoin from the beginning and had similar thoughts to Sarah, 0:16:29.196 --> 0:16:32.196 like there's a whole blockchain here, how could participants be 0:16:32.236 --> 0:16:35.356 anonymous like Sotoshi says? And then he was faced with 0:16:35.396 --> 0:16:39.076 this case where in the wake of the takedown of 0:16:39.196 --> 0:16:43.876 the first dark web black market for drugs, the Silk Road, 0:16:44.876 --> 0:16:47.956 he could see that there's one VA agent who had 0:16:47.956 --> 0:16:50.596 worked on that case was cashing out hundreds of thousands 0:16:50.596 --> 0:16:54.796 of dollars worth of bitcoin of unknown origin, and he 0:16:55.676 --> 0:17:00.036 guessed that this the EA agent Karl Mark Force, had 0:17:00.076 --> 0:17:02.476 stolen it from the Silk Road or had somehow enriched 0:17:02.516 --> 0:17:04.636 himself in the midst of his case, and so he 0:17:04.716 --> 0:17:07.796 kind of just like I don't know, emboldened by Sarah's paper, 0:17:08.236 --> 0:17:11.956 just sat down and started just clicking through bitcoin addresses 0:17:12.396 --> 0:17:15.996 and was able to trace this corrupt DA agents bitcoins 0:17:16.116 --> 0:17:21.236 back to the Silk Road, ultimately showing that Karl Mark Force, 0:17:21.356 --> 0:17:24.916 this DEA agent, had been selling law enforcement information to 0:17:25.596 --> 0:17:29.036 the creator of the Silk Road and being paid bitcoin 0:17:29.076 --> 0:17:32.636 and exchange exactly and also trying to extort money from him. 0:17:32.996 --> 0:17:36.716 So this is actually helps explain the tracking process. If 0:17:37.196 --> 0:17:41.036 this corrupt the agent had sold government information to the 0:17:41.156 --> 0:17:44.636 Silk Road bosses and been given bitcoin and just sat 0:17:44.716 --> 0:17:47.436 on the bitcoin and never moved it, he would have 0:17:47.476 --> 0:17:51.796 been unfindable, right So Fatig Green Gambarian, the case actually 0:17:51.876 --> 0:17:55.356 begins when he gets a tip from a cryptocurrency exchange 0:17:56.236 --> 0:18:01.036 basically that this sort of shady DA agents is cashing 0:18:01.036 --> 0:18:04.716 out hundreds of thousands of dollars and is trying to 0:18:04.756 --> 0:18:06.716 do it under a suit of him. That's the first 0:18:06.796 --> 0:18:11.836 kind of giveaway and then of course, like at this point, 0:18:12.276 --> 0:18:15.556 the silk Road, this dark web drug market has been seized, 0:18:15.916 --> 0:18:19.516 so the FBI actually has all of its bitcoin addresses. 0:18:20.276 --> 0:18:22.596 I think that Karl Mark Forrest is the agent just 0:18:23.116 --> 0:18:26.196 never really reckons with the fact that all of this 0:18:26.236 --> 0:18:29.996 would be captured in the blockchain. He believed, like everybody, 0:18:30.076 --> 0:18:32.636 that bitcoin was untraceable, and then in fact it might 0:18:32.676 --> 0:18:34.396 be kind of like the perfect kind of way to 0:18:34.436 --> 0:18:36.796 skim off the top is that you're going to steal 0:18:36.876 --> 0:18:39.556 untraceable money, how is anybody gonna catch you. It's a 0:18:39.556 --> 0:18:42.636 funny idea that people might have been lured into criminal 0:18:42.676 --> 0:18:45.876 activity because they thought they had a secrecy that didn't exist. Well, 0:18:45.876 --> 0:18:48.476 you know, it's like this kind of eternal idea about 0:18:48.596 --> 0:18:52.756 the Internet that like the anonymity there, or the perceived 0:18:52.836 --> 0:18:57.476 anonymity like unlocks your darkest desires. And I think that 0:18:57.636 --> 0:18:59.756 is true sometimes, and it seems to have been true 0:19:00.116 --> 0:19:04.956 for Karl Mark Forrest, like he sort of was seduced 0:19:04.956 --> 0:19:07.716 by this false promise of anonymity to become a corrupt 0:19:07.716 --> 0:19:10.196 cop and it wasn't alone. Like that's the crazy thing. 