Edit — 3 August 2023 — A recent discovery regarding the BALD exploiter and a secondary connection to Mike McDonald, aka Timex, aka one of the smarter gamblers / investors around, inspired an update to this post from 2020. Luckily for Mike, there’s enough separation to avoid any suspicion, but this article covers how you can protect yourself where performing p2p wager settling.
In the midst of Rufus Peabody & EmpireMaker tweeting out about their golf DFS dispute, I was reminded of something that I sometimes forget being in my own little bubble — that bitcoin is far more ubiquitous than I realize. Here’s two very non-technical high stakes APs that are playing for 30k / week for 6 weeks and they’re going to settle in BTC — not exactly uncommon of course, but it’s just a good reminder to me that there’s some portion of non-KYC’d large txs that are occurring in the cross booked sports betting / DFS world between mostly non-technical people.
However, as we march deeper and deeper into 2020, there’s an obvious theme that’s developing in the bitcoin world — as governments, specifically the United States attempt to regulate, legitimize and control bitcoin flows that we are trending towards a reality that maybe not all bitcoin outputs should be valued the same. Therefore, when you’re cross booking a betting contest, I contend there’s a few issues you should absolutely consider when arranging the details of your cross booking when it comes to settlement in bitcoin.
Let’s examine some of the issues and how they apply to cross booking sports bets or DFS head-to-heads specifically.
Just Some Quick Technical Info
Before we move on let’s just point out a few key technical pieces —
- Currently, in 2020, bitcoin has terrible privacy, anonymity and fungibility. Yes, these are all different things and would require an extremely long, in-depth discussion as to why, but just know that bitcoin is poor right now in all 3. Edit — 3 August 2023 — this has only gotten much, much worse, not better. Just about every tx is being real-time KYC’d through a process called KYT — Know Your Transaction. I expect that this will continue to get worse as protocols ossify and other protocols that try to implement onchain privacy are attacked by regulators and government investigators.
- The poor privacy and fungibility features built in, plus numerous KYC on and off ramps, have allowed blockchain forensics companies and government funded efforts to effectively de-anonymize large portions of the BTC blockchain.
- Currently, there are very poor mixing / tumbling options available to bitcoin that suffer not only from possible technical flaws (Wasabi), but also liquidity related issues. Even if overall liquidity improved, the real goal of “legitimate” liquidity being supplied is nowhere near a reality. Hopefully, one day it will be, but it isn’t now and blockchain txs are forever. Edit — 3 August 2023 — This remains mostly true with a few changes including Tornado Cash getting OFAC’d, Wasabi seemingly even more broken, etc. There are some smaller, promising options, but in reality, would you trust any of these solutions to withstand the test of time and stand up to governmental scrutiny when inscribed on an immutable blockchain? I would not.
- Non-KYC’d centralized exchanges or bitcoin businesses, in effect, act as huge mixers (until the US govt comes and copies their database). The number of mixing options through no-KYC centralized exchanges and BTC businesses is rapidly shrinking with the crackdowns of BitMex and Deribit. You better believe this trend is never reversing until there’s a decentralized finance chain-of-custody breaking, non-custodial “wrapping” option for BTC, but until then these options are becoming more and more limited. Edit — 3 August 2023 — Basically every CEX and even many DEX apps have implemented KYC since this 2020 post and it will only get worse. Your “easy” mixing options are basically completed eliminated.
Most Sports Bettors Are “Into Some Stuff”
This is something else I have to remind myself of since I am dull and straightedge — most sports bettors are into other activities and have behavioral and consumption patterns that I do not and many are likely going to lead to a problem with a coin that’s currently trivial to fully surveil.
Many sports bettors are financial traders or fancy themselves as traders. Many are gambling funds in other gambling disciplines. Some may be accepting BTC as payment for services and not paying taxes. Some may be using their funds on darknet markets for illegal goods and services. A few travel all over the world and may soon be breaking the Bank Secrecy Act / Travel Rule. There may even be 1 or 2 real heinous sickos paying for pedophilia. In fact, I can think of 100s of other potential activities that I don’t engage in, but could call into question the source of a bettor’s funds.
The problem with all of this is that if you’re crossing or performing some type of p2p betting with crypto settlement, you may be inadvertently receiving and comingling your funds with “tainted” funds due to bitcoin’s current terrible fungibility and privacy features.
Trust me this stuff probably doesn’t matter right now, but it’s going to very soon.
You’re Paranoid — Show Me Proof This is an Issue
Fair enough.
Let’s start with the largest bitcoin derivatives exchange in the world having all of their transactions flagged by Chainalysis as high risk. Pretty much every bitcoin trader that’s been around since 2017 has probably used BitMex since they had the highest volumes and liquidities and performed no KYC.
Just yesterday it was announced by Chainalysis that they found more Silk Road transactions that led to the forfeiture of almost a billion dollars in BTC meaning that there is still very active work going on de-anonymizing very old onchain activity.
