Ian Hutchinson

This will be the sixth time I have rewritten my bio, and I have become exceedingly inefficient at it.

Bitcoin is not as auditable and transparent as some claim.

Posted:

2 minute read

It’s claimed that bitcoin is better than trad finance because it’s so auditable and also so transparent, and that this level of transparency and auditability leads or will lead to less fraud than exists in Tradfi.

If you agree with that then my challenge to you is to answer (or, posit how one might be able to answer) the following questions based solely on on-chain data:

  1. How many bitcoin wallets do I have? (I, who is me, who is the author of this article)

  2. How many bitcoins do I have? This includes coins stored in custody at eg. exchanges.

    Here is a bitcoin transaction.

  3. Who owns the originator wallet? Who owns the recipient wallet?

  4. Can we know for sure that they are different people?

  5. Can we know for sure what relationship the owner of each wallet has to the other?

  6. Can we identify the purpose or putative purpose of this transaction?

    Here is a ‘dormant’ bitcoin address. At the time of writing, it holds a hair under 80k bitcoins. This address has only received bitcoins, and never sent them.

  7. If the owner claims to have forgotten or lost their private key, do you suppose they have lost these bitcoins for all relevant legal purposes? (eg. taxation, estate planning, divorce proceedings)1

  8. How would you know that the owner is or is not lying about having lost the key?

  9. If multiple separate people simultaneously and independently claimed to be the true owner of these bitcoins and to have lost the private keys, and if this was important for eg. tax purposes (regardless of whether the bitcoins are recoverable), what information would the blockchain provide to resolve this dispute?

    Here is a bitcoin address associated with ransomware.

  10. It is illegal to pay ransomware operators in some jurisdictions. Can you determine if any payments to this address were made in respect of organisations in such jurisdictions?

    Here is an old wallet address associated with Binance. I have chosen Binance because it is a well-known exchange and I do not claim that they have done anything untoward with this wallet, it’s purely for example.

  11. Can you provide an exhaustive list of their other wallets, and of their total BTC in custody?

  12. Are there seperate wallets for operational funds and customer deposits, and can you identify which is which?

  13. Can you precisely seperate operational transfers from customer deposits/withdrawals?
  14. Of the withdrawals, can you conclusively prove that none of them were made to wallets under the control of Binance staff or insiders?
  15. Can you prove that the total of all bitcoins Binance have in custody are at least equal to the total value of customer wallets?
  16. Some of the questions I have posed may be answerable with off-chain data. Would similar questions as these not be answerable -or less readily answerable - by the competent authorities within the traditional system?

If bitcoin is as transparent and auditable as bitcoiners claim, these questions should be easy to answer. If this system is at least more transparent and auditable than Tradfi, then they should at least be easier to answer than similar questions asked in Tradfi land.

Obtaining transaction data is not the challenge in conducting an audit in traditional finance. Transaction data may not be public information, but it is not hidden from auditors. That bitcoin transaction data is public does not solve the problems that exist in traditional auditing.

  1. This one’s a freebie! Try to imagine how it might shake out under different legislative environments. ↩