Paranoiacs in the Bitcoin community have long speculated that the US government may have cracked the virtual currency’s privacy model, that once made it popular with the online drug trade. For example, over the years various people have suggested or wondered (sometimes as a joke) if the NSA actually created Bitcoin in an effort to trap criminals.
Unbelievably, these people were on to something. Sort of. According to a cache of documents from NSA whistleblower Edward Snowden published by The Intercept on Monday, the NSA has actually been attempting to track Bitcoin users since 2013.
Bitcoin was the spy agency’s “#1 priority,” the documents show, though the agency was also targeting two other digital currencies, one of which was a Bitcoin predecessor called Liberty Reserve. According to the outlet, the NSA leveraged its ability to scoop up huge amounts of internet traffic in an attempt to identify Bitcoin transactions and users. Documents suggest that passwords and device IDs were also collected. The documents also suggest that the NSA may have used XKeyscore—a system the agency used to search the vast amounts of personal information like emails that it collected—to round out information on Bitcoin users.
The core of the surveillance effort was a system codenamed MONKEYROCKET that involved a product (possibly a piece of software, possibly a VPN) described in documents as a “non-Western Internet anonymization service” with users in Iran in China. Instead of keeping Bitcoiners’ traffic safe from spies, however, this software actually funneled data to the NSA for analysis. The other part of the system, The Intercept reported, was a tap on an unspecified foreign cable site.
The NSA’s data-guzzling approach here differs significantly from how most blockchain forensics are conducted: By looking at the blockchain, the public ledger that tracks every Bitcoin transaction. On the Bitcoin blockchain, users are represented by strings of numbers and letters called addresses. Anyone can see funds moving between addresses, and even data mine the ledger for connections between addresses. But normally, the identity of the person behind the address is difficult if not impossible to determine without external sources or investigation.
We don't know how successful the NSA’s attempt to crack Bitcoin’s privacy model was, although it seems pretty sophisticated in The Intercept’s snapshot from five years ago. Regardless, it’s long been known that Bitcoin is not the most private cryptocurrency around—its blockchain is completely transparent and viewable to anyone, after all. Coins employing obfuscation techniques or advanced cryptography, like Monero and ZCash, have more recently attempted to improve on Bitcoin’s privacy model.
The realization that the feds have been trying to track Bitcoiners for years is no doubt concerning to anybody who relies on Bitcoin’s privacy guarantees (and vindicating to the NSA conspiracy theorists), and it’s a good example of how being extremely paranoid doesn’t necessarily mean you’re completely wrong.