0:19:10.596 --> 0:19:14.396 T green Combarian then found like this other sum of 0:19:14.476 --> 0:19:17.996 hundreds of thousands of dollars of bitcoin that people had 0:19:18.036 --> 0:19:21.156 noticed was missing from the Silk Road, and everybody thought 0:19:21.196 --> 0:19:24.236 that it must be the same corrupt EA agent. But Tigren, 0:19:24.276 --> 0:19:28.996 who is now getting better at tracing cryptocurrency transactions by 0:19:28.996 --> 0:19:31.756 this point on the blockchain, figures out that it's another 0:19:32.116 --> 0:19:35.236 corrupt agent. The Secret Service agents based in the same 0:19:35.276 --> 0:19:39.836 Baltimore office as the DA agent Carl Mark Force, And amazingly, 0:19:39.836 --> 0:19:42.556 they were not even aware of each other's corruption. They 0:19:42.596 --> 0:19:45.156 did this independently as far as anybody can tell, and 0:19:45.196 --> 0:19:48.036 they were both just kind of, like, you know, seduced 0:19:48.116 --> 0:19:53.756 by this same the same misunderstanding about bitcoin being essentially like, 0:19:54.076 --> 0:19:57.716 you know, anonymous money that anybody can just grab and 0:19:58.116 --> 0:20:01.676 steal and nobody can catch them. I feel like we're 0:20:01.716 --> 0:20:05.316 in an episode of The Wire. Yes, there was a 0:20:05.356 --> 0:20:09.516 spectacular case called Alphabet. Could you just describe that case 0:20:09.556 --> 0:20:11.716 and the tools that the investigators used to crack it 0:20:11.756 --> 0:20:14.836 and bring it down? When the Silk Road is taken down, 0:20:14.876 --> 0:20:18.596 the first market this sort of combines the dark web 0:20:18.596 --> 0:20:22.156 and cryptocurrency to try to create untraceable black market transactions. 0:20:22.476 --> 0:20:25.036 That leaves this power vacuum that's filled by one market 0:20:25.116 --> 0:20:28.116 after another, and they a lot of them, like run 0:20:28.116 --> 0:20:30.756 away with everybody's money. The administrators steal the money and 0:20:30.756 --> 0:20:32.716 what we call an exit scam. A couple of them 0:20:32.756 --> 0:20:36.476 are taken down by law enforcements, and then finally a 0:20:36.516 --> 0:20:40.636 new one surface is called Alphabet, that seems to have 0:20:40.756 --> 0:20:45.036 made no mistakes, and law enforcements around the world cannot 0:20:45.116 --> 0:20:48.556 find any way to identify its administrator, who goes by 0:20:48.676 --> 0:20:52.636 the handle Alpha O two, and Alphabet eventually grows to 0:20:52.676 --> 0:20:55.116 be ten times the size of the Silk Road and 0:20:55.276 --> 0:20:58.956 is doing like millions of dollars in black market transactions 0:20:59.036 --> 0:21:01.316 every day, and what kind of things are being traded? 