Bitcoin was never really anonymous, and it seems the Danish police have caught on to that fact. According to reports by Danish newspaper Berlingske, law enforcement in the Scandinavian country has figured out how to apply blockchain analysis to hunt down and prosecute darknet market vendors.

"The perspective is groundbreaking," Kim Aarenstrup, head of the National Cyber Crime Centre (NC3) of the Danish National Police, told Berlingske. "Where the investigation previously hit a dead end, we can now proceed."

Blockchain Analysis

Bitcoin has been presented as an anonymous digital currency for a long time. But this is not really accurate. While payments are not made to real-world identities, they are made to Bitcoin addresses that are publicly available on the blockchain. If such an address can be tied to a real-world identity, all anonymity is lost. That's why some refer to Bitcoin as "pseudonymous" rather than anonymous.

By applying blockchain analysis and combining this with Know Your Customer (KYC) and Anti-Money Laundering (AML) policies by bitcoin exchanges, Danish police are able to track down darknet market users.

"We are pretty much unique in the world at this point because no one else has managed to use these tracks as evidence," Aarenstrup told Berlingske. "Everyone is looking toward Denmark in this field, and we are in close dialogue with a number of other countries right now so we can further develop methods and teach them how we do it here."

More specifically, it seems the Danish police are using blockchain analysis to close a sort of legal loophole utilized by users of darknet markets like AlphaBay and Silk Road . Contraband - often illegal drugs - are typically shipped to the home addresses of darknet customers. But if the package is intercepted by the police, the buyer can simply deny having ordered anything.

Now, NC3 claims to have developed special software that applies blockchain analysis to prove that the delivery address matches a specific Bitcoin transaction. This has led to two convictions over the past few months.

Cybercrime

In part due to its perceived anonymity, Bitcoin has grown to be a wildly popular payment method for cybercriminals. In a report published last year, Europol - the law enforcement agency of the European Union - said more than 40 percent of online transactions for illegal ends are made with bitcoin.

Speaking to Berlingske, Aarenstrup acknowledged that the ease of use of bitcoin is a growing concern:

"Bitcoin - and virtual currency in general - is widely used in the trafficking of weapons and drugs, and in ransomware and extortion cases. It is used a lot by criminals."

Unsurprisingly, Bitcoin is increasingly becoming a central point of focus for cybercrime units worldwide. Only last month, a joint initiative of Europol, Interpol (the intergovernmental organization facilitating international police cooperation) and the Basel Institute on Governance (an independent not-for-profit competence center specializing in financial crime) indicated that they would up the efforts to counter bitcoin money laundering.

And Danish authorities have been paying attention to the digital currency for some time now as well. A 2015 strategic analysis report by the Danish National Police mentioned bitcoin as a key focal point to counter cybercrime.

The success of the new Danish tracking method appears to have already been embraced by international organizations: both the FBI and Europol are already using the system, according to Berlingske.

"I would just say to those out there in the criminal community that they need to be careful because we can follow them. They should not think they can hide from the police anymore," Aarenstrup concluded.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.