Crypto in the Dark

Crypto in the Dark

The interplay between the Dark Web and cryptocurrencies   

Text by Leo Taalas

In the beginning of April, German authorities, in coordination with US law enforcement, shut down Hydra: one of the largest Russian language Dark Web marketplaces. Not only was the marketplace shut down and an alleged operator arrested but the authorities were able to recover cryptocurrency wallets containing about 25 million US Dollars. It is estimated that Hydra was responsible for up to 80% of all Dark Web related cryptocurrency transactions. This sting operation was a major step in combatting illegal activities on the Dark Web. It also showed the importance of cryptocurrencies in enabling the Dark Web.

This paper dissects the shifting role of the Dark Web in the current global, technological, and political climate. From this perspective it looks into the impacts this may have on the growth of cryptocurrencies considering their synergies. From the analysis the paper will draw conclusions regarding the future outlooks of the Dark Web and by extension cryptocurrencies. Finally, it considers the steps that governments may have to take in order to combat the rampant growth of illicit activity on the Dark Web facilitated through cryptocurrencies.

Since the creation of the internet in the late 1980’s a majority of the internet users have relied on indexed content easily accessible through standard web search-engines, often called the Surface Web. Notwithstanding, a large part of the data on the internet is not indexed by web search-engines. Non-indexed information is considered a part of the so called ‘Deep Web’ – accessible only though specific search engines or relying on different indexing methods that are not accounted for on standard browsers.  Much of the content on this Deep Web is legitimate and is not indexed on standard browsers for technical, monetary, or privacy reasons.  

The Dark Web is a subsection of the Deep Web that has been intentionally concealed to facilitate criminal activity and provide safe spaces free from government control and censorship. This part of the Deep Web is home to extremist forums, whistleblower sites, and marketplaces for illegal goods where almost anything is available for sale. Although difficult to ascertain, it has been estimated that only 4% of information of the internet is located on the Surface Web, while the other 96% remains unindexed.

In order to access the Deep Web, and by extension the Dark Web, the most common tools are anonymized nodes on various networks such as TOR or I2P. For example, TOR, originally created by the U.S. Naval Research Laboratory, was aimed at creating anonymous online communications for governmental uses. In essence, all connections to the network are made though different layers concealing the users’ identity by routing through international nodes and assigning it the IP address of the final relay or layer. This level of protection is undertaken to ensure the total anonymity and security. In order to access the Dark Web it is necessary to utilize different software, configurations or authorizations. Access methods are found mostly on forums such as Reddit and 4Chan where Dark Web users gather on the Surface Web.

Cryptocurrency works in practice through users’ wallets where they store their valuable tokens. These wallets have two keys: private and public. The former is used by the user to access and use their wallet, while the latter is similar to an address for directing payments. When transactions are made, encryption is done using the private key of the sender and when it is sent it can be decrypted using the public key visible to the receiver, thus finalizing the transfer of tokens from one wallet to another. Most importantly however, once a transaction is completed, it is recorded onto a distributed ledger called the blockchain. How the transaction is verified onto the ledger depends on which cryptocurrency and by extension which blockchain is being used. The relevant distributed ledger records only the transactions that are being made in terms of the wallets and sums. There is no reference to personal information, and thus, it creates a ‘pseudonymous’ way of conducting transactions. Anyone who has access to private and public keys are able to make transactions.

It is due to its privacy that crypto has become the currency of choice on the Dark Web. Users can maketransactions without revealing their identity, instead relying on their wallet address. This follows the nature of the Dark Web which seeks to limit the amount of personal information available.

Moreover, the transactions are incredibly simple to make with little to no regulation. Transactions between wallets are not as closely monitored yet, and it is likely that a transaction that would be flagged by a bank would not raise concerns when using cryptocurrencies. The pseudonymity and substantial freedom mean that crypto is suitable for transactions for illicit goods and services on the Dark Web.

Upon its creation, the Dark Web was poised to be a place free from political restrictions and allowing people to express opinions and avoid persecution. However, the role of the Dark Web has recently shifted towards a marketplace of illicit goods and services. The emergence of cryptocurrencies has had a multiplier impact on the size of the Dark Web marketplace; in effect making it into a virtual bazaar. More users are driven to use the Dark web for illicit matters due to transaction simplicity. Conversely, the growing use of Dark Web for illegal trade is leading cryptocurrencies to gain popularity. Due to increased digitalization and the growth of the surface web, it is safe to assume that the Deep Web will continue to grow. In addition, more users are likely to overcome the technical barriers limiting access to the Dark Web due to rising technological literacy.

Despite the movement of the Dark Web towards a marketplace, there is also a growing number of users accessing the Dark Web due to a deterioration in the political climate. Countries such as Russia have begun creating their own segments of the internet – RUNET – and restricting access to websites that do not match the political agenda of the nation.

As a result of this so called ‘splinternet’ many users have learnt how to use the Deep and Dark Web to circumvent geolocational restrictions. For example, the BBC is currently instructing Russian readers to install TOR browser. Growth in this direction does not directly get impacted or impact cryptocurrencies, however, once on the Dark Web users are more likely to utilize cryptocurrencies if they ever do participate in illegal activities.

The Dark Web and cryptocurrencies have numerous synergies, mostly due to the intrinsic values that they were created on. When a transaction is made using cryptocurrencies there is an inherent level of intrackability. The transaction that is stored on the blockchain does not reveal any real details of the users who are making the transaction and ensures them anonymity with only their wallet address being known. This ensures safety for both the seller and purchaser of illicit goods as they wish to remain undetected. Moreover, these transactions are not labelled, and thus, do not indicate the nature of the contents being traded. This covert nature of transactions is a large part of marketplaces on the Dark Web.

