Topic: How can tainted coins becomes hard to be recognized by centralized services (Read 730 times)

Yes, exactly, that is why bandits, kidnappers and many other criminals prefer Fiat in cash, it is not traceable and tainted-resistant because it can not be tainted. Like the recent hack, all the addresses have been known, will be tracked and monitored, what Fiat in cash can not give. We can even see thieves robbing banks successfully without being able to trace the money stolen. 

It's something we've seen many times in history, and who knows a little better about the history of drug cartels in Colombia and Mexico some 35 years ago, knows that drug cartels bought entire governments, including presidents - all with the help of the US dollar and one very dirty agencies from the US.

Also, today it is not strange for them to seize cryptocurrencies that they declare dirty, and then wash them through the auction process and return them to the system which will sooner or later taint those coins again. How long will it take until some genius comes up with the idea that all BTC must be cleaned, and then it will return to the system according to some new rules - your coins, our private keys...

Nothing happens because tracking cash is much more difficult than following the blockchain trail. But if Alice used PayPal, bank, WU, a CC, or some other trackable processor, the authorities could question the connected people about their relationship to Alice the drug lord.

Bitcoin is being treated differently because the state doesn't like what it doesn't see or have a way to control, and they are the ones in power, not us. That's why there is a problem with Bitcoin "taint", but there is no problem circulating physical cash that was previously involved in the drug trade, human trafficking, illegal prostitution etc. Corrupt officials also don't seem to have a problem taking a cut from "tainted" USDs.      

I was thinking more along the lines of having an exchange suspending your account or holding your funds. Not so much sanctions or criminal proceedings. Kind of like no matter how many times a stolen item changes hands, the last person holding it is the one that has to give it back to the owner. Sorry if I did not make that clear, stupid busy at work and at times it can take an hour to post 5 lines of text.

As for the switching to another exchange, here in the US they all do it to some degree if they allow conversion to fiat. BitPay, although it has other issues seems to do it the least, or at least has no complaints about them doing that. Coinbase / Gemini / Kraken seem to all have about the same number of people complaining about it.

-Dave

None. So long as you're not involved in any illicit activities, you should not be subjected to any sanctions or criminal proceedings. You are not aware of the activities and more importantly, you aren't the person involved in it. It is pure BS to be treating those Bitcoins to be tainted, because as usual, taint is a terrible concept to deny legitimate users from using Bitcoin. If anything it is more of a ploy by regulatory bodies to discourage people from using Bitcoin.

If you are using any exchanges that discriminates (so to speak) tainted coins, then I suggest you to switch to another. There can be a myriad of reasons for them to hold your coins hostage or to freeze your account, "tainted" TX is just one of them.

Here is something else to ponder. What happens when the "lord of drug" Alice sends her tainted USD to Bob then Bob to Chris, etc. And here is a better question to ask, why is bitcoin being treated differently here?

I do not think Ed should have any issue with the exchange, although it depends. It should not have any issue because the amount of Bitcoin all the way from Alice later to him can not most likely be the same.

For example if Alice receive 1 btc, it will be very unlikely 'that the 1 btc will be sent to Bob while Bob sent the same 1 btc also to Dave while Dave sent the same 1 btc to Ed'. The chances that something like this will happen is slim. Likely the btc from Alice would have been different when it reached Ed which will make the exchanges not to see it as illegal, or many of their customer's account would have been frozen or blocked.

Starting with, just in case you missed all my posting about tainted coins being BS, I think it's all BS.
BUT: I just as an interesting side thought. What would be the repercussions if you did wind up with 'tainted' coins but they were tainted after the fact so to speak.

Alice sends coins to Bob, Bob sends coins to Chris, Chris sends coins to Dave, Dave sends coins to Ed.

Everyone is good, however it comes out long after Ed has the coins that Alice was actually running a drug ring out of her living room.
Ed has had these coins for months, but that info only came out last week.
Now 4 transactions and months later Ed sends those coins to Coinbase and gets the whammy.

Since when Ed got them even if he knew the entire trail at that time he and everyone else thought Alice was legit.

In the end, there would probably be lawyers involved and such, and much money spend on them, but it is something to ponder.

-Dave

This reminded me of when I started to use Bitcoin, I was paying 120000 satoshi for each transactions at the time if I want to convert Bitcoin to Fiat for spendings, I did that like four or five times before I knew about Litecoin which its fee is so low. I had no option because the transaction fee on exchanges are very high and I even did not know the difference between wallet and exchanges at the time. But, now, it is not hard at all to make use of low fee for Bitcoin transaction. I can easily now Ricochet on my own with several Bitcoin addresses using several low fees in a way the coin will not be seen tainted.

There are also withdrawals from centralized exchanges and gambling platforms which always overpay and target quick confirmations. People tend to overpay the mining fees if they are using crypto to purchase goods or services and they have to pay a fixed coin amount within 10-15 minutes, otherwise the total sums will change.

I actually started a thread about people paying high fees when not needed. https://bitcointalksearch.org/topic/who-is-paying-very-very-large-fees-when-not-needed-and-why-5346270

Many of them were from exchanges that pay a flat amount per withdraw.
Others looked like they were just poorly programmed fee estimators.

The other side of it is that if the exchange addresses are known, the people looking for "taint" should know what they are.
But, since most of those services are probably going to be crap, the info they give will be crap too.

-Dave

For every real tainted transaction paying a higher fee there are hundreds of "clean" transactions paying the same high fees. I can think of many cases where the transaction ends up having an unreasonably high fee, the most common one is probably day traders wanting to get their coins to exchanges as fast as possible and try to be ahead of any possible fee spike. Another common one is those using a broken fee estimation mechanism or a third party fee estimator that is malicious and is suggesting them absurdly higher fees.

