Bitcoin and anonymity

Remember those cartoons from the 90s where someone in a chat room who thought he was talking to an attractive woman was actually talking to an old fat dude in a tank top?

That meme has come back around with Bitcoin. (But the anonymous person on the other side of the interaction this time could be a money launderer or mail-order pot dealer. At least, that’s the image some detractors want to attach to Bitcoin.)

Most of us, though, are not money launderers or mail-order pot dealers. We just seek the simple privacy from having our finances tracked. You know, the same way we would bristle at a stranger asking us what our monthly salary was.

Bitcoin facilitates financial anonymity, provided a user wants to take the steps necessary to be anonymous.

Daniel Cawrey at CoinDesk makes the interesting point that Bitcoin eliminates the need for trust from a third part (say, a bank). In fact, trust doesn’t factor in at all because transactions are recorded on the blockchain.

I send you 4 BTC, your account records 4 BTC. There is no need to tie an identity or name to the sender or recipient — we can just look at the addresses and the blockchain.

That said, the identity of a casual Bitcoin user can be triangulated by following patters of behavior and cross-referencing those against account activity. That is, if someone is so inclined to go through the effort.

But you can make Bitcoin anonymous with some additional effort.

CoinJoin is one simple way to do this. This downloadable software allows a user to join a session with other users who (at the risk of oversimplifying things) then mix a bunch of Bitcoins together.

So long as the Bitcoin outputs are different from the inputs (e.g. the 100 BTC you put in comes out as 25 BTC and 75 BTC), this puts a big knot in your Bitcoin money trail.

Again, the goal here is not to do anything devious; privacy simply requires extra work these days.

Finally, it should be noted that users on big exchanges or payment processors that seek to be regulations compliant will find anonymity harder to achieve.

Which makes sense: Google, for example, has been forced to comply with the NSA, and no one using Gmail these days has any reason to think his or her emails are private.

That’s the thing with compliance. To stay on the right side of the law, you have to make yourself easy to find.

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