When news first broke in 2011 of an online marketplace built by hackers on the “dark web” where users could buy and sell illegal drugs and weapons for bitcoins, much of the mainstream media jumped to the false conclusion that this new Internet money is completely anonymous. Is Bitcoin anonymous?
In fact, every time an amount of bitcoin changes hands, the transaction remains forever visible in an immutable, public ledger called the Blockchain. Users of the Silk Road marketplace operated TOR anonymity software to cover their tracks. But in less than two years, by the end of 2013, the servers had been located and taken down by the FBI. Silk Road’s alleged 29-year-old mastermind Ross Ulbricht had been caught by federal agents in the science fiction section of the Glen Park public library in California and sentenced to life in prison.
Bitcoin Transactions Aren’t Anonymous
By studying Bitcoin’s public ledger cybercrime specialists can track the history of every fraction of bitcoin, like a marked bill that leaves a unique trail, its fingerprint, as it passes from one Bitcoin address to another. Even the most clever hackers eventually make mistakes. Every new transaction increases the risk of getting caught, making it easier for one of these experts to associate a Bitcoin address — and its entire, publicly available transaction history — with some personally identifiable information. Compared to traditional illegal drug and weapons sales, the use of Bitcoin is complex and potentially riskier because of this permanent, public trail.
Once an investigator links a user’s identity to his Bitcoin address, he can look up the current balance of that address and track both the source as well as the eventual destination address of all bitcoins that have ever passed through that one user’s account. With advanced network analysis he may also be able to uncover other Bitcoin addresses owned by the same user. Sometimes an individual or organization publicly announces an address to receive payments or donations, and services like Blocktrail even provide labeling to make it easier to keep track of the owners of these addresses. For example, addresses for many Bitcoin exchanges as well as for charities like this homeless shelter in Florida are publicly available.
A growing legacy of Silk Road is the increasing public awareness that Bitcoin is not anonymous — otherwise Ross Ulbricht might not now be behind bars. The world is slowly catching on to the fact that the digital currency revolution may not be about anonymity as much as transparency, a feature that can be used to improve social justice or to combat fraud.
Social Impact and Transparency
In the last week of May 2015 billionaire Richard Branson hosted an invitation-only Bitcoin Summit about social impact on his private Caribbean island where transparency was discussed in connection with its possible social impact. While the irony of an “elite” Bitcoin event for social impact did not go unnoticed by the public, the media coverage only makes an argument for the social significance of the digital currency revolution more difficult for the skeptics to ignore.
One example given in the Wall Street Journal’s coverage of the event is the suggestion made by acclaimed anti-poverty activist Hernando de Soto to use the Blockchain to title property for the poor in developing countries. The permanent registration of this type of information could help protect underprivileged people against corruption by making these public records truly open, verifiable and independent of any central authority.
Similar issues effect us in more developed countries too. One problem endemic to modern democratic society is campaign financing. A widely exploited loophole in U.S. politics allows for what the New York Times calls “total public anonymity” for individuals and corporations in the realm of political financing, also known as “dark money.”
A recent poll conducted in the United States by The New York Times and broadcaster CBS in June 2015 revealed:
“With near unanimity, the public thinks the country’s campaign finance system needs significant changes.”
This excellent short video by Aaron Byrd and Quynhanh Do for the New York Times is called “Campaign Financing Without Fingerprints.”
Without even the slightest hint of irony, it is very tempting to imagine that public, decentralized, peer-to-peer ledger technology like the Blockchain can eventually provide a solution.
Read “The Legacy of Silk Road and Ross Ulbricht’s Life Sentence” and “The Legacy of Silk Road Part 2: Decentralized Marketplaces“.
At The Next Bitcoin Wednesday
On 1 July, 2015 Australian director of Vaultoro Joshua Scigala spoke about the different types of Bitcoin transparency. One of the questions raised during his talk is how this new technology can give us control over the balance between (financial) privacy and transparency in modern society.