The Great Cryptocurrency Anonymity Debate Intensifies as Vertcoin Tests Stealth Addresses

bitcoin anonymous transactionsThe regulatory debate of cryptocurrencies is a sensitive matter for the cryptocurrency community. When Mike Hearn, Chair of the Bitcoin Foundation's Law & Policy committee, proposed a “brainstorming” on the possible merits of blacklisting addresses, there was a backlash at the very idea of having such a debate, but lawmakers and academics are constantly giving speeches and publishing papers on the legal implications of cryptocurrencies with particular emphasis on its anonymity or pseudo-anonymity features.

Anonymity or pseudo-anonymity is a core feature of Bitcoin, the most prominent cryptocurrency, born in 2009 out of the cypherpunk scene which declared in its manifesto, published in 1993, that:

“Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn't want the whole world to know, but a secret matter is something one doesn't want anybody to know. Privacy is the power to selectively reveal oneself to the world. “

Many Bitcoin adopters therefore highly value privacy and anonymity as a principle in itself, but with Bitcoin transactions being publicly visible to all is the debate misguided and confused?

Just How Anonymous is Bitcoin?

It was previously widely believed that Bitcoin was anonymous and tracing bitcoin transactions was impossible. All changed when, on the 27th of February, a Reddit user published evidence that MT Gox possessed 200,000 bitcoins by analyzing publicly available transactions. This analysis was later confirmed by Mark Karpeles, the then CEO of MT Gox which filed for bankruptcy claiming it had lost 850,000 bitcoins, when he publicly announced that MT Gox has "found" 200,000 bitcoins.

The ability of the Reddit user to attribute ownership of 200,000 out of the 850,000 bitcoins claimed by Mark Karpeles under testimony to have been lost, provided a very public example of the possibility of attributing ownership of Bitcoin addresses with some level of accuracy in limited circumstances where ownership is known for one or more transaction in a chain of transactions. It is however possible to obfuscate transactions so that such analysis becomes incredibly difficult or impossible.

One way to obfuscate transactions is by mixing bitcoins by using such services as CoinJoin or Share Coin. Unfortunately, it has recently been reported that some of these services do not provide full anonymity as it is still possible to trace the original transaction.

A greater level of anonymity may be provided by stealth addresses which use a complex process to, in effect, fully hide the public key or the sent amount as shown in the screenshot. Stealth Addresses have not been added to the bitcoin protocol, but can be accessed by the use of layered services, such as Dark Wallet, a new service announced on May the 1st by Amir Taaki working together with a group of coders that go by the name UnSystem.

Vertcoin Poised to be First Cryptocurrency to Add Stealth Addresses

No Cryptocurrency has yet implemented stealth addresses on the protocol level, but there are at least three cryptocurrencies planning to add anonymity features. One of the newer arrivals on the scene, Vertcoin, which distinguishes itself by a changing mining algorithm designed to prevent or minimize mining centralization, is poised to be the first ever Cryptocurrency to add stealth addresses to vertcoin’s protocol. Testing has already began, to be followed by a full launch in approximately 20 days.

Announcing stealth addresses Vertcoin developers stated in a blog post that:

“Stealth addresses increase privacy for a recipient by allowing you to publish a stealth address, which is like a seed which the sender then uses to generate a unique one-use Vertcoin address for the transaction. All the transactions remain public on the blockchain, but knowing the entire transactional history of your stealth address is now no-longer possible except for you, the holder of the secret key.”

Although the announcement was widely welcomed by the Vertcoin community which has recently seen the VTC price fall 50%, questions have been raised on the benefits and wider costs of adding stealth addresses. Aware of such concerns, a spokesman for vertcoin stated that: “Vertcoin does not want to hide criminals against nations, they want to hide ordinary people against corporations!”

Striking The Right Balance

From congress halls and academic ivory towers to internet forums and street cafés there is an ongoing raging debate on where to strike the balance between privacy and security. On the one hand of the spectrum there are law enforcement and government agents like David S. Cohen, Under Secretary of Terrorism and Financial Intelligence, who states that:

“There may be situations where we need to choose between innovation and transparency… when forced to choose between the two, we will err on the side of transparency.”

Erik Barnett from the Department of Homeland Security goes much further and states that:

“If we’re not able to follow the money, criminal organizations will easily risk the loss of one conspirator and a certain sum of money to profit overall from a system that conceals their trail… eliminating the anonymity in virtual currencies is an appropriate balance to that concern.”

Critics have pointed out that the goal of eliminating anonymity is a somewhat extreme position. They argue that governments claim to have the right to keep secrets of varying levels of classification and for varying degrees of importance from the public who, in theory, is the government’s master. To claim that no one has the right to anonymity and that it should be eliminated is to claim that governments have no right to secrets. In which case, the concealing of information from the public should cease.

On the other end of the spectrum there is UnSystem which proclaims that:

“Our goal is not to placate and obey the rules of the people responsible for navigating the world into a permanent financial crisis. With or without their permission, we are going to build a better future out of the ashes of this system which they broke

Many would argue that, regardless of the political system of governance - from tyranny to a consent based libertarian solution of no central governance - some rules are a necessity, especially concerning acts which are clearly and uncontroversially unlawful, such as kidnapping for ransom.

The most prominent voices seem to be in the middle. They reject either extreme, arguing instead for a combination of both positions. They argue that while cryptocurrency is a very novel invention, some of its qualities are ancient in many ways. Like cash, cryptocurrencies are an anonymous or pseudo-anonymous way of transferring wealth. As there is currently a regulatory system that has been put in place to tackle what is considered to be financial crimes which is adequate despite fiat being anonymous, it is suggested that there is no reason for cryptocurrencies to be treated any differently and that the right balance is struck by applying the current regulations that are already in place for fiat to cryptocurrencies. Speaking in June 2013, Jennifer Cavalery, director of Financial Crimes Enforcement Network (FinCEN) stated that:

“[Cryptocurrency] businesses… have the same obligations as other financial institutions, and the same obligations as any other money services business out there.”

Gavin Andersen, speaking at the Council of Foreign Relations on the 6th of February seems to support the current US regulatory approach which simply applies current financial laws to cryptocurrencies when he stated:

“I think the regulators here in the U.S. have actually done a pretty good job of realizing that, you know, there is a balance to be struck. And if there are tremendous benefits, then even if there are additional risks, if the benefits outweigh the risks, then the rational thing to do is to, you know, allow -- or not try to impede progress.”

Protocol Level Regulation v Transaction Level

Some of the confusion in regards to the regulatory debate seems to have been created by a mistaken belief that to regulate cryptocurrency means interfering with the protocol rather than regulation of transactions in cryptocurrency.  Most would argue that, like fiat itself, there is no reason to regulate a tool or limit its ways of operation simply because a malicious actor will abuse it and that there is no reason for any regulation of any kind on the protocol level of any cryptocurrency just as there is no regulation of any kind on the paper fiat itself. If any regulations must be applied then they can be applied on the transaction level by requiring exchanges or other financial businesses to comply with AML rules or other regulations just as banks are regulated in regards to fiat currency rather than fiat itself.

The implementation of stealth addresses by Vertcoin therefore is a welcomed development to address privacy concerns of cryptocurrency financial transactions so as to, at the very least, bring cryptocurrencies anonymity on par with fiat currencies.

Last modified (UTC): June 11, 2014 8:33 AM

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Andrew Quentson

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