{"id":3267,"date":"2023-10-25T13:04:39","date_gmt":"2023-10-25T13:04:39","guid":{"rendered":"http:\/\/ci02ccbcdec000268f"},"modified":"2023-10-25T13:04:39","modified_gmt":"2023-10-25T13:04:39","slug":"why-blockchain-surveillance-needs-fincens-patriot-act-ploy","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/technical\/why-blockchain-surveillance-needs-fincens-patriot-act-ploy","title":{"rendered":"Why Blockchain Surveillance Needs FinCEN\u2019s PATRIOT Act Ploy"},"content":{"rendered":"
<\/div>

FinCEN\u2019s Proposal of Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions of Primary Money Laundering Concern<\/a> would criminalize Bitcoin privacy tools under the suspicion of money laundering. The proposal cites Section 311 of the USA PATRIOT Act, which enables the bulk collection of data by intelligence agencies. <\/p>\n

If FinCEN has its way, all regulated entities will have to provide customer data for funds suspected to have interacted with \u201cmixing\u201d tools and services to federal agencies, and could go as far as including the use of the Lightning Network<\/a> as a reportable act. To understand the motivation for FinCEN\u2019s proposal, we need to look at the relationship between blockchain surveillance firms, intelligence agencies, and the methods informing heuristics to track funds on-chain. <\/p>\n

Blockchain surveillance firms use a range of heuristics to track funds on-chain. Some heuristics stem from publicly available, peer-reviewed research, such as the common input ownership or co-spend heuristic, in which it is assumed that all inputs to a transaction are owned by the same person. Other heuristics are less publicly known due to the proprietary nature of blockchain surveillance software. What we do know is that Chainalysis has \u201cdeveloped thousands of other heuristics based off [of] an understanding of idioms of usage in the bitcoin ecosystem\u201d, according to a research paper<\/a>. <\/p>\n

There may be a thousand ways to skin a cat, but if \u201cthousands\u201d of heuristics are necessary to track funds in Bitcoin, we can assume that the processes applied are not necessarily very reliable. This lack of a scientific framework to complete blockchain surveillance tasks is highlighted by the aforementioned paper as well, citing the lack of a \u201cground-truth dataset for address clusters\u201d. <\/p>\n

FinCEN\u2019s proposal is now supposed to come to blockchain surveillance\u2019s rescue, by enabling the bulk feeding of the so-called intelligence heuristic. In the intelligence heuristic, blockchain surveillance firms pair on-chain data with real-world data that is either openly available \u2013 such as by sharing addresses via public communication channels \u2013 or obtained via service providers. But private information can, at this point, only be obtained lawfully such as via warrants or subpoenas, which require probable cause and constitute lengthy processes. This should currently make the intelligence heuristic a slow and costly one complicated to apply in bulk \u2013 a problem FinCEN\u2019s proposal would solve by requiring alleged mixing transactions to be directly reported to the federal government, disregarding the people\u2019s right to protection from arbitrary search and seizures in favor of anti-terrorism legislation. <\/p>\n

\u201cYou can\u2019t trace funds through a service, because the way that services store and manage funds deposited by users inherently makes further tracing inaccurate,\u201d writes<\/a> Chainalysis. \u201cTransactions coming into services can\u2019t be connected to transactions leaving services\u201d. By attributing transactions to known entities, blockchain surveillance aims to make funds traceable on-chain \u2013 But blockchain surveillance software can\u2019t attribute what it doesn\u2019t know. \u201cOnly the exchange itself knows which deposits and withdrawals are associated with specific customers, and that information is kept in the exchange\u2019s order books, which aren\u2019t visible on blockchains or in analysis tools like Reactor.\u201d Without the regulation of privacy tools under the PATRIOT Act and the consequential reporting of user data, a large part of its business would continue to be rooted in suspicion. <\/p>\n

The systematic inaccuracy of blockchain surveillance software is, too, reflected in the US government\u2019s own procurement records, showing that departments such as the US Treasury contract not one, but at least two different blockchain surveillance firms for law enforcement purposes, namely Chainalysis Inc. and Elliptic Enterprises Limited. This is because, as illustrated<\/a> in the case US vs. Sterlingov, different blockchain surveillance providers historically yield different results. <\/p>\n

