Lead researcher of a group that says they have created an analysis tool for US law enforcement that can be used to overcome the challenges of criminals using Bitcoin for transactions has hinted that it could lead to greater Bitcoin adoption.

Andrew Cox who is leading the work for Sandia, a US-Federally Funded Research and Development Center which has delivered essential science and technology to resolve most challenging security issues in the US for more than 60 years, said:

“In many ways, figuring out how to effectively combat illicit Bitcoin commerce and reduce its perception as a tool of criminals can encourage more people and companies to adopt Bitcoin for legitimate purposes.”

He explained that the work is in response to law enforcement’s most immediate need to reduce the time and resources necessary to trace illicit commerce. It would be handy for authorities because they have few battle-tested legal, policy, and technical tools to counter those illicit uses.

This is based on the view that Bitcoin will likely spawn innovations that will enable new forms of both legitimate and illicit commerce.

“Our job was to understand how Bitcoin works,” Cox said. “Bitcoin is a new semi-anonymous currency that holds the potential to change the way all sorts of transactions work in a way that might really benefit the economy.”

The many benefits of Bitcoin adoption

It can make monetary transactions much more efficient, drive down the costs of doing business, make transaction histories more transparent, which could help both financial markets and financial regulation, and — depending on who you ask — reducing the risks associated with inflation and reliance on centralized monetary institutions. On the other hand, criminals have been using Bitcoin for drugs, guns, child pornography etc.

Criminal enterprises have used Bitcoin at least in part because of the perceived ease with which transactions can be anonymized. This has made it harder for law enforcement to keep track of users.

Sandia has been a contractor for the U.S. Department of Energy’s National Nuclear Security Administration (NNSA) and supports numerous federal, state, and local government agencies, companies, and organizations.

The work which was conducted for the Department of Homeland Security (DHS) Science and Technology (S&T) directorate, could be delivered to other federal law enforcement agencies.

Sandia conducted a systems analysis of illicit e-commerce focusing on Bitcoin. The team set up a research environment to experiment with other algorithms that can de-anonymize illicit Bitcoin users. It includes a mix of traditional and novel investigative techniques, along with existing financial regulation and innovative policy and process tools.

After de-anonymization, law enforcement can link the Bitcoin addresses to a specific alias and they will know all of the Bitcoin addresses they need to deal with.

“Our clients are happy about the requirements we’ve developed and the research we’ve done on what types of tools and capabilities are needed,” Cox says.

As it is getting more established that Bitcoin is here to stay even though its adoption level is still low due partly to several reasons, it raises the question if a form of government regulation of the digital currency’s use would - in any way - instill confidence in more people to encourage its use.

As in the case of Japan where, after the introduction of a virtual currency bill in May, there has been a recorded upsurge in the number of Bitcoin traded in the country as it gains legitimacy. The question now is: would that be the case in the US (and elsewhere)?