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What if somebody steals a bitcoin?

Bitcoin has seen a lot of chaos in the last few months, including being banned in several countries, the fall of the Silk Road, and biggest of all, the collapse of Mt. Gox, which was for much of Bitcoin’s early history, the largest (and only major) exchange between regular currencies and bitcoins. Most early “investors” in bitcoin bought there, and if they didn’t move their coins out, they now greatly regret it.

I’ve been quite impressed by the ability of the bitcoin system to withstand these problems. Each has caused major “sell” days but it has bounced back each time. This is impressive because nothing underlies bitcoins other than the expectation that you will be able to use them into the future and that others will take them.

It is claimed (though doubted by some) that most of Mt.Gox’s bitcoins — 750,000 of them or over $400M — were stolen in some way, either through thieves exploiting a bug or some other means. If true, this is one of the largest heists in history. There are several other stories of theft out there as well. Because bitcoin transactions can’t be reversed, and there is no central organization to complain to, theft is a real issue for bitcoin. If you leave your bitcoin keys on your networked devices, and people get in, they can transfer all your coins away, and there is no recourse.

Or is there?

If you sell something and are paid in stolen money, there is bad news for you, the recipient of the money. If this is discovered, the original owner gets the money back. You are out of luck for having received stolen property. You might even be suspected of being involved, but even if you are entirely innocent, you still lose.

All bitcoin transactions are public, but the identities of the parties are obscured. If your bitcoins are stolen, you can stand up and declare they were stolen. More than that, unless the thief wiped all your backups, you can 99.9% prove that you were, at least in the past, the owner of the allegedly stolen coins. Should society accept bitcoins as money or property, you would be able to file a police report on the theft, and identify the exact coin fragments stolen, and prove they were yours, once. We would even know “where” they are today, or see every time they are spent and know who they went to, or rather, know the random number address that owns them now in the bitcoin system. You still own them, under the law, but in the system they are at some other address.

That random address is not inherently linked to this un-owner, but as the coins are spent and re-spent, they will probably find their way to a non-anonymous party, like a retailer, from whom you could claim them back. Retailers, exchanges and other legitimate parties would not want this, they don’t want to take stolen coins and lose their money. (Clever recipients generate a new address for every transaction, but others use publicly known addresses.)

Tainted coin database?

It’s possible, not even that difficult, to create a database of “tainted” coins. If such a database existed, people accepting coins could check if the source transaction coins are in that database. If there, they might reject the coins or even report the sender. I say “reject” because you normally don’t know what coins you are getting until the transaction is published, and if the other party publishes it, the coins are now yours. You can refuse to do your end of the transaction (ie. not hand over the purchased goods) or even publish a transaction “refunding” the coins back to the sender. It’s also possible to imagine that the miners could refuse to enter a transaction involving tainted coins into the blockchain. (For one thing, if the coins are stolen, they won’t get their transaction fees.) However, as long as some miner comes along willing to enter it, it will be recorded, though other miners could refuse to accept that block as legit.  read more »