By Elaine Ou
The anonymity of bitcoin
gained it myriad adherents among anarchists and drug dealers around the world.
Now, though, it’s looking like the digital currency isn’t quite anonymous
enough.
USEFUL
IN THE WORLD OF DIGITAL CURRENCIES. PHOTOGRAPHER: BEN PRUCHNIE/GETTY IMAGES
Consider the sudden popularity
of Zcash and Monero, two new cryptocurrencies that offer confidential
transactions. When Zcash first became available last week, demand was so strong
that its founders temporarily became paper billionaires. Monero rose to fame
after a popular marketplace in the dark web -- the portion of the internet
where people sell everything from guns to hacking tools -- added it as a
payment option. Here’s a chart from coinmarketcap.com showing the value of a Zcash
currency unit:
The newcomers sense
opportunity in one of bitcoin’s flaws: Analytics companies -- fueled by government research grants -- have gotten really
good at exposing users’ identities, which were supposed to be hidden by public
keys that reduced them to a mere string of numbers and letters. This is
possible because all transactions are recorded in a permanent public ledger,
allowing anyone to see the entire history of each bitcoin and all the activity
of each account. A single payment to an online retailer can be enough to reveal
a user’s identity, which in turn reveals everything that person has done with
that account.
In other words, the same
transparency that guarantees the validity of bitcoin transactions also allows
people to find out whether a user’s bitcoin previously passed through dirty
hands. Such information is both an asset and a liability. It’s useful for
helping service providers make informed decisions about whether they want
someone as a customer, but it can come with the responsibility of having to
screen those customers to stay on the right side of the law. Here’s a tool that shows how much bitcoin payment traffic has
gone through various counterparties, such as the dark-web marketplace Silk
Road:
The U.S. government, for
example, has outsourced some of its crime-fighting job by requiring financial
institutions -- including digital currency
exchanges -- to enforce anti-money-laundering regulations. Drug-dealing and tax
evasion can be tough to stop at the source, but the perpetrators typically have
to move money, so banks and exchanges are in a good position to identify and
report illicit activity.
On the surface,
privacy-preserving cryptocurrencies seem designed precisely to undermine such
controls. Monero mixes multiple transactions together so that a
source cannot be directly linked to a destination. Zcash creates shielded transactions where everything
is hidden except for a string of data that proves the transaction is valid. Bitcoin also plans to add some
of these features in the near future.
As bad as it looks, though,
developers aren’t creating anonymous payment systems because they want to help
criminals evade the law. They’re doing it because that’s the only way a
decentralized currency can work. If, say, users have to evaluate the
acceptability of each bitcoin based on its transaction history, then one coin
can be worth more than another and the currency loses its reason for existence.
The dollar is successful
because it’s pretty much always worth a dollar, backed by the full faith and
credit of the U.S. government. That’s true whether it’s freshly printed or old
and torn, whether it has a pristine history or has passed through the hands of
Al Capone. A publicly controlled digital currency doesn’t have that legal
tender status and probably never will, so it must find some other way to
achieve the same fungibility.
Anonymity achieves this by
preventing merchants or service providers from seeing any blemishes that might
prevent them from honoring a unit of currency. Reducing the opportunity for
external judgment is pretty much the goal of privacy protection in general.
Ideally, so little information is revealed that everyone -- and every valid
transaction -- is treated equally.
Decentralized currencies arose
because people wanted to transact in a digital world without having to ask
permission. The extent to which this facilitates criminal activity depends
entirely on the prevalence of criminal activity in the real world. Maybe that’s
a problem that needs to be addressed outside the monetary system.
1.
Zcash was created by a venture-backed company. Some 21 million Zcash currency units
will be mined over time. The original investors will collectively receive 1.65
percent of the ultimate Zcash monetary base. The founders, employees and
advisers will collectively get 5.72 percent -- a stake that, at Friday’s price
of more than $5,000 per unit, would be worth more than $6 billion. The price has since declined to about $500.
2. Users have
private viewing keys so they can see the value of their own transactions.
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