I don't agree with that hypothesis at all. Rapidly moving the stolen coins does nothing to obscure the transaction trail. The only transaction which may need to have a high fee (depending on how the coins are being stolen), is the very first one which moves the coins from the owner to the thief's wallet, but even then, a low fee with RBF disabled will almost always result in the same outcome. For every transaction after that, including any designed to "obscure the transaction trail", it is completely irrelevant what fee is paid. It doesn't matter if I move the stolen coins in the next block or I move them next week - the exact same publicly viewable trail exists on the blockchain for all to see.

They go on to make a number of other flawed assumptions in the following paragraphs:

I could spend a coin tomorrow with an enormous transaction trail, or I could spend a coin in a year with zero transaction trail. Time to spend a coin does not equate to number of transactions.

Again, this is not accurate. If I steal some coins from you and send them to a brand new wallet, they could sit there for 10 years and you might never be able to trace them to me. Conversely, if I steal some coins from you and try to send them to an exchange tomorrow, then the exchange could link those coins to my identity. Time to spend a coin does not equate to chance of being detected.

Well, that depends on who you ask. Every blockchain analysis company or software and every exchange or other centralized services will have their own methods for determining what is "clean" and what isn't. The only way you can be absolutely sure that a coin is untainted is if it came directly from block reward of an empty block. That way you know it is brand new, never been used before, and doesn't include any fees which could have come from tainted coins. If the block reward does include fees, then chances are at least one of those transactions was tainted and so theoretically the entire block reward would be tainted too, although no one considers this the case. Some places will consider any coin which has come from a major centralized exchange to be clean, and some will only look back a set number of transactions so any coin which hasn't been tainted in the last 5/10/20/whatever transactions would be clean.

This is part of the problem. It is a completely arbitrary classification, so much so as to be nearly meaningless, and yet it seems to becoming ingrained.

I am curius what are examples of coins that are untainted?

Because there is no record of the transaction or any previous transactions. Even if someone uses the serial number(s) to try and track the movements of a bill or bills, only in cases of bank robberies or similar are the serial numbers of the stolen bills known. Even if a bank registers that it gives me specific bill, and then registers a week later that you deposit that same bill, it has no way of knowing if we traded directly with each other of if there were 100 intermediaries. This is not the case for bitcoin.

Aside from the scam risk, I have no issues accepting bitcoin from anywhere or anyone, since all bitcoin I receive is either mixed or coinjoined, and I do not use* any services or merchants which have ever suggested having a problem receiving mixed/coinjoined bitcoin.

Logically, everything should be clean as soon as it makes any single transaction, since you have no way of knowing if the funds have changed hands at that point and it is unethical to potentially punish an innocent party for something that the coins they bought honestly were involved in before they bought them.

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*I appreciate this may not always be the case, though, and is my biggest concern regarding the fungibility of bitcoin. As soon as merchants start refusing my coins and demanding that I use "clean" bitcoin, then I will stop using bitcoin.

Just like almost all paper money has traces of cocaine (and poop). But it's just not much of a problem that banknotes are literally tainted, and hasn't stopped people from accepting them.
And even though I think this isn't much of a problem for Bitcoin, I wouldn't want to get someone's "unwanted" Bitcoin, even if they pay a 10% premium. Apart from the risk of getting scammed, it might cause legal problems later on. Why else would someone pay 10% more?

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Hypothetical: say all Bitcoins in existence are coinjoined in one large transaction at the same time. Does that mean all Bitcoins get tainted? Or does it "reset" all taint since there is no difference anymore?

I'm really not so sure. It's still not entirely clear why they stopped their transaction filtering, since what they are doing is not at all prevented by Taproot, but they successfully managed to do it for several weeks. Perhaps this was them simply testing the waters. With governments around the world scrambling to control bitcoin in any way they can, I think we will see more of this kind of behavior, not less.

They do the same with coinjoins. Tainted inputs + clean inputs = all tainted outputs. Why not do the same with blocks? Tainted fees + clean block reward = tainted output.

The whole "taint" thing doesn't make any sense at the moment, but that doesn't stop them. Centralized exchanges only care about their profits, and that means they must toe the line the government sets for them, regardless of whether or not it makes any sense.

I completely agree, which is why I think we need to address this with privacy improvements before it becomes too late.

Good point. But again, OPAC blocks by Marathon was an experiment that backfired catastrophically so I don't expect people to start openly following that route.

If we were to define coins that way, then we're going to label even the new coins as being tainted (albeit to different extent). Block rewards are considered as a single unit as the fees. It would just be ridiculous to assume that the miners were intentionally laundering the Bitcoins as well. If exchanges were to also label taint on newly mined coins, then it wouldn't make sense at all. If we get to a point where a majority proportion of the coins are "tainted", then Bitcoin is just not fungible anymore or everyone would just give up on the concept.

For the time being. Nothing stopping them from saying the mining fees from any block which is not "OFAC compliant" (or whatever other nonsense pools like Marathon were using before they capitulated) is tainted. We definitely have not seen the last of these kind of "clean" blocks being mined, and the consequences that come with them.

Again, for the time being. There is zero chance that big blockchain analysis companies are not already working on de-anonymizing Lightning transactions. And exchanges can either simply refuse to implement Lightning, or only allow Lightning deposits if you also provide an associated proof of funds documents or some other horrendous invasion of your privacy.