Fact Check: Is Bitcoin Anonymous and Private?

Liz Louw
Liz Louw
12 November 2018

The number and variety of contradicting, misleading and confusing statements around bitcoin abound. Some assume the very worst, like that ‘Bitcoin’s energy use is destroying the planet’ (debunked here) or that ‘bitcoin is mostly used by criminals’ (debunked here). Other claims assume potentially beneficial traits, like total anonymity and complete privacy of transaction records. One thing is certain, if your primary motivation for using bitcoin is to keep under the radar and out of sight, you are in for a bit of bad news (and then some good).

The Bad News: Bitcoin is not Private or Anonymous

The quickest way to set the record straight is to head over to a bitcoin browser with your wallet address in tow. Block Explorer is one of several such browsers that lets you view the transaction history of the Bitcoin blockchain, as long as you have access to the address (public key), transaction number or block number in question. Yes, entries into the bitcoin blockchain are available for all to see, and once a transaction has been recorded into the ledger it is impossible to erase or alter.

As the bitcoin blockchain ledger identifies transaction senders and receivers by wallet address, it is most correct to refer to bitcoin as a public but pseudonymous network. With this in mind, the only thing standing between uncovering the identity of transaction actors is to match the wallet with an owner.

Considering the potential tax implications of investing, trading and transacting in cryptocurrency, government bodies across the world have been eager to draw back the curtain on the pseudonymity. This very month in Europe, the Spanish government approved a draft law that will require nationals to identify themselves as holders of cryptocurrency and disclose their wallet balances. While the law requires self-disclosure, those who fail to comply risk being tracked down anyway through cryptocurrency surveillance systems that analyse blockchain data to attempt to match wallets with owners. Though privacy coins like ZCash and services obfuscation such as Cash Shuffle aim to hide or confuse the trail of breadcrumbs, the Bitcoin network is entirely transparent (albeit pseudonymous) by design.

The Good News: Bitcoin is Transparent, Trustless and Permissionless

Though you might be disappointed and confused to learn of Bitcoin’s transparency, the good news awaiting you is the more significant benefit that we could gain from using distributed ledger technology as foundation of social infrastructures. To explain, let me paint you a picture:

The United States Federal Reserve is the body responsible for creating and implementing monetary policy in the USA. Though many are fooled to believe that it is a governmental organisation that is held to account by elected officials, the truth is that the Federal Reserve is entirely private and independent, accountable to nobody and therefore above the law.

Over the past decade, the Fed (followed by several European governments) started implementing quantitative easing (QE), a process by which they expand or contract the money supply under the guise of encouraging economic growth and stability. While the banks’ reserves have grown over the corresponding period, the value of existing currency has depreciated as result, leaving you and me with less money in our pocket to cope with higher prices on the grocery shelves.

A growing number of economists disagree with the Fed’s monetary policy. David Beim, professor of finance and economics at Columbia Business School, says that the policy's unproven effectiveness and its very premise make it an unpalatable option.

"What quantitative easing does is put more reserves into banks. To give them more doesn't change their position."

In July 2017, members of the US Congress petitioned for a bill to audit the federal reserve, an organisation whose operational dealings have been withheld in entirety from the very people it claims to serve.  Federal Reserve Chairperson, Janet Yellen, made their opposition to the bill clear:

“I’m strongly opposed to audit the fed.”

Picture a Government Run on Blockchain

A monetary system based and operated on blockchain technology would look very different. Craig Wright, Chief Scientist of Bitcoin developer nChain, explains the incentive of Bitcoin’s transparent design.

“Bitcoin is pseudonymous as it is about sound, honest money. Private has to be traceable. It is not drug money, it is not money for bucket shops and it is not money for crime.
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

Bitcoin's Public Ledger = Greater Accountability

With the arrival of Bitcoin, for the first time in modern history, we can choose what type of money we want to use. We are not bound by jurisdiction or geography. Wherever in the world you are, you can opt out of your national currency and transact, save and bank in cryptocurrency instead. For the first time, central banks and regulators do not have full control of the money supply, and it terrifies them.

As a monetary system, the transparency of distributed ledger technology promises far more than privacy could deliver in this same arena. Though a blockchain economy poses a tremendous threat to those authorities who have become comfortable in their secret abuse of power, for the consumer it promises protection of their buying power, and a transparent view over the monetary policy that they support by the sweat of their brow.

What is Bitcoin?

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