(Update 5 August 2021 — BitMex and Chainalysis announce that they are no longer flagging all txs as high risk which likely means they have successfully tagged all old BitMex txs and they are wiping the slate clean.)
You also just had an Ohio man get charged with facilitating payments for pedophilia because he was running a simple mixing service with no KYC / AML and we’re only talking $2000 — not exactly a lot of money.
It’s not even direct exposure to tainted funds either. If chain forensics companies have their way, even indirect exposure can increase your risk level when trying to cash out your bitcoins through a fiat offramp.
I could do this all day. The point is — you should 100% care about the provenance of the coins you are receiving when you’re settling in crypto for cross betting.
Update — 9 March 2021 — If you’re a United States citizen, realize that the US government is spending a ton of time and resources to deanonymize the blockchain and they have every intention of getting every satoshi paid to them through Operation Hidden Treasure.
So What Do I Do?
I think there are some very basic concepts to understand and small actions you can take to protect yourself. I’ll go from easiest / non-technical to wrapping yourself in tinfoil.
- Never re-use a receiving address — For every one of the settlements where you’re on the winning side and receiving payment, make sure you’re giving the payer a new address to send to. This way worst comes to worse, as long as you don’t consolidate payments, you can keep each payment isolated at least for a little bit / until you evaluate further.
- Don’t consolidate betting settlements until you’re absolutely sure of the provenance of all the outputs / coins — the second you consolidate all of the outputs / coins, just one dirty output can taint the entire pool of consolidated outputs.
- If you do get/identify some possibly tainted coins / outputs, use those as payments when you lose your bets and need to send to settle — make the provenance issues someone else’s problem (a real dbag move for sure, but have to look out for yourself). And, since you’ve isolated all bet settlements in their own addresses, this should help make sure you don’t contaminate your clean coins later.
- Utilize your wallet’s ability to isolate UTXOs — You will need to check your preferred bitcoin wallet, but I will show you an example using the Bitcoin Core software.
As an example in Bitcoin Core, you can choose to exclude certain inputs and mark them as Do Not Spend which will prevent you from comingling questionable funds.
5. If you’re escrowing into a multisig wallet with an arbiter, wait for them to escrow first and then do your own chain analysis — Now we’re in the overly technical solutions portion of the advice. Once you see where the escrowed funds came from, you can use a publicly available blockchain forensics tool like OXT to try and determine the provenance of the coins. Now, this is a lot of skill, practice and a little bit of “art”, but if you use OXT enough you will start to learn how to do some basic analysis yourself.
Additionally, don’t send your funds to a multisig wallet for escrow and comingle your funds without first doing these steps.
6. Demand settlement with coins directly from a centralized KYC exchange — I put this last because it’s a demand that I have made before and not a single person has ever agreed to it so best of luck. While this puts you “on the map” to forensics companies, you don’t have to worry about the provenance of the coins either.
7. Wait for onchain privacy and fungibility to get much better — One of the things that BTC hackers do is they wait … a long time. They are very patient. They are sitting on caches of coins just waiting to be spent until privacy and fungibility improves greatly for BTC. If you’re someone who can sit on the funds a long time and not be forced to convert them back to fiat, you could always just sit on them for a long, long time.
Things You Should Not Do
Simple really — don’t do the opposite of the things above.
Additionally, let me add one more thing that people do a lot that they think is foolproof. Don’t think that just because you used some centralized non-KYC entity to deposit and get fresh coins out elsewhere that your withdrawn coins won’t get mapped to you. If we’ve learned one thing in the last week it’s that the US government is actively scooping up databases of businesses and actively mapping non-KYC’d users via email addresses and withdrawal methods since the beginning of bitcoin’s existence. The old Russian exchange BTC-e is the perfect example, but let’s use an active one. Don’t think that just because you deposit into a site like Cloudbet and withdraw a week later that the chain of custody is broken forever — the privacy benefit from doing something like this only exists until the US government gets a copy of the database. There’s an extremely high likelihood that this is the fate that awaits BitMex and it’s history of deposits and withdrawals. So, while this can help break the chain of custody to independent researchers, it’s likely that government backed chain forensics companies will map almost all your no-KYC accounts in the future. Why do I bring this up in a cross booking / settlement article? Render unto Caesar the things that are Caesar’s — so if you’re winning your crossbookings or net positive on settlements, just make sure you stay on the right side of the law with what you’re claiming on your taxes for crypto holdings — especially if you’re a US citizen.
If you follow these steps, you can probably protect yourself many magnitudes better and create good procedure for keeping you and your funds safe from prying governments looking for criminals and incorrectly associating you to the actions of the prior coin’s owner. A simple rule of thumb that might not be so obvious while bitcoin has extremely poor privacy and fungibility is —
“Not all coins / unspent outputs are the same — learn to evaluate and handle them to maximize your results and minimize your problems.”
Good luck.
