Dirty Bitcoin: How to Protect Your Holdings

This post is a collaboration between Tony⚡️ and e4pool.

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Where Does "Dirty" Bitcoin Come From?

The active promotion of this pseudoscientific concept of "dirty" bitcoins began just 3-4 years ago, coinciding with the rise of paid services offering to check your Bitcoin address for "purity." Previously, such services were used almost exclusively by businesses like exchanges and swap services.

"When you order a check, you're buying someone's opinion on a particular address... even if an AML check shows a 10% risk, it's still your risk."¹

According to proponents of these services, "dirty" bitcoins are nothing more than coins received from illegal entities. This myth is typically supported by the following highly dubious arguments:

• Up to 40% of Bitcoin transactions are linked to criminal activity.
• All bitcoins can be traced back to the moment they were created by a miner in a block.

According to a response from Elizabeth Biscaye, Director of Investigations at a Chainalysis division, to a court inquiry in the case of Roman Sterlingov, the company's on-chain tracking methods have not been audited by third-party experts, and the company has no data on error rates or false positives for its software. Essentially, we get an assessment of bitcoin "purity" from a private company that does not disclose its evaluation methods, "as it could cause irreparable harm to Chainalysis's business." In the same case, a report from Cyphertrace, another blockchain analytics firm, was presented, which stated a 60% discrepancy between the two companies' data. Clearly, any talk of an objective percentage of "dirty" versus "clean" bitcoins is out of the question.

The claim that all bitcoins can be traced due to the blockchain's transparency is also incorrect. Transaction obfuscation techniques like CoinJoin exist to break or obscure the transaction history. Furthermore, the true owners of addresses cannot be identified solely through external observation, as on-chain analysis is based on heuristics—that is, assumptions that are prone to error.

Moreover, AML analysis doesn't go very deep, typically checking only 4-5 transactions (hops) back. The reason is twofold: looking further would require significantly more computational power due to the exponential growth of transaction links, and more importantly, a much larger number of transactions would be flagged as "suspicious." Exchanges simply couldn't afford to block deposits for such a critical number of their users. Andreas Antonopoulos explains this in detail in his video on the Ricochet feature in Samourai Wallet, which adds extra "hops."

Why Check Bitcoin for "Purity"?

So-called AML services offer a solution to a problem of their own creation: paid checks on your addresses (or your counterparties' addresses) and transactions as a protective measure. They justify this necessity with the following claims:

• If you send "dirty" bitcoins to a centralized exchange or swap service, your account may be blocked and your funds frozen.
• The exchange will demand additional information, forcing you to undergo KYC and justify the origin of your funds.
• Exchanges are obligated to do this under FATF guidelines.

First, let's reiterate the point made earlier: even the data from the largest on-chain analysis firms can (and does) vary significantly. What's more, there are dozens of such companies; some invent their AML analysis from scratch, while others simply buy checks from larger firms and resell them to retail users. Consequently, there is no single, unified assessment for any given address, which means there's no guarantee that a transaction from it won't be deemed "suspicious" by a custodial service.

"Since we have our own services, we can change the labeling however we want. [...] in fact, we give users the illusion that they've checked... and received information from us that will supposedly be accepted by the exchange they are sending funds to."

Using an AML checker is not only useless but also harmful. You are sacrificing your privacy to buy snake oil. Furthermore, you are using your own money to fund the very beast that seeks to undermine Bitcoin's fungibility and create a "separate class of coins," where only bitcoins held by centralized, data-harvesting services are recognized. Just ask yourself: how many "dirty" bitcoins passed through Binance from FTX? And why do AML firms consider Binance's addresses "clean"?

KYC procedures are harmful and ineffective, and services that enforce them should be avoided. But the nastiest trick you can fall for is the so-called "KYC shotgun." In this scam, an exchange provides a deposit address without asking for your personal data. After receiving your transaction, they use the pretext of a "high-risk" AML check to demand your passport and other documents. The service essentially blackmails you by holding your bitcoin hostage. Even after you comply with KYC, they might just return your funds minus a 3-10% fee, without even completing their end of the exchange.

This brings us to a critical question: on what grounds are they extorting your personal data and taking a cut of your money?

In the best-case scenario, the user is given a link to a check result from one of the many AML services. In the worst case, they are simply told that their assets are linked to criminal activity.

The results of an AML checker cannot be a valid reason to block funds. Moreover, an AML score is a metric for the service, not for the client. The service is free to purchase software from an AML firm and set its own risk thresholds for refusing service.

