Bitcoin Isn’t Anonymous, and That’s Ok.

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For most people who have found themselves deep into this topic of blockchain and cryptocurrencies, there was likely a moment or series of moments where the idea of blockchain clicked. Your understanding of it brought on a wave of ideas about how blockchain could be used and what applications might be crafted to better humankind. For a lot of us, once the dots were able to connect and the first layer of this new thing was shed, our appetites for more information, more use cases, more exploration was insatiable.

This desire to participate and learn within the blockchain community is palpable, to say the least, but for anyone outside of this, it is hard to look inside without skepticism and doubt. The tech is tough to understand, getting more sophisticated and specialized every day and the idea of trustlessness is already a massive hurdle to overcome ideologically. This division between #nocoiners and the blockchain community is as binary as those who love cilantro and those who don’t; there aren’t many people in between with one foot in either camp.

This is all to say that while that barrier to entry is high and the FUD machine is still operating, there are some unfortunate consequences percolating that may be holding back adoption; blemishing how people and media perceive Blockchain projects. In the forefront of public opinion is the misunderstanding that Blockchain and primarily Bitcoin are inherently anonymous and therefore only magic money for the creepy corners of the dark web. Of course, like other popular themes still lingering from the early days of Blockchain, Bitcoin isn’t anonymous and the creators of Bitcoin knew this.

The First Blockchain Wasn’t Meant to be Anonymous.

It’s completely understandable to approach Bitcoin and the majesty of Blockchain with healthy doses of skepticism and modesty, especially early in your crypto journey. Trustlessness is a tough concept to engage with, yet here is a technology that is inherently requiring you to trust that it is trustless. This uncomfortableness around the adoption of Bitcoin was exponentially worse in the early days as concerns around the cryptocurrency were being formed that Bitcoin was a completely anonymous peer-to-peer transfer of value, perfect for the black markets and criminals around the globe.

An FBI report leaked back in 2012 titled “Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity” is a prime example of how law enforcement was seeing Bitcoin at the time. In the report, the FBI expresses concerns surrounding the anonymity of Bitcoin and how it “…might logically attract money launderers, human traffickers, terrorists, and other criminals”. The FBI was quick to identify possible early use cases of Bitcoin, mostly unsavoury, but continued to note that Bitcoin is not fully untraceable and sited research from the University College of Dublin focusing on the limits to Bitcoins anonymity. It’s around this time that people, outside the developers and fanatics, were slowly beginning to notice that Bitcoin wasn’t the untraceable currency they once thought, and this wasn’t a secret.

From the inception of the Bitcoin, and specifically the release of the Bitcoin whitepaper, Satoshi Nakamoto was careful not to claim that Bitcoin was completely untraceable. In fact, the only use of the word anonymous appears in reference to a user’s public keys. The Whitepaper reads: “… privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.” In other words, the anonymity of Bitcoin stops at the public keys, the public key is your pseudonym.

Privacy in the Bitcoin Whitepaper
Privacy in Bitcoin stopped at the public keys

Pseudonymity is in the same camp as anonymity but the difference between the two is subtle and meaningful. Being anonymous largely implies that there is no trackable path to follow back to the true identity of the person or group. Pseudonymity is more in the naming practices and how a person or group may use a name to obfuscate their actual identity. For example, the author Samuel Clemens used the pseudonym Mark Twain to write under and keep his true identity secret. Mr. Clemens was pseudonymous because during his career he wrote under a fictitious pen name. However, he was not anonymous because the identity Mark Twain was in the public’s eye and even after Clemens was found to be the true identity of Mark Twain, the pseudonym was carried forward into pop culture.

Like the pseudonym of Samuel Clemens, each public key we generate becomes our own pseudonym. We can do our best to remain anonymous behind our public keys but the truth is that Bitcoin wasn’t designed with specific intentions to be completely secure and protect the anonymity of its users.

Being pseudonymous is hard

There have been some poignant examples in Bitcoin’s brief history that punctuate the idea of Bitcoin’s public keys as a pseudonym and showcase the difficulties some early users had in trying to hide behind the curtain. The story of Ross Ulbricht and his social project called the Silk Road is an especially a high-profile example of the limitations to privacy in Bitcoin.

Ross Ulbricht, under the pseudonym of the Dread Pirate Roberts, had founded and run the infamous dark web marketplace Silk Road. Early on, the website adopted Bitcoin as the only currency to be used on it as a way to circumvent the traditional financial institutions. Bitcoin had its advantages to this community at the time since the Silk Road’s access to financial services was limited, to say the least. The attractiveness of Bitcoins peer-to-peer format meshed well with the overarching crypto-anarchist vibe embodied by Ulbricht and his massive community. Ironically, it would be Bitcoin and the Blockchain that would ultimately play a role in the prosecution of Ross Ulbricht.

