'Dark' coins rising

Cryptocurrency users are stepping up efforts to make payments payments untraceable and fully anonymous

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To protect the identity of the recipient, there are multiple unique one-time addresses derived from the recipient's public key.

Several new cryptocurrencies have been developed based on the CryptoNote idea, including reference implementation CryptoNoteCoin, Bytecoin, DarkNote, DarkNetCoin, and Fantomcoin.

The software is open source, and the the CryptoNode site offers an "easy forking guide" to help people create their own version of the cryptocurrency.

Darkcoin attempts to solve the identity problem with a decentralized network of "Masternodes" servers that anonymize transactions by combining several transactions into one in the transaction record.

It's particularly popular with online gambling casinos.

Cloakcoin, launched last year, also promises anonymous sending and receiving of the currency.

"DarkCoins is like using cash which is basically untraceable," said Adam Kujawa, head of malware intelligence at Malwarebytes Corp. "And Cloakcoin is like paying for something by dropping a dollar into a pile of other money before having the recipient take out what they are meant to get."

Anonymity also a weakness

To a technologist, it might seem that the answer always lies with a better algorithm.

To a hacker, it might seem that secrecy and anonymity is synonymous with security.

Privacy advocates, money launderers, gamblers and criminals may be searching for bullet-proof anonymity, but if they do ever find it, that anonymity could be their own downfall.

After all, if the authorities don't know who you are, you don't know who they are, either.

[ Dark Wallet—threat or no threat? ]

Traditional criminal enterprises rely on networks of trust and personal relationships. Existing customers must vouch for new ones.

Criminals work their way up in a gang, or find new partners in prison, to be sure that they're working with people they can trust.

With fully anonymous online marketplaces, the person ordering the drugs could be a cop. The person offering to provide a list of stolen credit card numbers could be providing malware that broadcasts your location to the authorities.

If a seller has a history of successful transactions, or positive reviews -- there is no way to be sure that the counterparties of those transactions, and those reviewers, aren't also cops.

Another weakness of the cryptocurrencies, especially of the Bitcoin alternatives, is their low trading volumes, which makes them susceptible to manipulation.

Tod Beardsley, engineering manager at security firm Rapid7

"You can think of a fraction of the daily volume as a goal post for an attacker," said Tod Beardsley, engineering manager at security firm Rapid7 LLC. "Very roughly, if I can control about half of the value of a given coin, I can cause huge problems for everyone else when it comes to the short-term price and viability of the coin."

According to CoinMarketCap, Darkcoin had the fifth largest market capitalization on March 7, of more than $17 million, but a 24-hour trading volume of just $72,621 -- compared to $25 million for Bitcoin.

It doesn't take much of a bankroll to be able to manipulate Darkcoin -- $35,000 or so would be enough.

"I can engineer wild price swings, at will," said Beardsley. "After the booms and busts of dozens of altcoins from 2013 to 2014, the folks behind Darkcoin have a fairly large trust hurdle to surmount, and they're not making things easier on themselves by using terms like 'launder' that invite negative government interest. Bitcoin already has a money laundering image to shake off, but Darkcoin seems to be embracing it.”

Still, Darkcoin is actually doing pretty well compared to some of the alternatives, and interest in it has been going up steadily since the start of the year, possibly because of the Silk Road trial.

CloakCoin's market capitalization has fallen dramatically since its first burst of interest last summer.

"Cloakcoin is laughably low," said Beardsley.

On March 7, its 24-hour trading volume was just $58. Not $58,000 -- just $58. And its market capitalization was $46,000.

So maybe not a threat to law enforcement authorities just yet.

Related:

Copyright © 2015 IDG Communications, Inc.

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