The unreliability of blockchain surveillance software becomes even clearer when investigating the reasoning brought forward to support FinCEN\u2019s proposal, namely that terrorists, such as Gaza\u2019s Hamas, allegedly turn to cryptocurrency for fundraising \u2013 a claim that\u2019s been excellently debunked<\/a> by former US Chamber speechwriter and director of public policy at Riot Platforms Sam Lyman, highlighting that Hamas\u2019 previous crypto fundraisers were, in fact, an absolute disaster, leading to the covert funneling of funds toward the US Government. <\/p>\n

But facts don\u2019t stop former IRS investigator and current Elliptic strategic engagement lead Matthew Price from claiming<\/a> that \u201cusing crypto is \u2018much easier than smuggling cash over Egypt\u2019s border\u2019\u201d. Chainalysis disagrees, in a statement<\/a> issued to clarify the widespread misinformation that Hamas allegedly received millions in cryptocurrency leading up to the October 7th attacks: \u201cGiven blockchain technology\u2019s inherent transparency and the often public nature of terrorism financing campaigns, cryptocurrency is not an effective solution to finance terrorism at scale\u201d. <\/p>\n

We now have three different blockchain surveillance providers all claiming three different things. In the original article<\/a>, Tel-Aviv based BitOK claims for Hamas to have received over 41 Million USD, while Elliptic claims for the Palestinian Islamic Jihad to have received over 93 Million USD in crypto between 2021 and June this year \u2013 numbers which, Chainalysis claims, are \u201coverstated\u201d. Apparently, analysts falsely identified an exchange wallet as a personal wallet. <\/p>\n

Since the majority of heuristics and clusters applied lack a scientific basis, there\u2019s no way to know for certain whose numbers are correct. Instead, enforcement agencies must decide whose information to trust \u2013 picking and choosing whose \u201cscience\u201d fits its story best. Here, proximity to the intelligence apparatus comes in handy. In the past three years, Chainalysis has received<\/a> at least 3.3 Million USD from InQTel, the venture capital arm of the CIA, while its competitor Elliptic was founded out of a GCHQ accelerator<\/a>. <\/p>\n

The only problem: according to Chainalysis\u2019 own data<\/a>, less than 1\/3rd of funds received by mixers in 2022 were identified as illicit. The majority of funds remain perfectly lawful, while terrorist financing makes up less than a fraction of overall illicit funds identified: \u201c[T]errorism financing is a very small portion of the already very small portion<\/a> of cryptocurrency transaction volume that is illicit,\u201d says Chainalysis. <\/p>\n

Regulating privacy technologies under the PATRIOT Act therefore cannot be justified, as its only purpose is the enabling of total surveillance of otherwise law-abiding citizens via intelligence services while furthering the overreach of blockchain surveillance firms, collectively punishing the people for the actions of a few. <\/p>\n

Unfortunately for FinCEN, even with total oversight of all alleged mixing transactions, no proposal can change that a science that is not based on fact is fantasy. <\/p>\n

This is a guest post by <\/em>L0la L33tz. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

FinCEN has proposed to regulate Bitcoin privacy tech under the PATRIOT Act. But the data used to support FinCEN\u2018s proposal is partial at best, highlighting the gravity of blockchain surveillance software shortcomings. <\/p>\n","protected":false},"author":2528,"featured_media":3268,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[35],"tags":[856,730,59,747],"class_list":["post-3267","post","type-post","status-publish","format-standard","has-post-thumbnail","category-technical","tag-chainanalysis","tag-fincen","tag-opinion","tag-patriot-act"],"author_data":{"id":2528,"name":"L0La L33Tz","nicename":"l0la-l33tz","avatar_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2025\/03\/cropped-1p9qrztI_400x400-1-96x96.jpg"},"featured_image_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/bitcoin-magazine-fincen.png","_links":{"self":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/3267","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/users\/2528"}],"replies":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/comments?post=3267"}],"version-history":[{"count":0,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/3267\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media\/3268"}],"wp:attachment":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media?parent=3267"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/categories?post=3267"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/tags?post=3267"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}