Bitcoin isn't anonymous, but the idea of an anonymous digital currency has wide appeal. Core Bitcoin developer Mike Hearn says he's working on an interesting project to deal with remaining privacy holes. Essentially, a piece of Bitcoin and the Tor anonymity network will be "stitched together" in updates expected next month.
Bitcoin is pseudonymous, a step below anonymity. The public ledger, or the blockchain, lists the details—the who, when, what—of every transaction ever made. The Bitcoin ecosystem is a jumble of apps built on top of the original network protocol. Some of these are powered by bitcoinj, a Java implementation of the protocol that Hearn plans to tie to Tor.
The Tor anonymity network is software that funnels data through relays and encrypted layers in order to preserve user privacy and anonymity. Once Hearn makes the promised updates, all transactions made with bitcoinj-powered wallets will be routed through the Tor anonymity network, making the original data and IP addresses much more difficult to trace.
Law enforcement will certainly denounce this project. Control-happy regulators and politicians claim that an anonymous currency will merely fuel drug purchases and nefarious criminal activities. Although, criminals who want to remain anonymous would probably have an easier time using cash.
There are plenty of legitimate uses for an anonymous network. Hearn expects that the NSA has already "de-anonymized" the block chain through IP tracking. Hearn told Forbes:
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.
Giving friends and family access to a running list of completely legal purchases is obviously not appealing for many non-criminals. Plus, in order for a business account to operate on Bitcoin, it helps to shield competition from a list of every transaction the company has made.
Transaction anonymity is a pretty popular idea. Other projects have evolved to deal with Bitcoin's anonymity "flaw." ZeroCoin, to be released May 2014, is a stand alone currency with anonymous features built in. Dark Wallet, directed by the creator of printable guns, Cody Wilson, is also in the works.
Although integrating Tor is a step for Bitcoin privacy, and certainly is an impediment to eager snoops, imperfections remain. According to Coin Desk, Bloom Filters increase transaction efficiency but "bleed a lot of information." Hearn plans to address this in future updates, but added that there is no "silver bullet" to Bitcoin transaction anonymity.