Blocking your account is the exchange's initiative, not its obligation. No risk percentage generated by arbitrary, closed-source software gives the service the right to "freeze" your funds. The very concept of a "freeze" is also a ruse: these services are often more than happy to later send these "dirty" bitcoins to their own consolidation addresses.

"There is currently no legally defined percentage above which they can request your information. [...] The crypto exchange itself will decide: it will determine the threshold at which it will block [funds] and ask additional questions. This information (about the 'acceptable percentage of dirt' – editor's note) is always confidential, meaning crypto exchanges never disclose it to anyone. [...] These percentages can change every six months."

FATF's provisions are recommendations; they do not have the force of law.

"FATF basically makes up regulations as it goes along [...] FATF's recommendations are just that—recommendations. There are recommendations to comply with the Travel Rule... does anyone actually comply? I, for one, don't see it. This will only work [...] if everyone believes in it."

But that's not all. According to the recent "Proposal for a Regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing," after more than three decades of traditional financial institutions following FATF recommendations, 99% of criminal proceeds still evade confiscation.

Furthermore, the biggest money launderers are often major licensed banks, like HSBC, and lawyers holding judicial positions. This system is described in meticulous detail by Brandon Garrett in his book "Too Big to Jail."

"If we want to be like the banking system and banking products, we need to adhere to FATF's recommendations."

Do you really want to be like the banking system and its products?!

How to Protect Yourself from the AML Scam

Even if you actively use AML checks and are confident your bitcoins are perfectly "clean," there is no guarantee they won't become "dirty" tomorrow. AML firms apply labels retroactively. For example, if you received transactions long ago from an exchange that was later sanctioned, you could suddenly find yourself holding "red-flagged" coins. Those invested in perpetuating this AML madness call this "retrospective labeling" to make the nonsense they're spouting sound professional and raise fewer questions from inexperienced users.

There is no guaranteed protection from this because it's a one-sided game. The best defense is to simply steer clear of these charlatans. If you've already fallen victim to an AML scam and don't want to hand your data over to crooks, publicize your case on independent platforms if possible.

If you want to exchange dirty (no quotes needed) fiat for Bitcoin or shitcoins, platforms like Robosats, HodlHodl, and other services that don't require KYC/AML are at your disposal. Lightning Network payments are not yet afflicted by this malignant tumor, so you can use on-chain/Lightning atomic swaps. Atomic swaps with other blockchains are available on services like KomodoDEX, Samourai Swaps, and UnstoppableSwap. Additionally, several shitcoin DEXs like THORSwap support Bitcoin.

The best strategy is to avoid services that follow these policies. Direct exchange within a trusted community or on P2P platforms is the solution. Many businesses and stores—both online and offline—also accept bitcoin without regard for the destructive tools pushed by fans of the fiat standard.

Moreover, exchanging coins within a circular economy or even a small community renders the work of AML services useless. With each new transaction, even the "dirtiest" coins are magically cleaned. Look at the screenshots below, where after just six simple sends to one's own new addresses, the "dirtiest" coins—labeled by a service as coming from a "mixer" with a 90% risk score—are transformed into perfectly clean, law-abiding funds from an "unlicensed exchange."

(Image: A screenshot demonstrating the absurdity of AML policies and procedures.)²

Note that this example used no complex "coin whitening" schemes or specialized tools; it was a simple, sequential transfer of funds to one's own new addresses. This process can be easily automated and was offered, for instance, as a service called Ricochet by the Samourai Wallet team.

AML is a Scam!

Ultimately, we hope it becomes clear, even to the reader least familiar with the topic, that AML policies are fundamentally a scam, organized by the bigger crooks: high-ranking officials and lawyers in judicial positions. The growth of this, and any other destructive tool, must be fought.

Of course, crude approaches to this fight can end badly for ordinary citizens, and lobbying for policy change is beyond the reach of the average person. However, refusing to use malicious coin-checking services, choosing P2P platforms over centralized exchanges, and supporting local businesses and online stores that don't promote delusional narratives threatening one of the most important properties of money—fungibility—is already a major step towards supporting permissionless, censorship-resistant money and, by extension, free trade.

The importance of supporting developers of freedom technologies³ and educational projects that enlighten the public cannot be overstated.

Full original (ru) version with links and screenshots: https://21ideas.org/posts/aml-is-a-scam/

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