Academy Industry Analysis Article

Can Crypto Be Private? Bitcoin’s Public Ledger in an Age of Increased Surveillance

2020.05.28 adamokex

Data breach monitoring and prevention service Under the Breach recently reported on Twitter that a hacker was selling customer databases from Trezor and Ledger — two of the most popular cryptocurrency hardware wallet manufacturers. The data was allegedly obtained via a Shopify exploit. 

While passwords or direct access to users’ cryptocurrencies were not being advertised, the hacker claimed to have personal identification information — including email addresses, names, phone numbers and residential addresses — for upwards of 80,000 users. This information could, in theory, be used to deanonymize crypto wallet addresses and trace user activity, among other things.

Though Ledger and Trezor have both claimed that the information for sale is a hoax, the issue of blockchain privacy has once again been raised. Just how private are your cryptographic transactions on Bitcoin and distributed public ledgers — and how concerned should you be in an increasingly-less private world?

Is Bitcoin’s distributed ledger too public?

Bitcoin (BTC) transactions are immutably recorded on a distributed public ledger — meaning all transactions are permanently stored on a decentralized network that is publicly viewable to anyone with an internet connection. Along with being permissionless — anyone can access the network— and uncensorable — no one can reverse or delete transactions — the transparent nature of the first and foremost cryptocurrency is, in a sense, its foundation.

However, some believe Bitcoin’s public ledger will actually be its downfall. 

Famous United States National Security Agency (NSA) whistleblower Edward Snowden once stated that Bitcoin’s “much larger structural flaw, the long-lasting flaw, is its public ledger.” Speaking at a Blockstack event in March 2018, he claimed that “you cannot have a lifelong history of everyone’s purchases, all of the interactions be available to everyone and have that work out well at scale.” 

While the widespread tracing and cataloging of transactions on the Bitcoin blockchain may seem like a monumental task in the present, future technological advances could make it increasingly realistic. A massive and immutable ledger of pseudo-anonymous transactions today could conceivably become a goldmine of deanonymized transactions tomorrow.

This idea is especially relevant when considering how one must interact with bitcoins — via third-party applications, like wallets and exchanges. Most users are required to provide proof of their personal identity in applications to buy and sell cryptocurrency for fiat money — primarily, exchanges. 

Given that all the transactions made with any particular Bitcoin address are visibly connected, any cryptocurrency exchange abiding by know-your-customer (KYC) regulations (meaning it requires a personal ID to use its services) has access to both a user’s personal identity and their transaction history. The exchange can, with relative ease, provide the identified user’s transaction history to a government, upon request.

Governments pay big money to track blockchains

The immutable and public aspects of Bitcoin’s blockchain are particularly problematic when one considers the history of government surveillance and the role government regulators may play in the future. In fact, some documents from Snowden illustrate that the NSA was targeting Bitcoin users worldwide as early as March 2013.

In more recent years, providing blockchain analytics and tracking services to governments has proven to be a lucrative business. One firm, in particular, has received at least $10 million in U.S. taxpayer funds to help the government fight against crime that involves cryptocurrencies. Called Chainalysis, the company provides blockchain analysis tools to governments (as well as compliance tools to crypto firms) with the goal of, as its co-founder stated in a recent interview, “preventing bad actors from abusing cryptocurrencies.” 

The firm has lucrative deals with the Internal Revenue Service (IRS), Transportation Security Administration (TSA), U.S. Immigration and Customs Enforcement (ICE) and the Federal Bureau of Investigation (FBI), among other departments and agencies. Another firm, called CipherTrace, has also received millions of dollars to provide services in the same vein as Chainalysis — though, with more of a research-and-development focus.

The financial incentive for blockchain analytics firms is, according to long-time financial tech journalist Jamie Redman, unlikely to decrease as we progress into the future. He explained to OKEx Insights in comments this week: 

“Today, there are more than 20 different blockchain analysis firms that offer all types of on-chain analytics and surveillance. In 2013-2014, these companies just started to appear, and it wasn’t as large and as lucrative as it is today […] As long as governments exist they will continue to scale blockchain surveillance.”  

