The advent of blockchain technology has brought about a major ethical question: should cryptocurrencies be completely anonymous? A red flag has been raised in the industry as Bitcoin and other major cryptocurrencies have been used in illegal activities like drug trafficking and other black market dealings. Yet, the idea of cryptocurrencies in the first place was to provide an outlet for trading and sending money across the world so that it could not be tracked by any government or entity. Are public blockchains actually as anonymous as they seem? And if not, should they be?
Not as anonymous as you might think
Most of the world’s top cryptocurrencies, including Bitcoin, have been built on the assumption that each cryptocurrency holder would be pseudonymous. This means transactions can be traced to a public key, a 256 bit encrypted string which, while not providing any material data about a user’s identity, provides access to all transaction history and information for that token holder.
Pseudonymity, it appears, allows for users to remain anonymous as needed. Yet, digital currency can be tracked in case of illegal use since the history of each token can be traced back to its origin. This became clear when the US government successfully traced $13.4 million in Bitcoin over 3,760 transactions to the laptop of Ross Ulbricht, the 30-year-old accused of operating the black market website Silk Road.
The case for anonymity
Cryptocurrencies such as ZCash and Monero are able to fully anonymize transactions through the use of added cryptographic features such as zero-knowledge proofs and coin mixing, which enable transactions to be verified as correct without anyone knowing information about the transactions themselves, such as the token holders and amount of cryptocurrency being transacted.
In order for a cryptocurrency to be anonymous it must be fungible, meaning, one unit of a cryptocurrency is interchangeable with another unit and unlinked from any previous history. This removes any question or legal concern regarding how that unit of cryptocurrency was used in the past, With many countries and governments cracking down on cryptocurrency trading and use, many believe it is key to the survival of the concept of digital cash that it be completely anonymous and untraceable, no matter the circumstances.
Even Satoshi was afraid of pseudonymity
Bitcoin was designed to be pseudonymous by its creator Satoshi Nakamoto (who himself is pseudonymous). Nakamoto described the need for “keeping public keys anonymous,” in order to maintain the privacy of all users. What is less known is that Nakamoto actually asked users of his new currency to go to even greater lengths to protect their identity in this model, stating:
“As an additional firewall, a new key pair should be used for each transaction to keep them from being linked to a common owner... The risk is that if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.”
It seems Nakamoto was acutely aware that eventually, even with public keys being 256 bit and encrypted, the flow of transactions between users and wallets could eventually reveal the identity of a user, by linking transaction and public key information.
However, most users of Bitcoin do not abide by Nakamoto’s advice of using a new key pair for each transaction, and therefore, put themselves at risk for being monitored by third-parties. This renders the censorship resistant nature of blockchain technology as it was originally intended useless.
Not black and white
While anonymity remains a key in utilizing cryptocurrencies for many people around the world attempting to overcome oppressive governments, this doesn’t preclude the technology from facilitating illegal activities for those looking to shield themselves from the authorities. Do the benefits of complete anonymity outweigh their potential dangers? Only time will tell.
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