The ledger still records the transactions and users may be forced to use a crypto ‘tumbler’ or ‘chain hopping’ to hide the origin of the funds by moving the funds from one cryptocurrency wallet to another and taking out unrelated tokens – in essence laundering the money. These practices were some of the most highly requested on Hydra before being shut down. Cryptocurrencies facilitate potentially illegal or sanctions busting cross border transactions as they ensure that all users are working with the same tender. By working with cryptocurrencies rather than a certain currency means that users are not required to exchange their money before use. Once a certain amount of money is translated into cryptocurrency it is immediately usable for the holder. This could be particularly relevant in cases such as Russia, which has been shut off from the Mastercard and Visa payment systems as a part of the sanctions laid after their invasion of Ukraine, allowing its citizens to circumvent sanctions.

Utilizing cryptocurrencies on the Dark Web also has significant drawbacks. Once a transaction has been made and recorded on the blockchain it is irrevocable. All transactions are final, and refunds are impossible without completing a new transaction. This is a benefit for those looking to swindle Dark Web users and receive payment without providing them with services or goods. This combined with the lack of a competent authority to report to means that scams are frequent on the Dark Web, dissuading users from purchasing goods and services.

Another drawback of using cryptocurrency is its large fluctuations. The value of cryptocurrencies, due to their role as investments, means that it is much more prone to fluctuations than traditional currencies that mainly work as tender. This is also due to a lack of a central authority and unfettered market movements. Nonetheless, it is likely that with more widespread adoption as a tender, the value of cryptocurrencies will be more stable. Notwithstanding, currently users must take into account the changes in value of their cryptocurrency.

It is most likely that use of cryptocurrencies will become increasingly widespread, and their popularity will continue to rise, creating a multiplier effect. In addition to acting as a marketplace, allowing people to overcome the difficulties posed by the current global political climate means that the Dark Web is an integral tool for overcoming restrictions. With a larger number of users, it is probable that cryptocurrency technology will continue to progress. Facilitating the storage of private keys and decreasing gas fees are the main challenges that blockchain developers are likely to focus on. As a result of these developments, we will see cryptocurrency be increasingly integrated into daily lives. This increased integration and use would contribute towards solving issues concerning the fluctuation of prices by increasing credibility and use as tender. Integration is not only driven by development of Dark Web but rather breakthrough of cryptocurrency into mainstream finance. The role of cryptocurrencies on the Dark Web depends heavily in which directions the technology will be developed. If progress is made to prevent crypto ‘tumbling’, there may be a marked decline in the use of cryptocurrency on the Dark Web.

Due to progress in crypto we are likely to see the Dark Web grow as a marketplace, rather than as a space of avoiding persecution. As cryptocurrencies and the Dark Web are closely intertwined, we will also see an increase in the Dark Web transactions because of more widespread cryptocurrency adoption. This multiplier effect will come in addition to the changes in the current political climate which is substantially drawing people to utilize the Dark Web for reasons of censorship. Nonetheless, the rate of growth of crypto transactions on Dark Web seems to be smaller than that of general cryptocurrency transactions. As such, it is possible that depending on future outlooks regarding cryptocurrencies the Dark Web will be forced to react. A movement towards less anonymous transactions or more regulation could have a devastating impact for the Dark Web bazaar and could result in marketplaces requiring a new form of currency.

With a large number of threats already present on the Dark Web marketplace, the combined effect of their growth poses a very real threat for governments worldwide. If the growth of cryptocurrency is allowed to intertwine to the Dark Web, it is possible that the legitimate benefits of both will be negated due to a massive rise in illicit behavior. As such, it is important that both are regulated respectively in order to build upon their intrinsic values. In the case of cryptocurrency this could come as required declarations for transactions. This has been seen by crypto exchanges requiring proof of identity before allowing transactions. This would however imply the forgoing of pseudonymity, a quality that goes against the values of cryptocurrencies.

On the other hand, in terms of the Dark Web, monitoring is the best solution when looking to curb threats. It was through monitoring that the FBI was able to shut down the Silk Road in 2013. However, these threats are not on a national scale and would require international cooperation to combat threats efficiently as we have seen from the Hydra case. This could prove to be an area of tension due to the increased divisions in the current political climate. An alternative could be blocs of countries working collaboratively in respect to their pollical agendas.

Overall, it is crucial that the importance of both the Dark Web and cryptocurrencies are recognized, and their growth is directed properly. A careful balance between regulation and ensuring economic and political autonomy is pivotal to guaranteeing the healthy development of the Dark Web and cryptocurrencies.

The closure of Hydra was a large victory for authorities globally, but without measures taken to prevent the improper growth of cryptocurrency the marketplace of the Dark Web it is likely that we will see Hydra grow a new head.

 

Leo Taalas, Junior analyst at Cyberwatch Finland

Leo is currently studying at Università Commerciale Luigi Bocconi, in Milan and is due to graduate in 2023. He is completing an Economics, Management and Computer Science BSc. In addition to Milan, he has lived in Vienna, New York, and Rome where he completed the IB diploma. Leo is passionate about technology and design.

This article was first published by the Bocconi BSBCA (Bocconi Blockchain Cryptocurrencies Association).

Sources

https://www.unodc.org/documents/southeastasiaandpacific//Publications/2021/Darknet_Cybercrime_Threats_to_Southeast_Asia_report.pdf

https://metrics.torproject.org

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