0:21:01.476 --> 0:21:04.516 Alphabet is sort of innovation? Is is that well? Alpha 0:21:04.556 --> 0:21:06.236 O two, in fact, was it kind of credit card 0:21:06.236 --> 0:21:10.356 fraudster originally a kind of traditional cyberchromin hacker. And so 0:21:10.596 --> 0:21:15.436 he has this idea to combine the cybercrime frauds credit 0:21:15.436 --> 0:21:19.276 card you know, hacking world with the narcotics market on 0:21:19.316 --> 0:21:22.676 the dark web and creates this behemoth that sells both 0:21:22.796 --> 0:21:27.596 kinds of contraband stolen data hacking tools like troves of 0:21:27.636 --> 0:21:30.996 credit cards, but also heroin and fentanyl and meth ampheta 0:21:31.036 --> 0:21:34.596 means and anything you can think of, So I can 0:21:34.796 --> 0:21:37.636 I can buy stolen data along with my heroin? Yeah, 0:21:37.636 --> 0:21:40.596 I mean why not. What's the first case where it's 0:21:40.676 --> 0:21:48.556 really cracked just by cryptography? So cha Analysis by late 0:21:48.556 --> 0:21:52.916 twenty sixteen and twenty seventeen has figured out basically how 0:21:52.956 --> 0:21:57.996 to map out Alphabet's bitcoin addresses across the blockchain and 0:21:58.036 --> 0:22:01.396 has created this like constellation of two point five million 0:22:01.476 --> 0:22:06.316 addresses that it knows belong to Alphabet. But within that 0:22:06.396 --> 0:22:09.596 it's it's still very difficult to identify, like in single 0:22:09.676 --> 0:22:14.636 person's transactions, not to mention to try to identify the 0:22:14.716 --> 0:22:17.636 kingpin of this whole black market Alpha O two. But 0:22:17.716 --> 0:22:22.076 these two FBI agents in Washington, DC, who asked me 0:22:22.116 --> 0:22:25.036 to just call them Ali and Aaron, they had this 0:22:25.076 --> 0:22:28.676 idea of looking at those exit scams that I mentioned 0:22:28.676 --> 0:22:32.316 where the boss of a dark web drug market just 0:22:32.556 --> 0:22:35.076 steals everybody's money and runs off of it. They thought 0:22:35.076 --> 0:22:38.316 of it this way, like when an exist scam happens, 0:22:38.756 --> 0:22:41.236 kind of freaks out in the whole dark web economy. 0:22:41.516 --> 0:22:44.796 They all start warning each other, don't store any of 0:22:44.796 --> 0:22:47.636 your bitcoins on a drug market unless you're about to 0:22:47.636 --> 0:22:50.636 spend them, because the administrator can steal them at any time, 0:22:50.676 --> 0:22:53.196 and you've got to be careful about this. And so 0:22:53.236 --> 0:22:56.716 everybody pulls out their money from those accounts. But the 0:22:56.756 --> 0:23:00.276 one person Ali and Aaron realized who would not have 0:23:00.356 --> 0:23:02.916 to worry about that would be the boss of a 0:23:02.996 --> 0:23:06.276 dark web market him or herself. And so they had 0:23:06.276 --> 0:23:08.756 this idea to just kind of look across this whole 0:23:08.796 --> 0:23:12.356 alpha bay cluster that cha analysis had really assembled and 0:23:12.796 --> 0:23:16.396 look for sums of money that had sat unmoved, like 0:23:16.556 --> 0:23:21.716 large sums even as everybody else got spooked by exit scams. Yeah, 0:23:23.076 --> 0:23:26.436 suggesting a sense of security in those pools of money exactly, 0:23:26.596 --> 0:23:29.276 or just really suggesting that that probably belongs to someone 0:23:29.276 --> 0:23:31.516 who is immune from an exit scam. It probably is 0:23:31.516 --> 0:23:34.396 therefore a boss of a dark web market and or 0:23:34.476 --> 0:23:37.836 really or really dumb, right, Yeah, that's also possible. So 0:23:37.916 --> 0:23:39.676 they try this technique and they kind of combed through 0:23:39.676 --> 0:23:43.476 all those alphabet addresses and finds several sums, but one 0:23:43.516 --> 0:23:47.036 in particular that is really big has sat unmoved through 0:23:47.036 --> 0:23:51.236 exit scams and then is eventually parceled out and trickles 0:23:51.316 --> 0:23:55.516 out to a cryptocurrency exchange whereas cashed out and they 0:23:55.516 --> 0:24:00.476