3

Do chain analysis techniques consider the fee portion of block rewards as tainted funds?

e.g. if known stolen funds are moved in a certain block, the fees the sender pays end up "polluting" the block reward. I want to know how much weight this taint actually gets when it comes to chain analysis. Would the largest exchanges accept these coins as deposits?

If so, then a thief could launder the funds by colluding with a miner. e.g. do a self transfer that pays 10% in fees; don't broadcast the tx, just pass it to the colluding miner who mines it and later returns a portion of the fees to the thief out of the block reward.

If not, then a thief could taint every block's reward by simply self transferring a minimal amount with sufficient fees for next block. Then none of the blocks rewards can be deposited in any heavily regulated exchange. I guess miners could censor those txs if the thief's UTXOs are well known, but it's still an attack vector I guess.

3 Answers 3

0

I cannot look into the chainalysis code but if someone cooperates with a miner by paying unusual fees with tainted coins then the high fees are suspicious and I'm pretty sure analytics will monitor this. Usually it's not a question whether or not the funds on a bitcoin address are from a criminal source, it's a question of what % is polluted. If you go inbound in the transaction trees of an address back to the miner rewards then you might have 1000 addresses and a little percentage will be polluted. So e.g 1.5% of the starting addresses funds are from a criminal source. It's the same with the bills in your wallet or with your ancestors. Going 10 generations back we have upto 1024 great...grandparents and if 10 of them were criminal then we could say that 1% of our ancestors were criminal.

So the criteria aren't the same at all exchanges but I assume that only addresses with a relatively high percentage of pulluted 'ancestors' will be rejected otherwise the exchange would have to stop it's business.

2
  • So any block reward that includes a major "generous" fee would be considered taint? That's an attack vector.
    – pox
    May 3, 2021 at 16:44
  • I do bitcoin tracing and would consider an unusual high fee as a likely taint. Of course it could be as well a mistake by the sender or by a buggy wallet. Like all attacks the outcime isn't 100% safe.
    – tempo
    May 3, 2021 at 22:41
0

It was proposed by some regulators, but the whole idea isn't applicable to bitcoin (highly decentralized).

First of all, there are multiple mining pools and whoever tries to launder bitcoins in this way would have to collude with all of them. Second, pool is just a collection of smaller entities mining together and rewards are being distributed based on the hashrate. There may happen to be some out-of-bound mining because it's fairly hard to look for events like that, but if some percentage of the fees wouldn't be distributed properly, members of the pool would know about it.

Also it's impossible to "mine block first, add transaction later", this kind of attack would require mining pools to adopt custom bitcoin node software, which is not rebroadcasting said transaction further.

Overall it's way easier to set-up darknet market shop and sell "tainted" bitcoins for 10% discount, or just coinjoin, and most of the "high fees" incidents in past were just overlooking and misunderstanding of how bitcoin change works.

3
  • Why would the thief have to collude with all of the pools? Just one would suffice, since the tx isn't broadcast, just secretly given to it?
    – pox
    May 3, 2021 at 16:41
  • Also, nothing suggested "mine block first"... the pool defines the txs that get mined and just hands over the hash to the grinders. Nobody would know this particular tx is included. Grinders can't censor, to boot.
    – pox
    May 3, 2021 at 16:42
  • Third, coinjoins carry major taint. The question is how chain analysis treats block reward, not how to obfuscate utxo paths.
    – pox
    May 3, 2021 at 16:43
0

Can stolen or otherwise tainted coins be laundered through mining fees?

They can, and for sure they will.

Do chain analysis techniques consider the fee portion of block rewards as tainted funds?

In general, they should not, because the miner pool is, unless proven otherwise, protected by the good faith principle.

Demonstrating break of good faith requires demonstrating only the miner pool manager knew the transaction.

Once a miner pool manager bad faith is demonstrated, the first time they'll have a huge win, then regulation will be enacted, then if they do once again, government crackdown will come hard on them.

e.g. if known stolen funds are moved in a certain block, the fees the sender pays end up "polluting" the block reward. I want to know how much weight this taint actually gets when it comes to chain analysis.

None unless bad faith proven.

Would the largest exchanges accept these coins as deposits?

Yes.

If so, then a thief could launder the funds by colluding with a miner. e.g. do a self transfer that pays 10% in fees; don't broadcast the tx, just pass it to the colluding miner who mines it and later returns a portion of the fees to the thief out of the block reward.

No, the higher the fee, the most solid suspicion for bad faith. Eventually blocks chain police would build enough evidence to demonstrate bad faith.

If not, then a thief could taint every block's reward by simply self transferring a minimal amount with sufficient fees for next block. Then none of the blocks rewards can be deposited in any heavily regulated exchange. I guess miners could censor those txs if the thief's UTXOs are well known, but it's still an attack vector I guess.

No, they don't even need to censor it, if tainted fees are low, reward gets a very low taint, because most fees are legit.


What I can now unsee is a future where, long after inside countries anti mining laundry regulation has been enacted, nations hack each other's reserves and use their own mining rigs to launder coins stolen to the enemy, in blocks the enemy is forced to accept because multipolar global nation state consensus. Until a straw breaks the camel's back. I think you have discovered a casus beli for WWIII.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.