The arms race between those who want to regulate the controversial posterboy of cyptocurrencies, Bitcoin, and those who want to make it even more anonymous, is well and truly under way. While regulators seek legal means to keep track of Bitcoin transactions in order to prevent money laundering and the purchase of illegal goods, and have the support of some members of the Bitcoin community who want to see greater acceptance of their currency, others have moved in the opposite direction, and are working on ways to make it even more anonymous.
Whenever a transaction is made by Bitcoin it is recorded to the Bitcoin’s blockchain, a distributed ledger that can be read by anybody. This is essential in verifying payments and ensuring against forgery and fraud, but its public nature brings with it serious consumer privacy concerns that are only set to grow as the currency becomes more popular, and which also affects businesses whose competition can use the information to spy on their sales data.
Improving Bitcoin privacy is therefore seen by many as important for much more than facilitating criminal activity. As Bitcoin developer Mike Hearn explains,
‘The fact I use Bitcoin isn’t a secret, but I don’t want all my transactions in an NSA database. When I use Bitcoin in a bar, I don’t want someone on the local network to learn my balance. The way Bitcoin is used today, both those things are possible.’
The traditional ways of anonymising Bitcoins are buy to them anonymously (services such as LocalBitcoins.com allow buyers to meet up with sellers in person and pay for Bitcoins in cash), and/or to use Bitcoin mixer (also known as laundry or tumbler) services to break the link between an individual and their Bitcoins, mixing their funds with others so the trail back to them is confused. The most famous of these is Blockchain.info’s Shared Send, but this does have to abide by certain laws and so while highly effective, cannot be considered 100 percent anonymous.
Check out our step-by-step guide to Buying Bitcoins to pay for VPN anonymously for a detailed look at these methods. They can be remarkably effective, but the more anonymous a transaction is, the more inconvenient it is to perform, and the greater the risk of something going wrong (such as losing your money).
In addition to this, once an identity has been connected to a sequence of Bitcoin transactions through reuse, taint analysis, tracking payments, IP address monitoring nodes, web-spidering, and a host other mechanisms, all transactions made by that identity can be traced , and regaining anonymity is very difficult.
A number of new projects have thus been aimed at providing greater obfuscation for Bitcoin transactions, while at the same time making the process easier and more secure.
CoinJoin matches a Dark Wallet user with another Dark Wallet user who is making a payment at around the same time. The transactions are combined and encrypted so that it is very difficult to determine who paid who, and in future Dark Wallet plans to expand the idea to combine more users, making a tangled web of transactions that will be very difficult to follow.
While CoinJoin protects senders, ‘stealth addresses’ protects receivers. When a Dark Wallet user sends money to another Dark Wallet user’s stealth address, Dark Wallet performs an obfuscation process which encrypts the address in the blockchain so that only the recipient can recognise, decrypt, and claim funds from it using his or her Dark Wallet app. This means that no record between the sender and receiver is stored in the blockchain.
Darkcoin takes a somewhat different tack, and sets out to build a privacy based Bitcoin currency from the ground up; ‘We engineered Darkcoin to be a digital version of cash.’
Darkcoin uses a version of CoinJoin called DarkSend, which utilizes a distributed network of servers to negotiate multiparty payments. Unless the user chooses to disable DarkSend, ‘the whole blockchain will be a fog,’ explained Darkcoin’s chief developer Evan Duffield.
Anyone can setup one of these servers by paying 1000 Darkcoins, and in return will be entered into a lottery that will periodically pay 10 percent of all new Darkcoins mined and put into circulation.
It is still early days for Darkcoin, but things are looking promising. 4.1 million Darkcoins have gone into circulation since January, and now valued at $1.60 or so each, they are the fastest appreciating cryptocurrency since Bitcoin itself. The incentive scheme for runningservers has not yet been implemented, but despite this 42 servers are already operational.
A project by researchers at Johns Hopkins University, Zerocoin started as a proposed extension to ‘the Bitcoin payment network that adds anonymity to Bitcoin payments.’
However due to unwillingness by the Bitcoin Foundation to incorporate untried systems into the cryptocurrency, plus political worries that increasing anonymity in a currency which already makes governments very nervous would make Bitcoin too controversial, the Zerocoin creators have taken the bold move of turning Zerocoin into a standalone currency. As Forbes explains,
‘That new freedom allowed Zerocoin’s coders to take full advantage of a decades-old mathematical scheme called a “zero-knowledge proof,” which makes it possible to prove that a mathematical statement is true without revealing the content of the computation. Thanks to that seemingly magical trick, Zerocoins can act as sealed envelopes of cash that can be combined, split, or spent without either revealing the value of the cash inside those envelopes or their path through the network, all while still protecting against fraud and forgery.’
Zerocoin is slated to enter circulation in May 2014 ‘in some sort of beta program’.
Not so much a new way of making Bitcoin payments, but the IP address used to buy, sell and transfer Bitcoins can be used to identify the Bitcoin owner, so obfuscating this is vital.
Connecting to Tor or a VPN service before making any Bitcoin transactions achieves this (and if buying VPN anonymously, it is a good idea to do so through Tor), but there is a concerted move among developers to try to enforce this by integrating Tor into Bitcoin apps and wallets. This means that Bitcoin users automatically benefit from the triple layer of encryption and obfuscation that Tor provides.
Blockchain.info’s wallet, Multibit, Hive, and Android Wallet and more now include Tor integration, and Dark Wallet plans to add it in the near future. In addition to this, Tor integration is being built into the public version of bitcoinj, the software behind some of the most popular Bitcoin apps and wallets, so this trend is likely to accelerate.
Supporters of Bitcoin (and its spiritual successors) are split over whether to seek acceptance, respectability, and recognition from traditional financial institutions, or to take the Bitcoin concept further by ensuring even greater anonymity for its users, and thus likely entering into conflict with already alarmed governments who seek ways to control and regulate the new currencies.
Fortunately for the pro-anonymity faction, cryptcurrencies are basically just mathematical algorithms, and are therefore almost impossible to control (and the more anonymous they are, the more difficult they are to control), and in a world where many desire or require an electronic equivalent to used bank notes, the demand for anonymous cryptocurrencies is almost guaranteed to ensure their success.
We are entering a new era of civilization where the economic instruments of power that have always been the exclusive preserve of rulers and governments are now becoming decentralized and democratized. The effects of this are likely to be far ranging and profound, perhaps ultimately representing an economic shift as dramatic as the invention of banking, or even money itself.
Time will tell, but the pioneering ideas discussed above are parts of what is likely to be very important story.