Though governments had made efforts to track illegal activity involving Bitcoin previously, they first took earnest strides to track Bitcoin transactions after husband-and-wife academic team Philip and Diana Koshy published their findings in 2014 — mapping roughly 1000 BTC addresses to IP addresses. In fact, it was IP address tracking that helped the FBI catch darknet marketplace Silk Road’s creator and operator, Ross Ulbricht, the year before the study was published. Ulbricht is currently serving double life imprisonment.

Dust attacks are simple and cheap

Of course, it is not only law enforcement that has taken an interest in attaching identities to cryptocurrency addresses. Criminals also may use this information to exploit individuals and companies. One way they do this is via dust attacks.

Dust attacks transpire when a wrongdoer sends “dust” — very small amounts of BTC or another cryptocurrency — to a user’s personal wallet. The amount of cryptocurrency sent is often so small that the receiving user may not even notice it. Next, if the unsuspecting user then spends that tiny amount of crypto, this allows the attackers to attempt a combined analysis in an effort to identify the person or entity behind each associated wallet address. 

If the attackers are successful at associating a personal identity with a crypto address, they may use that deanonymized information to trace the affected user’s behavior and perform cyber-extortion, among other malicious acts.

Staying private when transacting with cryptocurrencies

Awareness around the fact that someone’s Bitcoin address can theoretically be connected to their personal identity and/or IP address is arguably growing, despite persistent representations of Bitcoin in media as the currency of choice for criminals. Even Bitcoin’s creator, Satoshi Nakamoto, was aware of this weak link in the network’s pseudo-anonymous nature. 

In 2010, Bitcoin’s anonymous creator advocated for the use of Tor, free and open-source software that enables anonymous communication while defending against web tracking, surveillance and fingerprinting by using multi-layer encryption. Nakamoto wrote at the time:

“If you send by IP, the recipient sees you because you connect to their IP. You could use TOR to mask that. You could use TOR if you don’t want anyone to know you’re even using Bitcoin. Bitcoin is still very new and has not been independently analysed. If you’re serious about privacy, TOR is an advisable precaution.” 

Bitcoin.org, an open-source project originally registered by Nakamoto, also warns against the possibility of having users’ IP addresses logged and recommends using Tor. The website’s “Protect your privacy” section explains:

“Because the Bitcoin network is a peer-to-peer network, it is possible to listen for transactions’ relays and log their IP addresses. Full node clients relay all users’ transactions just like their own. This means that finding the source of any particular transaction can be difficult and any Bitcoin node can be mistaken as the source of a transaction when they are not. You might want to consider hiding your computer’s IP address with a tool like Tor so that it cannot be logged.”

Though Tor comes recommended from both Bitcoin’s creator and bitcoin.org, it is not the only means to increase one’s privacy while using BTC or other cryptocurrencies.

Using fresh addresses, every time

Perhaps the easiest way to increase one’s level of privacy when interacting with Bitcoin is to always use a new address when receiving BTC. Additionally, it is useful to personally associate different wallets (or, at least, different addresses within those wallets) with different purposes — i.e. spending, long-term savings, etc.

By using fresh addresses for every transaction, senders are unable to associate a user’s receiving address with all of the addresses — and thus Bitcoin — owned by that user. This keeps all transactions associated with the separate addresses outside of their purview.

Mixing bitcoins

Bitcoin mixing services, such as CoinJoin, effectively combine multiple Bitcoin payments from multiple users into one single batched transaction. By doing this, those outside of the transaction have a significantly more difficult time identifying which spenders sent BTC to which recipients.

Perhaps the most famous usage of CoinJoin comes from Wasabi — an open-source, non-custodial Bitcoin wallet with an intense focus on privacy. Using “Chaumian CoinJoin,” Wasabi shuffles bitcoins and provides anonymous transfers.

CoinJoin transactions have only increased in number as time has gone on. According to CoinJoin developers, May 2020, alone, has seen more than 70,000 bitcoins obfuscated — worth more than $600 million, according to prices at the time of this writing. 

Free software entrepreneur and Wasabi contributor Max Hillebrand confirmed in a conversation with OKEx Insights this week that these numbers are “pretty accurate,” though there are likely some false positives, and that Wasabi sees roughly 10,000 fresh bitcoins (previously not CoinJoined) every month. “It’s very promising to see that these numbers are growing so steadily,” he said.

