Bitcoin anonymity is controversial and confusing
Is Bitcoin is anonymous? For one, there is a back and forth debate on anonymity as an asset in protecting user privacy and the danger of it abetting criminal activities such as terrorist financing and money laundering.
Also, if you follow trends in Bitcoin, you’ve probably come across the line that Bitcoin is anonymous many a times. This, somehow, contradicts the fact that the blockchain, or the ledger on which all Bitcoin transactions are recorded, is public, meaning everyone could access your transactions.
The Bitcoin Wiki:
“The main problem is that every transaction is publicly logged. Anyone can see the flow of Bitcoins from address to address.
So is Bitcoin anonymous or not?
The first place to start in answering this question is defining the word anonymous. A quick look up in a dictionary returns ‘without an identity’ as the meaning of the word.
With this knowledge, we should ask ourselves whether we can use Bitcoin without some form of identity. Of course, it would be impossible. Every Bitcoin user needs a way to claim his or her bitcoins on the blockchain. As a matter of fact, a blockchain public address serves as an identity for this purpose.
However, in contrast to traditional banking services, it is possible in Bitcoin not to link your identity on the blockchain with your physical identity. This is because you do not need to attach your name, physical or email address to your Bitcoin address for it to serve you.
The Bitcoin Wiki:
“Alone, this information can’t identify anyone because the addresses are just random numbers.”
We can, therefore, say that Bitcoin is usable with some identity that is unlinkable one’s real name. This aspect has a name; pseudo-anonymity.
Bitcoin is pseudo-anonymous.
The violation of Bitcoin pseudo-anonymity
Having said that, the reality of things is that there are many ways this pseudo-anonymity can be breached. In fact, it is becoming more and more difficult to maintain it as the cryptocurrency is integrated into commerce and financial systems.
The Bitcoin Wiki:
“If any of the addresses in a transaction’s past or future can be tied to an actual identity, it might be possible to work from that point and guess who may own all of the other addresses.”
For instance, the law in many jurisdictions, such as the Bitlicense in the US state of New York, now requires Bitcoin exchanges to collect customers’ real life identities, as part of the Know Your Customer (KYC) and Anti-Money Laundering (AML) measures. This exposes users’ physical identity where money gets into and out of the Bitcoin network.
In addition, it is possible, from close observation of transactions, for an adversary to link Bitcoin addresses to physical identities.
Is pseudo-anonymity a bad or a good thing?
In considering whether pseudo-anonymity in Bitcoin transactions is a good or a bad thing we should acknowledge that the technology, in some way, starts at a very low point in this aspect, especially as compared to traditional banking services.
The Bitcoin Wiki:
“Traditional banking provides a fair amount of privacy by default. Your in-laws don’t see that you’re buying birth control that deprives them of grandchildren, your employer doesn’t learn about the non-profits you support with money from your paycheck, and thieves don’t see your latest purchases or how wealthy you are to help them target and scam you.”
It is unethical for a bank to publish individual account holder activity to the public. But that is exactly what the blockchain does.
Therefore, any Bitcoin transaction deananymization taken could be understood as meant to bring the cryptocurrency to the same level with the traditional banking services.
It is a welcome feature, especially, if it helps Bitcoin users to continue living their private life without third parties collecting their financial activity data to their detrimental.
The kind of pseudo-anonymity that might be questionable is one that is solely meant to shield criminal activity.
How to improve pseudo-anonymity
As a Bitcoin user, just like a user of any other financial service, you are entitled to keep your financial activity private. As we have observed, it is possible for others to invade this space.
What can you do to protect your pseudo-anonymity on the public blockchain?
One basic step to take is to ensure that you do not use the same address over and over again. Even where you receive mass payments such as when you are a merchant it is advisable to use one address for each transaction.
Fortunately, the bitcoin technology allows users to generate as many public addresses as they want from their wallets.
You can also use of TOR, a communication that uses encryption to hide IP addresses so that adversaries cannot snooping on communications from your devices.
Last but not least you can use a mixing service. This is a service that takes your transaction and mixes it up with others before passing it over. This confuses any one tracking the transactions and makes it hard to infer identity on the blockchain.
Bottom line, it is important that you understand how important it is to protect your privacy with the blockchain. Even more important, you should closely follow the privacy trends in the blockchain technology.
Author Bio: Rupert Hackett works for Global Internet Ventures, an Australian based investment and consultancy group developing multiple Bitcoin companies. Rupert is studying the world’s first Masters in Digital Currencies and regularly blogs for BuyaBitcoin.