Bitcoin: Not So Private After All?

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How private are financial transactions that use the "virtual currency" Bitcoin? According to Timothy Lee, writing at Forbesnot very:

Bitcoin's peer-to-peer method for clearing payments means that the currency's "books" are inherently open. Every transaction ever made using the currency is available for inspection using a tool like Bitcoin's Block Explorer. 

The privacy benefits come from the fact that you can create an unlimited number of anonymous Bitcoin identities. Block explorer tells me that someone sent 36953.2525 Bitcoins to the address 148X4kTYZhjeKQcd1AVhcytXvh5gL6FNSe. I don't know who owns that address and there's no central database where I can look it up. Nor is there a Bitcoin Inc. that could be compelled to create such a database. And this, Bitcoin enthusiasts say, give their currency a privacy edge over the US dollar.

But the fact that the database doesn't exist doesn't mean it couldn't be created. Remember, people want money so they can buy stuff. There are a few goods and services, like pornography or consulting work, that can be delivered entirely over the Internet. But people mostly buy products that need to be physically delivered. An American who wants to deal primarily in Bitcoins will, at some point, need to either buy food and shelter in Bitcoins or convert some of their Bitcoins to dollars. And that means making Bitcoin payments to people in the US.

But the US government could easily require any business accepting Bitcoin payments (or converting Bitcoins to dollars) to collect identification information from their customers in the same way that "know your customer" regulations require financial institutions to collect information about their customers. And once the government has de-anonymized a significant fraction of the addresses on the network, they'll be able to infer many of the others using basic detective work.

Lee suggests that a sufficiently determined individual could use Bitcoin in a way that mostly preserved his or her anonymity, but only with significant technical savvy and lifestyle changes. This tracks with what one Bitcoin developer told Reason's Katherine Mangu-Ward last month: "With bitcoin, every transaction is written to a globally public log, and the lineage of each coin is fully traceable from transaction to transaction….Attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb." Naturally, Sen. Chuck Schumer is worried about illegal purchases using Bitcoin anyway

In June, Reason.tv talked with Mercatus Institute scholar Jerry Brito about Bitcoin:

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41 responses to “Bitcoin: Not So Private After All?

  1. Chuck Schumer is worried about illegal purchases using Bitcoin anyway.

    I find Chuck to be a valuable moral compass….if he is against it I find myself in favor of it.

    Thanks Chuck.

    1. I think that for the most part this is a perfectly valid decision helper.
      Chuck and anything with “for the Children” within 1000 feet of it.

      1. “for the Children”

        Yep that’s another one!

        Hat tip Kwix!

        1. I don’t understand the purpose of this post. It’s not new information. This stuff was covered over and over in even the first 2 weeks bitcoin was in the news. Gillespie even blogged about it here in mid-June.

          Sure, every transaction will identify one of many addresses or “keys” (something like “14K1mazY4HfyZsyMKsudFr64EwHqQT2njz”) but that’s meaningless if you can’t connect any of those addresses back to an actual identity. If you want your transactions to be anonymous, know what you’re doing and follow best practices (such as using a new address for every single transaction, using TOR, etc.), it would be almost, if not completely, impossible for you to be identified based on the transaction flow logs.

          Remember when Swiss bank accounts could still be trusted for anonymity? Even then, at least one other person had the ability to connect your numbered account to your identity. Imagine that scenario except you’re your own Swiss bank (the account holder is the only person who knows the identity of the person holding the numbered account) and you create a new numbered account for every transaction you participate in. On top of that, thousands of other people are also acting as their own Swiss bank (indistinguishable from yours), using a new numbered account for every transaction. Sure, if you’re not careful or don’t know what you’re doing, you could do something that allows someone to associate one or more of your addresses (account numbers) with your actual identity but, like I said earlier, if you want your transactions to be anonymous and know what you’re doing, it would be almost, if not completely, impossible for you to be identified.

  2. Goddamnit Google, I can’t tell you how many times while not paying attention I’ve clicked on the music software site after typing Reason in the search bar. I might actually have to put this on my bookmarks.

    1. In what world is a site with “reason” as a page higher ranking than one with it in the domain? Google is broken.

  3. Praxgirl only accepts donations in bitcoin. Not sure what that says about her, but I got the feeling she was mostly there to look pretty.

