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.
