Anonymity and the future of bitcoin

24 July, 2014

The subjects of regulation and anonymity remain particularly sensitive for the cryptocurrency community.

Crypto-currencies, including bitcoin, offer a number of impressive benefits, but perhaps the most popular benefit of all is anonymity. Around the world, individuals adopting bitcoin tend to have a high regard for anonymity and privacy. Given their public visibility, how anonymous are bitcoin and other crypto-currencies, however??

Previously, it was believed that crypto-currencies such as bitcoin were completely anonymous and lacked the ability for transactions to be traced. CNN 1 reports that bitcoin transactions are recorded in a public log without the names of buyers and sellers being revealed. The only information actually revealed is wallet IDs. The goal of this structure is to keep transactions private while simultaneously allowing users to buy or sell without those transactions being easily traced back to them. Bitcoin was never specifically intended for use in illegal transactions, but nevertheless, the digital currency eventually became notorious for its association with such black markets as Silk Road. Despite that, bitcoin was originally designed as a new form of currency that would allow users to transfer ownership in a direct manner rather than through a centralized authority.

Although the bitcoin network is based on a decentralized method for creating and then transferring currency online, transactions are stored within a public ledger, known as a blockchain. The blockchain is used for keeping track of payment history involving bitcoin transactions.

The New York Times 2 reports that while tracking bitcoin transactions is not as simple as tracking credit card transactions, some researchers do believe that the data associated with a bitcoin transaction can be traced. Specifically, researchers believe that it may be possible to track transactions based on the alpha-numeric data that comprises each bitcoin and then by reviewing that bitcoin's purchase history.

Earlier this year, that notion was confirmed when a Reddit user was able to publish information regarding the possession of 200,000 bitcoins by MT Gox. The information was obtained by analyzing transactions that were publicly available. Later, CEO of MT Gox Mark Karpeles confirmed the information when filing for bankruptcy. The publication of such accurate information served as a highly public example of the potential for accurately attributing bitcoin address ownership. With the publication of that information, questions of bitcoin's anonymity rose to the surface along with queries about what could be done to make crypto-currencies completely anonymous.

In reality, it is actually possible to conceal transaction information to ensure that such an analysis is either impossible or at least incredibly difficult. The New York Times further reports that computer science researchers at Johns Hopkins University are already at work on finding a solution to the question of anonymity. Based on what would be an extension for bitcoins, the new system has been dubbed "Zerocoin," and is intended to provide complete transactional anonymity. Basically, a large number of extensions are appended to each bitcoin.

Other developers are also at work on ensuring that bitcoin is completely anonymous. Among those developments is Dark Wallet. This browser app utilizes both CoinJoin and encryption technology, according to a report from PC World. 3 CoinJoin mixes multiple, random bitcoin transactions in order to conceal original payers. Released on May 1, 2014, Dark Wallet was designed by Amir Taaki and Cody Wilson.

The anonymity of bitcoin is one that has gained even more attention in light of proposed stricter regulations for bitcoin among several government agencies. As reported by The Stanford Review 4, the IRS has asserted that virtual currency will be treated as property for federal tax purposes. This would mean that any wages paid to employees in virtual currency would be taxable for the employee and therefore subject to payroll taxes and federal income tax withholding.

Tension as well as legal confusion regarding the taxation of online transactions has already begun to mount. According to The Stanford Review, Dark Wallet would make it impossible to tax a user's bitcoin transactions due to the fact that the technology itself makes it virtually impossible for government agencies to trace individuals who are involved in bitcoin transactions. While the IRS has stated that payments using virtual currencies would be subject to information reporting in the same regard as any other payment, technology such as Dark Wallet would make it almost impossible for such laws to even be enforced.

Exactly what will happen in terms of the regulation of bitcoin remains to be seen, but the currency is continuing to gain in terms of acceptance and mainstream usage. A report published by reveals a significant increase from only 7,000 bitcoin transactions per day just two years ago to approximately 70,000 transactions per day in May 2014. With anonymous technology such as Dark Wallet now more widely available, users can take full advantage of the benefits offered by bitcoin while remaining confident that their transactions are truly anonymous.


1) The Great Cryptocurrency Anonymity Debate Intensifies as Vertcoin Tests Stealth Addresses

2) Researchers Work to Add More Anonymity to bitcoin

3) 'Dark Wallet' wants to make bitcoin even harder to trace

4) Dark Wallet: Taking the anonymity of bitcoin one step further