    1. Not sure what that says about her, but I got the feeling she was mostly there to look pretty.

      There’s a problem with this?

      1. No, she does an excellent job of it.

  4. Not so private after all

    “After all?” You even reference a reason blog post with a quote from the BitCoin Dev team confirming the lack of reliable anonymity 45 days ago. This Forbes story doesn’t seem all that groundbreaking.

    1. Yeah, but NPR’s Planet Money + an infinite number of journalists + a selection of random Internet security experts, lawyers, and economists (none of whom know the first thing about bitcoin) have all repeated the anonymous mantra, so it must be true.

  5. why would I want to use bitcoin? I mean with US gov’t money at least everyone pretends together that it’s worth something…

  6. I still haven’t heard a good answer to the question, “Why would anyone exchange goods or services for BitCoins?”

    1. THERE IS NO GOOD ANSWER!

    2. To buy drugs and other illegal products. Which is why the inability to connect the anonymous accounts to the users is such an attractive feature.

      Which is another way of saying – this is yet another article that misses the entirety of the current appeal of bitcoin.

      “People like it because it’s anonymous!” “But people won’t like using it because it’s anonymous!”

      1. I understand why people would exchange BitCoins for drugs our other things. I am asking about those on the other side if the trade.

    3. The same reason you exchange goods or services for USD: Because other people who you would like goods and services from also trade in USD.

      Now, if what you really mean is “Why would anyone use bitcoins over USD”, it’s because bitcoins have several advantages:

      1. They act like cash, but you can transfer them electronically and (mostly) anonymously.
      2. No transaction fees (or more precisely, you get to choose what fees to pay, including none at all).
      3. No inflation (eventually).

      1. The same reason you exchange goods or services for USD: Because other people who you would like goods and services from also trade in USD.

        I agree that this is the reason I trade in USD. But you seem to be neglecting a critical factor of why I don’t trade in BitCoins even while acknowledging it.

    4. “Why would anyone exchange goods or services for BitCoins?”

      Bitcoin works like the digital cash everyone was talking about like 10 years ago and it never happened…

      Never happened until now that is!!!

      Anyway we got the digital cash we all dreamed about…now all we need to do is get businesses to actually accept it as payment.

      1. “Anyway we got the digital cash we all dreamed about…now all we need to do is get businesses to actually accept it as payment.”

        Yep.

  7. I bought 2 bitcoins at $14.50…

    The price is now $13.70

    I suck at bitcoin investing.

    1. Aren’t they engineered to decline in value (or, rather, scarcity), quickly at first, but more slowly later? Thus rewarding those who jump on the bandwagon early, thus prompting some enthusiasm?

      1. Actually, bitcoins are engineered to become harder to “mine” (create) over time, to a pre-determined limit in the number of bitcoins in the world. The early adopters (and later, those with a lot of computing resources to throw at the problem) could get bitcoins for “free,” through the computational “mining” process. But, for most of us, that ship sailed awhile back. Now, using normal home or business computer gear, you will be lucky to “mine” yourself a single bitcoin even after several years of trying. No problem, there, however. You don’t have to be a miner to accept, use, and otherwise benefit from gold coins, either. You can just treat them as money. So, also, with bitcoins.

        The “increased scarcity” of new bitcoins over time causes a “deflation,” in that each bitcoin (theoretically, and depending on the size of the bitcoin economy and the strength of demand) increases in value over time. This, also, is not a real problem, because people can traffic in fractional bitcoins (as North Americans once employed “pieces of eight”).

        The main danger in terms of privacy appears to be the possibility that governments will pass and vigorously enforce laws requiring the surrender of privacy in order to convert bitcoins (or other similar alternative currencies) into “official” national currencies. Also, I don’t know enough about the bitcoin address format to know whether unique addresses will soon (if ever) “run out,” assuming that everyone takes the prudent approach of using a new address for each transaction.

  8. But the US government could easily require any business accepting Bitcoin payments (or converting Bitcoins to dollars) to collect identification information from their customers in the same way that “know your customer” regulations require financial institutions to collect information about their customers.

    I know we’ve come to accept this sort of thing, but what gives the US government the authority to make me collect evidence before any crime has been committed? Excuse me, but is that really an enumerated power?

