ITU research will make it easier to investigate crypto crime

Cryptocurrencies have great potential as an alternative to traditional bank transfers, but still struggle with a reputation as a safe haven for criminals. A new research project at the IT University aims to develop new methods that will allow authorities to investigate suspicious transactions – while at the same time guaranteeing anonymity for law-abiding users.

Computer Science DepartmentResearchBlockchaincybercrimeBernardo Machado David

Bernardo Machado David, Associate Professor in the Department of Computer Science at the IT University of Copenhagen, has received DKK 2.9 million from Independent Research Fund Denmark for a research project that may pave the way for a wider implementation of cryptocurrencies.

The aim of the project is to enable authorities to investigate suspicious crypto transactions and at the same time solve another fundamental problem: securing the anonymity of law-abiding users.

"Most cryptocurrencies in existence today do not guarantee the privacy of users. All transactions are written on a public blockchain that anybody in the world can read. So in principle, anybody can see the transactions you are conducting and what data you are storing in those systems. This is completely incompatible with the privacy regulations we have in Europe and other parts of the world,” explains Bernardo Machado David.

Certain cryptocurrencies – such as Zcash and Monero – do allow for anonymous transactions where data is not publicly available, but these present another major problem. On these platforms, it is impossible for the authorities to conduct lawful investigations of transactions, even if a judge orders the identity of users involved in a transaction to be revealed.

"Technically, these systems do not allow for the de-anonymization of activities – nobody can uncover what has happened. That is obviously a problem since there are a number of national and international financial regulations specifying that banks and financial institutions must be able to provide records on user activity in connection with criminal investigations,” says Bernardo Machado David.

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[W]e need to have cryptocurrency systems that allow for anonymous transactions, but which can also revoke this privacy guarantee in cases where the authorities need to investigate what a certain person has been doing in the system.

Bernardo Machado David, Associate Professor, ITU
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"That is why we need to have cryptocurrency systems that allow for anonymous transactions, but which can also revoke this privacy guarantee in cases where the authorities need to investigate what a certain person has been doing in the system.”

New cryptographic techniques

The researchers in the project will develop a theoretical framework and new cryptographic techniques making it possible to design systems that keep sensitive information anonymous in normal transactions, but can revoke this anonymity if an investigation requires it.

According to Bernardo Machado David, such methods are crucial if cryptocurrencies and smart contracts – which are based on the same technology – are to be implemented on a wider scale, achieving their full potential as cheaper and safer alternatives to the traditional financial sector.

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We want to change the perception of cryptocurrencies as a shady and hyped phenomenon and show that the technology can be used for real business.

Bernardo Machado David, Associate Professor, ITU
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"What we want to achieve with this project is to enable legitimate companies to adapt this technology for real products that people can use in accordance with national and international regulations. We want to change the perception of cryptocurrencies as a shady and hyped phenomenon and show that the technology can be used for real business. For that to happen, we must close the current gap in cryptographic theory,” he says.

Safeguard against power abuse

The methods the project aims to develop will have a built-in safeguard against abuse of power by the authorities, since no single person or authority will be able to access information about users and transactions, says Bernardo Machado David.

"We will build a mechanism that requires a certain number of authorities, such as the police, the tax authorities and the judicial system, to work together in order to gain insight into the activities of a particular person. For example, to see whether or not the person has received money from a known criminal organization or search for patterns indicating illegal activity. In this way, we will ensure that no single authority can subvert the system and get access to private information,” he says.

The project will run over a period of four years and begins in July.

Further information

Bernardo Machado David, Associate Professor, email beda@itu.dk

Vibeke Arildsen, Press Officer, phone 2555 0447, email viar@itu.dk