Though anonymizing ones bitcoins has apparently grown in popularity, cryptocurrency exchanges are not terribly keen on the practice due to compliance concerns with government’s anti-money laundering (AML) regulations. Binance, for example, has been known to freeze bitcoins that have been mixed in the past — something Hillebrand told OKEx Insights is a cowardly practice and constitutes user harassment. “In these cases,” he explained, “the company is harassing users who value and protect their privacy.”

An additional risk of mixing services, in general, is that the user must trust the individuals running them. In theory, it could be possible for those operating some mixing services to steal users’ funds or keep a log of their requests. Wasabi, however, can neither spy or steal from users, according to Hillebrand.

Privacy coins provide additional anonymity

While Bitcoin remains only pseudo-anonymous, at best, there exist other cryptocurrencies that make tracking user behavior virtually impossible through various techniques.

Zcash and zero-knowledge proofs

Zero-knowledge proofs are mathematical methods that assist in the brokering of sensitive transactions that demand increased privacy and security. They have long existed in the world of cryptography, making them interesting for privacy-focused cryptocurrency enthusiasts.

Zcash (ZEC) is undoubtedly the most famous cryptocurrency to use zero-knowledge proofs in an implementation called zk-SNARKs. The technology permits fully-encrypted native transactions that are still verifiable.

Monero and ring signatures

Monero (XMR) is one of the most well-known privacy-centric altcoins in the cryptocurrency space. 

The privacy coin uses a triangular distribution method to form a ring of signatures, instead of one signature. This renders transactions virtually anonymous since a third-party cannot identify which signature from a group of signatures belongs to which specific individual. 

Additionally, the network cannot differentiate between spent or unspent outputs. This ensures that every transaction output has plausible deniability. 

Mimblewimble

Mimblewimble is a type of blockchain design that allows for increased privacy and scalability while using the proof of work (PoW) consensus mechanism. In essence, it allows for confidential transactions — only in a way that is separate from zero-knowledge proofs or ring signatures.

What makes Mimblewimble unique is that it does not provide any identifiable or reusable addresses to users. As such, someone outside of a transaction’s participants cannot make sense of any visible data. Because blocks on a Mimblewimble blockchain appear as one large transaction, as opposed to a collection of multiple transactions, it is virtually impossible to link individual inputs and outputs.

Most believe that implementing Mimblewimble into Bitcoin would be too difficult a task to accomplish — though it is theoretically and technically possible. Instead, most development pertaining to the privacy-centric blockchain type has taken place on altcoins like Grin and Beam. Litecoin (LTC) creator Charlie Lee has also expressed interest in implementing Mimblewimble to LTC.

Should we ever expect Bitcoin to be private?

Though the privacy flaws inherent to Bitcoin are continually becoming more apparent, it stands to reason that privacy may not be the dominant cryptocurrency’s end goal, at least for some. While critics like Snowden argue that its immutable public ledger is problematic, some, like Redman, believe that may be overstated. “There are good aspects to a transparent ledger, just as there are bad aspects,” he explained to OKEx Insights. “It’s all about your perspective.”

Hillebrand, meanwhile, believes the distributed public ledger is Bitcoin’s biggest strength. He told OKEx Insights:

“For me, privacy is not the end goal. Defense of my property rights is my end goal. Privacy is a strategy that makes defense more effective. So, the public ledger of Bitcoin is its biggest strength because it allows me to verify the total money supply and, thus, this is a defense against unwanted inflation.

If we would have a perfectly anonymous monetary system, where some entities can increase the money supply anonymously — like early eCash — then my end goal of property rights defense is broken. Then I no longer care about privacy, as I have already lost the battle.” 

Referencing technologies and practices that can make Bitcoin transactions more private — such as those discussed above — Hillebrand continued:

“So, having a verifiable public ledger of pseudonymous identities, and then utilizing tools to ensure that the pseudonyms are not linked, is, in my opinion, ‘good enough.’”

As governments around the world continue to encroach further and further into individuals’ lives and more and more privacy is willingly given up, crypto anarchists like Hillebrand believe that Bitcoin’s importance will not diminish. Rather, for those who value personal freedom and responsibility, according to the entrepreneur, it is the best tool for holding and transacting money. He told OKEx Insights: “Don’t beg for permission. Claim your sovereignty.”


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