Anonymous dark web marketplace, the Silk Road
The Silk Road on the dark web

In the court proceedings of Ulbricht, the FBI was able to use Bitcoin’s Blockchain and strategically correlate transactions leading to a set of servers they had previously seized. The over 3500 transactions, open to view in Bitcoins public ledger, were found to have been from the seized servers and traceable directly back to Ulbricht’s personal Samsung 700z laptop, also under seizure from the FBI.

In the case of the Silk Road, Bitcoins anonymity was challenged as the security and privacy ended at the public keys. Ross Ulbricht’s pseudonyms were his public keys, each with a trackable and verifiable history of activity and transactions. The success of the FBI was in linking the pseudonymous public keys to the then anonymous Ross Ulbricht.

But What if I Want Anonymity in My Cryptocurrency?

An increasingly common question around privacy coins is why do we need them in the first place? At the root of this question is why do we as individuals need to protect our own data, our own personal information, why do we need basic privacy – after all, you’re not a bad person, you have nothing to hide.

A Tragedy Far Too Common

Privacy is a funny thing this way, it’s not immediately evident why someone would want privacy if they aren’t doing anything wrong, if they aren’t collecting skeletons in their closet. But privacy is actually a very valuable resource for a society at a whole and this is what makes seeing the individual benefits sometimes difficult. To exemplify this, consider privacy compared to another common resource like national highways. In this example, individually it would be difficult to encourage citizens in a nation to go out and physically build their portion of a national highway. People may be more motivated to do what’s best for themselves in the short term and not build their portion of the highway, instead of splurging on that new inground pool! But this obviously will leave big sections of the nationally spanning highway bare and unusable and the whole nation will suffer when trying to use this resource, even those who opted for the backyard pools.

This relationship, of some people in a group acting for themselves even if it is contrary to the greater good of all, is called the tragedy of the commons. This social phenomenon is a large portion of the reason that proper privacy is so difficult to incentivize at an individual level. Privacy is a “national” resource that benefits everyone when all can contribute and maintain it. So why do we need privacy? If you find someone or yourself not immediately able to answer this and therefore don’t practice proper privacy – remember that you are then part of the problem, part of the tragedy of the commons.

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I’m Ready for Privacy Coins

There are a number of promising blockchain projects that are tackling the topic of privacy and elevating their cryptocurrency from pseudonymity and closer to full anonymity. The Ultimate Guide to Privacy Coins has already been written, so dive into that and how the various projects differ in their philosophy and tech.

Privacy coins are replacing Bitcoin across a lot of avenues where Bitcoin once reigned superior. The shift is primarily fuelled by the need for more privacy and anonymity within those given communities. Users there became increasingly aware and concerned about Bitcoins limitations in privacy and started to take advantage of projects like Bytecoin, Zcoin and Monero to name a few. The newer iterations of privacy coins focus on making everything on their chains completely anonymous, from the details of a transaction to the user’s public keys. Ledgers on these chains are obscured by stealth activity, making linking transactions with wallets a nearly impossible task.

Monero anonymous transactions
Privacy and confidentiality on a blockchain

In many cases of privacy coins, anonymity is retained even if a human user is verifiably linked to their pseudonymous public keys because the activity that is associated with those public keys are open to the public and encrypted even on the blockchain. Take a spin around a privacy coins block explorer and you will quickly be able to see what information is missing that is open by default on other ledgers like Bitcoin. Check out Monero’s block explorer, for example, and you can see activity that is obscured by “Confidential Transactions” rendering it useless to us humans, but still cryptographically verifiable on the blockchain.

Parting Thoughts

Privacy is a fundamental resource that is currently inversely correlated between its growth rate and public valuation of it. In other words, it’s becoming so much more important than it used to be and we just care less and less. But this tragedy of the commons is being played out on a scale never seen before with technology that can enable our imagination beyond previous limitations. Centralization threatens everyone even if you don’t care to protect your daily privacy and technologies like blockchain are a tip of the iceberg in the suite of solutions that we need.

Bitcoin was given a task it was never meant to address but there are energetic blockchain projects that are already filling this niche of anonymity. Blockchain can be a catalyst in a privacy movement but user adoption needs to be by default, not an opt-in situation before the tipping point can be reached. If individuals are left to protecting and promoting their own privacy it is likely centralization of data and its immutable corruptibility can continue its standard as the favorable option.

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CoinCentral’s owners, writers, and/or guest post authors may or may not have a vested interest in any of the above projects and businesses. None of the content on CoinCentral is investment advice nor is it a replacement for advice from a certified financial planner.