Cryptocurrencies, such as Bitcoin, seemed like a silver bullet to allow digital payments the following:
- Anonymous online transactions similar to cash.
- No transaction costs.
- No risk of chargebacks (good for merchants).
- No taxes
Unfortunately, a lot of these points are not quite true. In this post, I am going to be discussing what I see as the most important aspect, anonymity.
Bitcoin's "Public Ledger"
The first thing that you must understand is that Bitcoin revolves around a blockchain which is often referred to as a "public ledger". This file or data structure lists how many bitcoins every "wallet" (account) currently has, as well as the amounts they had at any point in time since the system began. This is a problem in its own right as the file is becoming massive (currently over 10 GB), but is beyond the scope of this post.
In the world of bitcoin, you do not own "bitcoin" objects with unique IDs that get moved around. Instead if you were to buy something with bitcoin, your wallet's number of bitcoins would go down, whilst the reciever's bitcoin count would go up by the same amount. In this way, bitcoins are not "marked". This helps protect annonymity, but the chances are that your transaction is the only one of that precise amount being processed at that time. Some cryptocurrencies, such as Litecoin, process transactions more frequently, which is great for making transactions quick, but further decreases the likelyhood that another transaction of the same amount is going on at the same time, thus reducing the annonymity. This means that if someone knows your wallet ID they can tell who you are giving bitcoins to, or who you are recieving them from.
For the purpose of annonymizing Bitcoins, you can use a service such as the Bitcoin Fog which acts as a tumbler. You can transfer coins to "the fog" and it will make sure to mix/match bitcoins of the same transaction amounts with various other wallets. Then you can retrieve them to a different wallet. The service takes a small percentage and you can be fairly sure that nobody will be able to "link" your two wallets as being connected to the same person. However, they will probably be able to tell that your final wallet recieved a payment from the fog. Illegal services such as the Silk Road relied on these tumblers to protect themselves which leads me to the main point of this article.
Should Anonymizing Bitcoins Be Considered Money Laundering And Illegal?
There are a few points to consider with this question:
- Should Bitcoin be defined as a currency, and thus subject to money laundering laws?
- Is it money laundering when you want to hide where the bitcoins came from, or when you're trying to hide where you spend them?
- A user may wish to buy bitcoins off an exchange and remove the link between their bitcoins and bank account before they make a purchase. This could help men buy porn with without their wife, or anyone else, finding out. Perhaps there is a gay politician who wishes to hide his sexuality and is under constant scrutiny from the media.
- A user may wish to buy bitcoins from peers on a market with better rates than an exchange. They have no way of knowing what those bitcoins were used for previously. Thus they do not want to be linked with any possible previous illegal activity that occurred without their knowledge.
I have only provided a very small glimpse into the world of bitcoin annonymity, but hopefully left you questioning whether it is worth sacrificing our right to annonymity and privacy in order to prevent crime. How much are you willing to sacrifice? Most of the people I meet don't seem to think that privacy matters, or that tools such as encryption are only used for illegal activity. For those people, I recommend watching the following TED talk on why privacy matters. In the meantime, could you please post all of your passwords and account details in the comments below?