    I’m beginning to think that efforts to route around our nascent totalitarian state are worse than futile, they’re a distraction. Once you allow such a state to develop: You. Are. Fucked. V for Vengeance is a fantasy. Has totalitarianism ever been successfully challenged from within?

    Lest you think I’m off my meds for using the t-word, ask yourself how it happens. It isn’t really imposed from the top-down by mustache-twirling villians. No, the people put on their chains willingly, because the state offers them something they desperately desire. And what do we desire? Safety and equality. Pathetic.

  9. Is there any place to actually spend bitcoins beside SilkRoad?

  10. Sounds like “The Unincorporated Man”. In the future, people will know better than to let the government issue money.

      1. Only 2 left in stock–order soon (more on the way).

        So i should order soon cuz they are almost out….but they will soon have more so don’t really worry about it.

        Amazon is one freaky chick.

  11. Bitcoin is 100% anonymous when used correctly, and anyone who says it isn’t is 100% full of shit and/or technically inept.

    If coins can be minted without paying money, and thus value can be extracted from the system anonymously, then one can send said coins anonymously and receive goods in as anonymous a form as possible, considering that goods must be physically exchanged at one point or the other. For virtual goods this is 100% anonymous. For the seller, it can be kept anonymous by technical means.

    Stop spreading horse shit.

  12. Can the FUD. Bitcoin is digital cash. Not a difficult concept.

    Who takes bitcoin? I do. I have an album as a free download, if you like it you can donate with bitcoin. Find it here: http://saddet.com

    If you’re as sick of reading these articles as I am get in the game and offer a service or product.

    If you can’t wrap your mind around a simple concept, move on – it’s not for you.

  13. Tim is understating the privacy benefits. Although it goes against the essence of a digital currency, some transactions can be made person-to-person or via encrypted email where merely the ownership of the bitcoin private keys have been exchanged. These transactions will be off-the-grid and outside the scope of the bitcoin block explorer.

    The effect of this is two-fold: (a) complete ownership of bitcoin without ever being “on the block chain” or associated with the block chain; and (b) sufficient plausible deniability for any forensic or statistical traffic-analysis techniques that do attempt to trace bitcoin transactions and their flows.

    Bitcoin challenges hawala more than it challenges VISA, Mastercard or PayPal.

    Also, see “Maintaining Anonymity While Using Bitcoin” http://themonetaryfuture.blogs…..using.html

  14. I believe that bitcoins are going to change the world. I recommend that everyone read up about them. If you are interested in buying/selling bitcoins, I personally use and recommend http://www.tradehill.com – they have lower fees than the main exchange (mtgox), and their website seems more professional IMHO.

    Also, I have a code that will get you 10% off trading fees there for life: TH-R1168

    Enjoy!

  15. BitCoin is an experiment. A proof of concept. There have been myriads of problems but so far it has managed to overcome them all. I do not think the ultimate objective it to convert the world to using bitcoin, but to allow multiple non-governmental money providers to evolve. Also to expose the falacy that the value of money is somehow dependent on government. In the US the value of our money is purpotedly based on the “full faith and credit of the United state government” As the recent debt limit debacle should make clear to everyone. The value of US money is based on the wealth citizens create – nothing more.
    Money is a medium of exchange. Myriads of people have observed that it can be shells, beads, whatever people can use to exchange one set of goods or services for another.
    The perfection of Bitcoins anonymity for ordinary citizens is not critical. It is actually important that those willing to work at it (criminals) can achieve anonymity. A system strong enough to provide criminals with total anonymity protects ordinary citizens because it is not worth the effort of government to trace things if they can not trace the criminals.
    Further, specific weaknesses in one currency are meaningless if there are multiple choices available. If BitCoin is just one of many similar schemes each sufficiently different that they do not share exactly the same vulnerabilities, then it is not worth the effort of government to crack them.

    The most critical question is can bitcoin evade being crushed by government long enough to become widespread enough to be unassailable.
    Governments do not take kindly to threats to currency – look at what happened to liberty dollars and e-gold.

  16. Check out this site which attempts to like transactions with ips http://pi.uk.com/bitcoin/unconfirmed-transactions

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