In many ways, the internet, which was originally seen as a tool of expression has also come with the vulnerability of being a perfect outlet for surveillance. Our online, mobile, and electronic communications are under constant surveillance from institutions with vested interest in collecting an assortment of important political, personal, and economic data.

The bitcoin blockchain houses a vast amount of economic data waiting to be collected, temporarily hidden behind a veil of cybersecrecy. The possibility of tracking spending patterns could lead to gathering data on the users of the bitcoin network. Could it be that technologies of digital money, which initially present themselves as a bastion of individual freedom, will be subverted by institutions of power into a twisted form of panopticon?

[wlm_private “Insider”]

Privacy: Non-negotiable Or Fleeting Anomaly?

Although the bitcoin public ledger of transactions carries with it the potential to be used anonymously, it is trivial to destroy the anonymity of a wallet into a fully translucent view of a users’ financial life. Even the most savvy hackers of the bitcoin space, when inclined to “cash out” at scale, have been shown to use services which invalidate this anonymity.

The difference in anonymous transactions and fully transparent is where your real-world identity is not linked to the wallet address. If it is linked, any transaction can be followed through the blockchain and spending habits can be monitored, a most opportunistic scenario for surveillance purposes. Much the same as the pre-DNS era of the internet, bitcoin’s use is not currently attached directly to the end user. A bitcoin address is hardly an identifying article of metadata. Yet, in due time, it is quite likely that users will succumb to the whim of convenience at the cost of personal privacy.

A 2012 report from the FBI shows the dominant method in which law enforcement is currently attempting to identify and track the movement of money: exchanges and money transmitter services. “The FBI assesses with medium confidence that law enforcement can identify, or discover more information about malicious actors if the actors convert their bitcoins into fiat currency” the report reads and further concludes that the main incentive for criminals to use bitcoin is that “law enforcement faces difficulties detecting suspicious activity, identifying users and obtaining transaction records”.

And a sizable portion of bitcoin activity is seen to be coming from these identifiable sources:

Bitcoin Activity

An analysis on the activity of the bitcoin network shows us that exchanges and speculation are one of its main use cases. Source: Meiklejohn, et al., University of California, A Fistful of Bitcoins: Characterizing Payments Among Men with No Names

A further study on the anonymity potential of the bitcoin network conducted by the University of California uses a form of pattern analysis on the bitcoin network known as a “peeling chain”. This type of analysis, which is already widely employed by the banking industry, analyzes the flow of money between change addresses to determine common transactions. In this study, the researchers were able to reliably link many Mt. Gox addresses to Silk Road wallets. Upon receiving a subpoena, these exchanges would then be required to provide information on accounts to law enforcement agency and by extension, reveal the identity of Silk Road users. Specifically, the report reads:

“We are able to track flows of money by following these change links systematically: at each hop, we look at the two output addresses in the transaction. If one of these outputs is a change address, we can follow the chain to the next hop by following the change address, and can identify the meaningful recipient in the transaction as the other output address (the “peel”).”

– Meiklejohn, et al., University of California, A Fistful of Bitcoins: Characterizing Payments Among Men with No Names

Bitcoin: A Threat Or Opportunity For Government?

Amateur nation states today disallow online communications and attempt to limit the use of bitcoin. The superpowers however, use these technologies entirely differently. Instead of something to be viewed of as a threat, superpower governments use these technologies as a kind of law enforcement tool. The bitcoin network may provide the ability to evade jurisdictional controls in many areas of money management, but superpower governments will use these technologies to further their own ability to exert their laws on citizens. Professionals use the internet, and will use the blockchain, to identify criminal activity.

If bitcoin is adopted by a more mainstream audience, and if not used in conjunction with some third party service, people’s spending habits will be as hidden as their social media activity or browsing history is today. The idea remains that the concept of the blockchain ledger itself is neither good nor evil for privacy, but the actions the user takes to preserve anonymity and withhold sensitive data will determine the utility they receive while using it.

The use of digital money leaves extensive public records and bitcoin is no different. In time, we may see bitcoin become the most transparent form of money the world has ever seen.


Travis Patron

Travis Patron is the author of The Bitcoin Revolution: An Internet of Money, a seminal publication in the digital money space which outlines the basics of the bitcoin payment system. As a public speaking authority, he regularly speaks to audiences on the economics & industry trends of bitcoin.

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