When people first hear about Bitcoin, they are often told that it is a form of anonymous cash that cannot be tracked by any government or company. While the digital currency can be used in a private and secure manner, it is definitely not anonymous by default. There are also plenty of governments who would like to see the anonymous aspects of Bitcoin removed from the protocol, but it doesn’t seem like that’s going to happen at any point in the near future. The correct answer as to whether or not Bitcoin is truly anonymous is that it has the potential to be used that way. Bitcoin was created to solve the problem of censorship resistance more than anonymity in finance, but it’s possible that we’re not that far away from a completely anonymous cryptocurrency that cannot be tracked by anyone. Let’s take a closer look at anonymity in the Bitcoin space.
The Public Ledger
One of the ironic aspects of calling Bitcoin an anonymous payment system is that every transaction can be seen on the public Bitcoin ledger. When Bob sends some bitcoins to Sally, he has to broadcast that transaction to the entire network in order for it to be confirmed. Without this transparency, it would be difficult for miners to make sure that no one is trying to double-spend their bitcoins. The only issue with tracking the transactions related to Bob or Sally is that you don’t know which public Bitcoin addresses are owned by them. Each Bitcoin user is given a pseudonymous Bitcoin address, and the user can actually create as many of those addresses as needed on a regular basis. Many privacy advocates recommend creating a new address for every Bitcoin payment, and there are plenty of other changes that could be made to the protocol to make this kind of functionality easier to implement in the near future.
Interacting with Traditional Financial Institutions
Although it is technically possible to make anonymous payments on the Bitcoin network from time to time, that anonymity is lost when dealing with traditional financial institutions. Any Bitcoin exchange that deals with fiat currency is going to need to take down a lot of personal information about you before they’ll be able to offer you their services. Most of these requirements are related to anti-money laundering policies, which became much more intrusive after the 9/11 attacks. The fact that every Bitcoin user needs to be tracked whenever they make a purchase is basically an admittance from most governments that there is no such thing as financial privacy. This was one of the main reasons that Satoshi Nakamoto created Bitcoin in the first place. When people are allowed to be their own banks, it becomes much more difficult to track what people are doing with their money on a daily basis. Although governments can enact regulations on the entry and exit points of the Bitcoin ecosystem, they have not been able to target people who only operate within the confines of currencies guarded by cryptography. Anyone who wishes to use Bitcoin in an anonymous fashion will want to stay away from any institution that requires some identity verification before allowing a deposit or withdrawal to be made.
The Future of Anonymity in Bitcoin
Cases involving Silk Road, BitInstant, and a few other companies in the Bitcoin space have taught us that Bitcoin is definitely not anonymous at this point in time. Having said that, there are a number of different programmers and cryptographers who are working on the technologies that will allow for completely anonymity for Bitcoin users in the near future. Dark Wallet is a Chrome extension that plans to use stealth addresses and mixing services to provide enhanced privacy features for its users. Zerocoin is another project that has been in the works for some time, and the idea with this enhancement is that users would be able to exit and then re-enter the Bitcoin blockchain without showing a paper trail behind themselves. In addition to the added anonymity features for Bitcoin, there are also altcoins, such as Anoncoin and Darkcoin, that plan to come up with some security improvements of their own.