Investigate This

Tracking crypto fraud with unspent transaction outputs

The author uses real-life examples from his fraud investigations to dispel a major myth about bitcoin’s anonymity, showing just how traceable the digital currency is. Unspent transaction outputs are one mechanism to track payments on the blockchain and ultimately discover who’s behind any illicit activity.

When the enigmatic inventor of bitcoin, Satoshi Nakamoto, published the white paper, “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008, it introduced the world to the now-famous digital currency. Nakamoto described bitcoin as a peer-to-peer version of electronic cash that would circumvent financial institutions through a decentralized system, allowing people to wrest control from financial elites. Privacy was central to Nakamoto’s vision, and transactions appeared anonymous because they involved addresses that concealed users’ real identities. Two anonymous parties could establish trust through a “cryptographic proof,” known as proof-of-work, that verified the validity of their transactions. And while bitcoin’s cryptographic proof might’ve helped fuel the idea in the public that users’ identities were cloaked in secrecy and difficult to trace, thus providing security to those looking to hide illicit activity, the reality is that bitcoin isn’t anonymous. Rather, it’s pseudonymous, much like authors use pseudonyms to hide their identities. (See “Bitcoin: A Peer-to-Peer Electronic Cash System,” by Satoshi Nakamoto,, 2008; “Who is the mysterious Bitcoin creator Satoshi Nakamoto?” by Cointeligraph; “Cryptocurrency’s Myth of Anonymity,” Wired Gadget Lab podcast, Feb. 9, 2023; and “How ‘Trustless’ Is Bitcoin, Really?” by Siobhan Roberts, The New York Times, June 22, 2022.)

That pseudonymous nature might provide a certain level of privacy to its users, but it doesn’t mean that fraud examiners can’t trace the movement of bitcoin and discover its users’ identities. Indeed, some of bitcoin’s most important features and functions provide a wealth of data that investigators can use to track bitcoin transactions and crack fraud cases in which cryptocurrency is involved. Here, I’ll demonstrate how one such mechanism of bitcoin, its unspent transaction output (UTXO) system, makes it highly traceable and how it can facilitate fraud investigations. 

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