Law in the Internet Society
Maya Uchima

Bitcoin: The Illusion of Anonymity

How the Illusion Started

Bitcoin, whose market cap surpassed a quarter of a million dollars this year, has long given its users a sense of security that their transactions are “anonymous” because of its elimination of a centralized bank, or any trusted third party. Users of Bitcoin seek anonymity, not because they want to deal in illegal activity (although there are plenty of criminals turning to digital currencies to hide transactions) but because they desire privacy and security in knowing that they control the release of personal data and their spending history. In the Bitcoin network, instead of having a general overseer who holds all the information, people can check a “public ledger” that records every exchange made and is available for the public to see. With this lack in monitoring and regulation traditionally done by banks, people have assumed that their activity is untraceable to them and completely anonymous. This isn’t so great a stretch of the imagination, as, although every transaction is recorded in the “public ledger,” the only immediately identifiable characteristic of the exchange is the pseudonym attached to the wallets transacting. No personal information is attached to these wallets and none is needed to set one up.

Breaking the Trance

Any user of Bitcoin who has had to buy Bitcoin would know that one must use an online exchange, such as Coinbase. When creating an account on this site, a user must enter all government standard KYC and AML information including social name, security number, government issued identification, address, and phone number. This would immediately call into question the “anonymity” of a currency if this kind of data must be input to buy it. Even with more complex strategies, wherein a user could buy Bitcoin (providing all the above information) and place it into a wallet (which does not contain any personal information) and then transfer those funds to a second wallet, adding a buffer between the online exchange transaction and the second wallet, the impediment is slight. If one wished to trace a single bitcoin back to the online exchange, it is easy to do so by looking through the public ledger. Every transaction in the history of Bitcoin is logged in and searchable. The second wallet’s Bitcoin would be traced back to the initial wallet and then to the online exchange. This sounds eerily like the trusted third party system that Bitcoin, and other cryptocurrencies today, sought to avoid and banish in the past. It is now up to the online exchange to securely protect its users’ personal data. Just because there is no easily identifiable information attached to these transactions once the Bitcoin has entered the wallet, there are still ways to figure out who does what on the Bitcoin network. There have been major busts by law enforcement cracking down on individuals using Bitcoin to engage in criminal activity. Companies such as Chainalysis use analytical tools to measure activity on the network and flag suspicious exchanges. Once they have located a shady transaction, they can log all of its actions and can correlate this activity with real world actions an individual has taken. For example, by watching the timing of the transactions of a particular wallet, investigators can match those times with periods where a suspected individual is online or can find emails that provide evidence pointing to the completion of a transaction (“just sent you the money”). Although seemingly circumstantial, the analysis can cover enough details that the evidence can pinpoint a single person. In the takedown of the Silk Road, investigators used a combination of server insecurities as well as old-school investigative techniques to link the founder of the Silk Road, Ross Ulbricht, to the TOR server handling the activities on the site. They searched Ulbricht’s emails and facebook account for clues and used PEN registers to collect routing data to correlate Ulbricht’s online activity.

Is Anonymity Even Possible?

Bitcoin may not have concurred the issue of anonymity, and may have even replicated the bank system that its users sought to skirt. What of other currencies? Is anonymity in the digital realm even attainable? Two digital currencies, ZCash and Monero, seem to be the leaders of the pack in achieving anonymity on a blockchain currency. “Zero knowledge proofs” separate the transactions from the people who make them so no one can reverse engineer where the funds come from by reviewing the blockchain. The public ledger reveals different information and no longer discloses which wallet sends or receives what. All that is shown is whether or not the funds were transferred in a positive or negative fashion- not even how much was transferred. Although there are benefits to being able to trace a fund back to its roots, if the higher priority for a user is in its anonymity, Bitcoin may not be the answer.


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r7 - 06 Mar 2018 - 04:06:30 - TravisMcMillian
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