Bitcoin and Privacy: A Brief analysis

By: Sravanthi D

In recent years a variety of alternative web based payment methods have emerged. You might be familiar with Paypal and Google Checkout, and recently a service by the name of Bitcoin has been increasingly gaining traction. However, all these sources of electronic payments are dominated in fiat currencies (e.g., dollars), and that is where Bitcoin, a peer-to-peer payment network, differs (Meiklejohn).

So what exactly is Bitcoin? It is a digital crypto-currency which offers a new and innovative way to complete transactions. Popularized by its ability to anonymize transactions, Bitcoin presents a fascinating opportunity to change and upload the practices of core institutions behind the modern market economy. Governments and regulators have expressed a particular interest and concern over Bitcoins’s ability to mask wrongful behavior due to its privacy measures- which stand as one of their pillar principles. Motivated by Bitcoin’s close relation to privacy, I hope to touch on the architecture and operation of Bitcoin and its privacy measures.

So the basics- the gaining popularity of this service allows users the capability to purchase goods such as hotel stays, food, and smart phones on a variety of company websites such as Overstock and eBay. Users can also exchange Bitcoins amongst each other and this imitated the transaction model similar to PayPal or Visa. Transactions are then e-validated by a network of users also called miners who verify exchanges in return for newly mined Bitcoins. Users also have the ability to convert Bitcoins in to legal tender. Because there is a fixed supply of 21 million Bitcoins and no monetary authority, the rate of supply is volatile and inherently deflationary. Unlike earlier digital currencies, Bitcoin’s network is completely decentralized meaning that the users of the system can interact directly. The identity of the user is encrypted and there is no exchange of personal information. It is for this reason that transactions are considered pseudonymous as opposed to completely anonymous (Vico and Arago). However, there is a transaction record including the Bitcoin user’s encrypted identity on the public ledger system, also referred to as the block chain, which uses cryptography to confirm transactions (Koshey et Al.). As of 2014, there are more than 12.85 million Bitcoins circulating with a market value of more than $8.3 billion (Wan and Hoblitzell).

The concept of privacy is particularly important against the objectification by governments, corporations, and other individuals. The control of information about oneself within the Bitcoin ecosystem has been regarded and referred to as “user defined privacy” which is one the fundamental factors in the popularity of Bitcoin (“Beyond Silk Road”). Bitcoin is transparent in nature as anyone can see the global history of transactions and discover the allocation and destination of the digital currency. Moreover, Bitcoins transparency is extended towards the communication of their privacy policies. Closely fitting the Fair Information policies guidelines for informed consent and openness, Bitcoin outlines the purpose, use, and result of the information collected. BitCoin recognizes the constraints of the technology being used and thus ensures that users are informed of what precautions to take when using the service. Due to the unique structure of Bitcoin, it is not done in the traditional sense where the contact information of the “privacy officer” is available. Instead, the Peer to peer service links its user to communities where everyone can address concerns. Bitcoin goes beyond expectations and provides users all the tools to take privacy into their own hands as well as link them to websites where one can access the publicly available information of all transactions. The algorithmically generated Bitcoin ‘addresses’ result in a pseudonymous transaction arguably maintaining an anonymous presence (bitcoin.com).

There are several measures such as the implementation of mixing services to significantly enhance anonymity and privacy. Mixing services scrambles a user’s bitcoins with the bitcoins of others with the intention of confusing the trail back to the fund’s original source (Matonis). Bitcoin Fog and BitLaundry are two examples of mixing services that provide a high degree of anonymity. In addition to this, Bitcoin uses strong cryptographic systems which generate private keys- a randomly generated number corresponding to funds on the public ledger and signatures- a mathematically generated hash proving a signing operation took place. Furthermore, complex mathematical computations such as hashes contributes to the successful mining of coins, and the use of SHA -256 (a robust hash algorithm), is used to reduce error rates and improve data security (Vico and Arago). Lastly, when it comes to addressing government regulations and policies, though lacking in detail Bitcoin directs users to external sources regarding information on basic rights, taxation, regulations, and recent news. Though privacy wise Bitcoin excels, the ambiguity of transactions becomes a hub which fosters incredible amount of grey area. Consequently this is a reflection of the increasing amount of illegal activities flourishing through this online community such as tax evasion, money laundering, and fraud.

References

Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies, U.S. Senate Committee on Homeland Security and Government Affairs Cong., 103 (2013) (testimony of Thomas R. Carper). Print.

“Frequently Asked Questions.” Bitcoin. N.p., n.d. Web. 23 Nov. 2014.
Koshey, Phillip, Diana Koshy, and Patrick McDaniel. An Analysis of Anonymity in Bitcoin Using P2P Network Traffic. N.p., Mar. 2014. Web. 18 Nov. 2014.

Meiklejohn, Sarah, Marjori Pomarole, Grant Jordan, Kirill Levchenko, Damon McCoy, Geoffrey M. Voelker, and Stefan Savage. A Fistful of Bitcoins: Characterizing Payments Among Men with. Publication. 6th ed. Vol. 38. California: n.p., 2013. Print.

Vico, Jesus Diaz, and Antonio Sanchez Arago. Bitcoin: A Cryptographic Currency. Rep. N.p.: Inteco, n.d. Print.

Wan, Tiffany, and Max Hoblitzell. Bitcoin: Fact, Fiction, Future. Rep. Texas: Deloitte UP, 2014. Print.

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