Ask Dr. Bitcoin: Is Bitcoin Anonymous?

DrBitcoinHeader800x465A common misconception is that Bitcoin is an anonymous currency. What it offers is a kind of ‘pseudo-anonymity’ (or ‘pseudonymity’), which means that if the someone were inclined to trace Bitcoin transactions or investigate Bitcoin addresses, they can do so just by looking at, BlockExplorer, or any a number of open source tools used to perform forensics on the blockchain.

The blockchain is a ledger wherein all Bitcoin transactions are recorded. It offers pseudonymity, since people’s names and addresses aren’t reflected in the ledger, but the Bitcoin addresses can still be tied to a person through good old detective work. It might entail a little digging around, but as Silk Road founder Ross Ulbricht was unfortunate enough to discover, the owner can certainly be traced.

A new Bitcoin wallet, ‘Dark Wallet’, aims to protect the identity of users by taking pseudonymity to anonymity. Dark Wallet is a project created by Cody Wilson and Amir Taaki. Wilson gained attention last year when he fired the first-ever printed gun, while Taaki is the anarchist developer behind the DarkMarket, a decentralized online black marketplace that aims to become the next Silk Road.

Wilson and Taaki launched an Indiegogo campaign last October for their Bitcoin wallet, and it was quickly funded in cash and Bitcoins. Dark Wallet can be downloaded and run with the Chrome browser.

Just go to, click ‘Download ZIP’, unpack the ZIP file, go to ‘chrome://extensions,’ enable Developer Mode, click ‘Load unpacked extension’ and select the unzipped folder.  This is a pre-alpha preview which means users can expect glitches and instability from the software.

How Dark Wallet works


darkwalletSo how can software protect one’s identity? Dark Wallet uses a technique known as CoinJoin, which has been around since the early days of Bitcoin. CoinJoin makes it possible to anonymize transactions by combining random Bitcoin transactions so the blockchain records two transactions as one. Before, you’d have to have coding skills or crypto-prowess to use CoinJoin, so not everyone enjoyed the anonymity it offers. Dark Wallet makes it simple for any Bitcoin user to mask their identity.

For example, Mike is buying a My Little Pony stuffed toy from an online seller, and at the same time, I could be buying a truck of weapons-grade plutonium from an online black market to power a new alternative-energy car battery I’m working on. Both Mike and I use Bitcoins to pay for our purchases. What Dark Wallet will do is combine the two transactions so it will be reflected as one on the blockchain (along with many other wallet users). This makes it impossible to determine who bought what. Dark Wallet will also allow users to run CoinJoin even when they’re not making any purchases or payments, in order to mix their Bitcoins and send them to another address owned by them. This makes it harder to determine the identity of Bitcoin owners.

The more CoinJoin is used, the harder it will be to trace who owns the Bitcoin.

“When you start to join transactions, it muddles them,” said Taaki. “As you start to go down the chain, you can only be 50 percent sure the coins belong to any one person, then 25 percent, then one out of eight and then one out of sixteen. The conditional probability drops very fast.”

Enticing for criminals


Bitcoin-Image2778935760Since the inception of Dark Wallet, Wilson has been plagued with questions as to its purpose. Dozens of critics have suggested it will make money laundering even easier, encouraging more illegal activities.

By telling people you can buy things using Bitcoin and Dark Wallet anonymously, the obvious fear is it will be used to buy illicit drugs, illegal ammunition, or even fund pornographic sites catering to pedophiles.

Back in December, Jon Matonis, executive director of the Bitcoin Foundation, said in an interview that Dark Wallet’s effort is consistent with the foundation’s goal of promoting and developing Bitcoin into a private, government-free currency, but admitted that he is concerned with some of the aspects of the Bitcoin wallet. For one thing, even the name “dark wallet” has negative connotations which could cause people to assume it’s been designed for illicit activities.

Because of these concerns, some are wondering if the authorities may attempt to prevent the launch of Dark Wallet.

Stephen Hudak, spokesman for the U.S. government’s Financial Crimes Enforcement Network, declined to comment specifically on Dark Wallet, but stated that agency is “well aware of the many emerging technological efforts designed to subvert financial transparency.”

“It’s certainly our business to be interested and vigilant with respect to any activities that may assist money laundering and other financial crimes,” he added.

The ‘F’ word


Wilson knows that Dark Wallet will probably be used for illegal transactions like the purchase of drugs, but that’s not his intention.

In a previous interview, Wilson insisted there’s a need for anonymous cash online, and stated that, “It’s not that I want you to buy drugs. It’s just that I think you should have the freedom to do it.”

Yup, the ‘F’ word. Freedom. That’s what Dark Wallet is attempting to offer to Bitcoin users. Skeptics may wonder what anonymity has to do with freedom.

Mcnealyemcworld2012Sun Microsystems co-founder (and @theCube alumn) Scott McNealy famously said once that “You have zero privacy anyway. Get over it.”  Much later on, Google CEO Eric Schmidt said “If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place…”

The problem is that in these modern days, one never knows when one is breaking the law.

An interesting thought exercise is to attempt to imagine how many people (experts, if you will) do you think you’d have to gather into a room to understand the totality of just federally enforceable American law? How many people (again, trained experts in the law, so we can somewhat reduce the number) do you think would be required to understand the totality of federally enforceable American law that was passed for 2013? What about the totality of the tax code that was put into place in 2013?

Ignorance of the law excuses no man, as the axiom goes. I wonder if you can say that still truly applies when the number of experts required to know the totality of the law is hard to imagine, even for those with large imaginations?

When thought about in these terms, it’s not difficult to imagine how having a way to completely obfuscate one’s financial path can be handy. By providing a way to make anonymous purchases, people will be free to buy things they have longed for without worrying about being judged or prosecuted for committing a crime of ignorance.

The goodness that anonymity offers should not be overshadowed by how others can use it for wrongdoing.

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