Regulators, blockchain projects and Bitcoin users can achieve a mutual understanding in preserving privacy rights at Bitcoin transactions.

Anti-establishment and counter-government sentiments fuelled the early days of crypto. More than a decade later, crypto is slowly moving away from its wild-west early days and into a more organized system that traditional financial institutions are reluctantly adopting.

Cryptocurrencies have also managed to attract the no less reluctant attention of various regulators. With reactions ranging from a complete ban on crypto transactions to making authorities question the overall role of regulation, cryptocurrencies have wreaked havoc on policy making everywhere, especially in its perceived ability to allow users to achieve anonymity and protect their personal information online.

Facilitating private crypto transactions

As highlighted in the Bitcoin white paper, privacy was of great importance to Satoshi’s vision of a purely peer-to-peer electronic currency.

This promise influenced both Bitcoin’s use as a seemingly untraceable payment method and the emergence of many blockchain projects. It has, however, proved to not just be greatly exaggerated but simply untrue, leaving regulators and authorities alike in the uncomfortable position of having to figure out what to do about it.

The solution put forward in the Bitcoin white paper was that by anonymizing public keys, transactions will still be visible, but without identifying the parties. This promise of anonymity has led to a certain level of comfort among people transacting on the chain.

This sense of security culminated in the broader adoption of Bitcoin for transactions on the dark web. The practice eventually led to some high-profile arrests and sentences, such as that of the founder of Silk Road. As police got more involved, the crypto community started seeing the cracks in crypto’s “anonymity.”

The concept of anonymity is under a greater threat amid the continuous improvement of blockchain analytics tools. Even so-called privacy coins haven’t been spared by the increasingly sophisticated analytics capabilities of services such as Chainalysis.

Privacy protection outside the chain

Blockchain infrastructures were not considered very privacy-friendly due to the dispersion of the entered information across all blocks. This dispersion makes important data protection rules, such as the right to erasure and the right to be forgotten, which are practically impossible on the chain, as they require all reference to specific personal data to be removed. This is the reason that the industry has sought alternative tools to counteract the prevalent privacy concern that has been plaguing Bitcoin investors for almost a decade.

One of the best privacy tools specifically designed for Bitcoin users is called Bitcoin Mixer, or Bitcoin Tumbler. It is a type of online mixing service that caters to privacy-conscious Bitcoin users, by concealing all transactions made by the user. The process involves mixing the user’s deposited Bitcoin funds with other Bitcoins in the mixing pool, and returns the exact amount of Bitcoin back to the user through a randomised address. This measure prevents anyone (e.g. bad actors or blockchain surveillance entities) from tracking the user’s transaction activity as the randomised process effectively breaks the connection between the user’s origin address with the newly assigned recipient address.

While the privacy regulation laws revolving cryptocurrency payments are subject to change, privacy tools like Bitcoin mixers have served the purpose of anonymous Bitcoin transactions for hundreds of thousands of Bitcoin users to date.

When talking about crypto transaction data, privacy by design doesn’t exist. It’s nice to remember Satoshi’s vision of private, peer-to-peer transactions occasionally, but in reality, very few crypto transactions are actually untraceable. And even transactions that depend on privacy-enhancing tricks are subject to constant threats coming from different parties and organizations.

Future-proofing Bitcoin transactions

Privacy regulations might prove to be the no man’s land where regulators and blockchain and crypto users can achieve a mutual understanding because they have a common enemy — governments with extensive surveillance practices. Meanwhile, third-party privacy-focused tools like Bitcoin mixing services are complementing what existing blockchain infrastructures are lacking, to offer an untraceable and anonymous transaction that is needed by crypto users.

Regulators and blockchain and crypto users also have a common goal: to ensure that both cryptocurrencies and the technologies underlying them are used in a way that’s not deceptive in its promise. Which might just be what the long-awaited, wider adoption of digital currencies needs.

If you’re interested in finding out more about the mixing process and why you should mix your Bitcoin, you can check out our previous article for more insights on Bitcoin mixing.