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Thursday, November 28, 2013

Are Bitcoins safe from counterfeiting?

Crypto currency is also vulnerable to theft
Bitcoins are subject to network counterfeiting

By James Duvalis

The on-going story of the emergence and continued evolution of the fledgling bitcoin cryptocurrency is one of the most fascinating ones to have emerged in recent years. When the pseudonymous developer Satoshi Nakamoto first introduced us to the concept in a 2008 paper, few people could have anticipated just how far the idea would have come five years later.

The gradual and widespread uptake of the bitcoin currency has understandably lead the spotlight of scrutiny to be shown directly upon the currency. Chief among the concerns raised regarding the cryptocurrency are the price volatility and a whole host of potential security problems.   

This widespread scepticism has meant that the currency has been experiencing extreme reactions in the last year. In June 2013 alone it was announced that while BitPay had facilitated bitcoin transactions from over 4,500 companies, Thailand had effectively declared the currency to be illegal. So, just what are ordinary users supposed to make of all this? Is getting into the bitcoin game an unduly risky one, with the chance of fraud or counterfeiting waiting around every corner?

Bitcoins and theft


First things first, the short history of bitcoin is not one that has completely free of theft, attempted manipulation and other potential sources of mischief. Because the currency is built for anonymous transactions (something that saw it quickly adopted by sites such as the nefarious silk road website) many have argued that it is not as secure as it might be.

Some of the biggest instances of bitcoin theft are:
  • In 2011, MyBitcoin (a then transaction processor) was hacked. The episode ended with around 78,000 bitcoins (equivalent to a staggering $896,929 at the time) being completely unaccounted for
  • In 2012, Bitcoin savings and Trust was shut down with around $5.6 million in bitcoin based debts. This has led to pretty fervent accusations of foul play and the US SEC has subsequently opened up a federal investigation into the case
  • In 2012, a Trojan horse virus stole thousands of bitcoins from several sites
  • In 2013, the site Instawallet was robbed of around 35,000 bitcoins. The value of individual coins at the time meant that this theft was worth over $4.5 million! 
As with anything in the online world, bitcoins are only as safe as the systems that they operate on. One weak link in the global chain can bring the whole thing grinding to a halt, the consequences becoming very real financially very quickly for those involved.

It is still unclear whether law enforcement agencies around the world have developed anything resembling a coherent strategy when it comes to the theft of bitcoins at this point, although the issue is likely to be weighing increasingly heavily upon their minds.

So while you can have your bitcoins stolen from you, is it possible for someone to make a copy of your bitcoins and pass them off as authentic?

Are Bitcoins safe from counterfeiting?  


If you talk to anyone who is invested in the bitcoin project for long enough you will eventually hear the claim that bitcoins are by the very nature impossible to counterfeit. This claim is made repeatedly and loudly whenever the security concerns surrounding bitcoins are raised by those that are not yet sold on the validity of the currency.

If bitcoins are indeed impervious from counterfeiting, this would obviously be one of the strongest feathers in the cap of those that are trying to convince a wider audience of the young currency’s legitimacy. But are these claims accurate?

There is no “bitcoin” to counterfeit

There are several features of bitcoins that seem to back up the claim that the currency is counterfeit protected. Firstly, and perhaps most significantly, there is no ‘thing’ called a ‘bitcoin’ to counterfeit.  When you have twenty bitcoins on your computer, this is an abstraction. What you really have are twenty individual addresses that relate to the second main anti-counterfeiting aspect: the bitcoin network.

When you transfer some of your bitcoins to another person as part of a transaction you are not giving them a number of individual bitcoins. Rather, you are submitting your transaction to the bitcoin network where the address and value of your claim is verified, making a legitimate bitcoin really nothing more than an entry on the network list.

So, it is argued, counterfeiting is impossible due to both the nature of the bitcoins themselves and the network all transactions must take part in.

Counterfeiting has always been about fooling people and systems, not ‘creating money’

While this argument seems to be sound, it seems to be founded upon an incorrect assumption as to what counterfeiting actually is and what it entails.

Anything can be counterfeited because counterfeiting has never been about creating actual money (or in this case bitcoins). The aim of the game has always been to create something that fools other people or a particular system into believing that you possess the real thing. When this view is taken, it becomes clear that it is possible for bitcoins to be counterfeited, or at least for someone to be able to make transactions on the network without legitimately obtaining their bitcoins first.

There are a number of theoretical ways in which the currency could become subject to counterfeiting. The first is the ‘race attack’ (a form of ‘double spending’) where two simultaneous transactions using the same bitcoin are sent to the network.  One transaction would be sent to an address controlled by the hacker and only announced to a few nodes in the network, while the second transaction would be sent from another address and announced to the whole network in the normal way. The aim would be for the second payment to register first, thereby deeming the transaction as received.

The second main way is another form of double spending named the Finney attack.  Here, the counterfeiter pays for a service with bitcoins that they have not publically announced to the network, before overriding the transaction before it is technically completed by publically announcing the bitcoins to the network.

In essence, these two methods involve crediting two separate people at the same time in order to confuse the network system. If these tactics are successful then there is no need for the perpetrator to even attempt to counterfeit anyone else’s bitcoins.

So, the claim that bitcoins are entirely safe from counterfeiting is not entirely accurate, although the methods involved are intrinsically difficult and resource heavy. Whether or not these kinds of attacks continue to grow in correlation with the currencies increasingly widespread use remains to be seen. What do think of bitcoins? Are they a risky flash in the pan or something far more substantial?  


About the author: James Duvalis a freelance blogger who loves studying the ways in which the internet is changing the way we do things. He recommends Essentra Security.

Image license: henribergius, CC BY-SA 2.0

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