Those who haven’t researched Bitcoin deeply often think it is an anonymous currency. In fact, Bitcoin is not entirely anonymous and cannot offer the same level of privacy as cash without the right addons
As early as 2013, it was widely thought that transacting with Bitcoin could evade government authorities and that cryptocurrencies like Bitcoin were anonymous. Unfortunately, transactions involving the digital currency beloved by crypto-advocates and criminals were debunked by the Federal Bureau of Investigation (FBI) and other law enforcement agencies to be pseudonymous. The infamous darknet marketplace Silk Road has disproved the belief that Bitcoin was designed to be an anonymous coin. Ross Ulbrict, the founder of Silk Road, was caught and sentenced to life prison in February 2015, after two years of investigations by the FBI largely through the use of a free and publicly available blockchain explorer tool. It was later known that through a detailed blockchain analysis, authorities could trace all Bitcoin transactions back to the owner of the Bitcoin address, as transactions on the blockchain were meant to be transparent, immutable and public. Similar cases including the world’s largest bitcoin heist involving Mt. Gox exchanges have been solved with the help of blockchain analysis tools. Although it could be proven useful for the central authority in its investigative process for illicit activities, the majority of the cryptocurrency community were critical about the lack of privacy for Bitcoin transactions.
During the June 2019 Bitcoin conference Edward Snowden, a cybersecurity expert and former Central Intelligence Agency (CIA) employee emphasised on the importance of privacy as a source of liberty. The bitcoin advocate explained that the lack of privacy is an existential threat to Bitcoin, which was created as a form of protection for users from political change. Snowden further shared with his audience that during the period when he was charged with leaking highly classified information from the National Security Agency (NSA) in 2013, he paid for encrypted services in Bitcoins to communicate with journalists that year.
The Risk of Regulation
Based on his past findings on those classified information from NSA, Snowden had revealed that regulators were seeking control of Bitcoin and other cryptocurrencies with unrealistic expectations. Therefore, it is imperative that cryptocurrency exchanges, especially centralised exchanges like Binance, Coinbase and BitFinex, should defend their users’ privacy - the fundamental of human rights. If any of these exchanges cave in to regulatory demands, other exchanges might follow, sacrificing their users’ personal information in order to appease government bodies and central authorities. As a result, users’ Bitcoin and cryptocurrency funds would be controlled by governments and private organisations, which defeats the purpose of the decentralised digital currency, for the people. Other financial cryptocurrency services should also be aware of the privacy concerns of their users and prevent these shortcomings from occuring in the future.
Smart Navigation for Privacy
In 2016, a vigilante hacker group known as Shadow Brokers, had auctioned NSA classified information in exchange for Bitcoins. This hacking case had alerted government bodies and it marked the start of a governmental war on cryptocurrencies. In spite of the government’s investigation, they had failed to uncover any leads into identifying the Shadow Breakers. Similarly, the identity of the creator of Bitcoin - Satoshi Nakamoto was never uncovered by the authorities. These two examples have proven the fact that there are still ways to work around the ‘system’ and retain the rightful privacy. Today, there are several privacy tools such as Bitcoin mixers and privacy-focused crypto wallet which could obfuscate the personal information of the user transaction in Bitcoin, or other cryptocurrencies. Since cryptocurrencies like Bitcoin are pseudonymous by design, anyone can view the entire transaction history and track the funds back to the owner, as long as they have the said Bitcoin address and perform blockchain analysis using available platforms such as the publicly available blockchain explorer.
Suggested Solutions for Enhanced Privacy
In reality, the Bitcoin’s privacy features are very little to none. While there have been numerous suggestions such as Confidential Transactions, scalability and security are some of the reasons which prevent the upgrade on the Bitcoin blockchain. Fortunately, there are various privacy tools available in the market such as VPNs, Privacy wallets and Bitcoin mixers to facilitate the obfuscation of an user’s Bitcoin transaction, making them untraceable and anonymous as a result. For instance, a Bitcoin mixer sever the links between the user’s origin Bitcoin address and the new receiving Bitcoin address by sending coins from the user to other users in the mixing service and back to the user. The likely outcome of utilising a Bitcoin mixing service will prevent bad actors to track the user’s transaction activities, even with a free and public blockchain explorer platform.
Prominent Miners Warns Better Privacy Is Required
In recent years, the lack of privacy in Bitcoin has also been largely attributed to the cryptocurrency’s fungibility, which is a key component of Fiat currencies. As mentioned in earlier paragraphs, there are many proposals in regards to improving the privacy of Bitcoin, but many of such proposals come with trade-offs in the areas of scalability, security and other important aspects which may compromise the blockchain network. While scalability is a critical issue of Bitcoin, given the rapid adoption growth of Bitcoin and other cryptocurrencies, privacy concerns remain as the most important area of development for the new asset class that should not be overlooked. In addition, the idea of government or law enforcement agencies blacklisting certain Bitcoin addresses and intercepting transactions by demanding Bitcoin miners to block transactions based on their request is worrisome, since it defeats the reason that cryptocurrencies were created for the people. One known example that such a scenario may happen is when the government's intervention forcibly stopped 51% of miners to stop mining (suspend the transaction process) to freeze the funds of a particular Bitcoin user. If the privacy aspect of Bitcoin were properly executed, no one would be able to determine the balance in a Bitcoin address, or control the Bitcoin network. Thus, it is of paramount importance that the Bitcoin mining pools should not be orchestrated by any collectives (mining centralisation) in the future. With less than 51% support from miners, these Bitcoin transactions would simply be slowed down rather than completely blocked.
On the other hand, users could play the part of securing the transaction experience by ensuring their anonymity and privacy with VPNs and Bitcoin mixing services. There are several Bitcoin mixers in the market, most notably MyCryptoMixer and Blender.io, where users could deal with Bitcoins while ensuring complete anonymity and privacy, which could be beneficial to their right to privacy and safety when transacting in Bitcoins. Although Bitcoin mixing services charge a low nominal service fee, it is better safe than sorry that users should perform additional steps whenever they are dealing with a significant amount of Bitcoins. Central authorities and bad actors could have a chance to determine your transaction activities, your exchange and private Bitcoin wallet addresses as well as your personal information which could be derived from a thorough blockchain analysis.
Protect Your Identity with the Pseudonymous Bitcoin
Due to the minority of Bitcoin’s transactions being linked to illicit activities, it may seem that the leading cryptocurrency would be subject to even more stringent regulations set forth by governments and law enforcement agencies in the future. Also, Bitcoin’s pseudonymous nature may be exploited for purposes which may compromise the user’s safety and right to privacy, thus adequate privacy measures utilising privacy tools like Bitcoin mixers and VPNs could mitigate the risk of personal information disclosure. Also, with a limited supply of 21 million Bitcoins, the growing interest in Bitcoin mining globally may also see the governments identifying large mining operators and the subsequent coerced 51% of the network hashrate, affecting the operationality of the network. New mining protocols could be created in order to further decentralise the Bitcoin transaction selection process and prevent a large cluster of Bitcoin miners facing possible jurisdictions from the government in their countries. If the Bitcoin ecosystem works together to resolve the biggest weakness for Bitcoin, it is possible that some of the features associated with privacy coins like Monero and Zcash will eventually find their way into Bitcoin, and enhance the network to be truly anonymous and private, for the people using them.