Disadvantages of tracking the bitcoin on the blockchain

Disadvantages of tracking the bitcoin on the blockchain

Imagine two ten dollar banknotes. One is new and immaculate, barely out of the press. The other one is wrinkled and soaked.

Both are worth the same. It does not matter that the solid bank was on the table of a drug dealer or Trump. It’s good to buy two subway cards.

That means fungility. It is one of the essential properties of money that we do not think too much about. When it comes to cryptocurrency, fungility is threatened, thanks largely to the transparent nature of the blockchain. Wallet addresses are pseudonyms, but the flow of funds can be seen by anyone.

Last week, Bitfury reminded us of this risk when they introduced Crystal, a toolkit that can track criminal activity in the Bitcoin registry.

The platform is an attempt by Bitfury to “help the bitcoin escape the association with black market transactions.” Valery Vavilov, director at Bitfury, said the Crystal package will allow users to see if a bitcoin address from which they receive money is blacklisted or not.

Bitfury began as a minaret operation. It’s not the first company to offer this kind of tracking service. Chainalysis, Elliptic, Skry (now part of Bloq) are already on the market.

Of course, catching offenders is a noble mission. Let’s suppose, for the sake of discussion, that the offenses are actually crimes, the kind of victims.

Surveillance offered by these companies may also bring other benefits, helping startups work with traditional financial institutions. Banks were refractory to serve the crypto sector because it is associated with crime. If he could prove that the money of the crypto customers is not “dirty,” then we could attract the authorities on our side.

Using the blockchain in this way could also have more perverse effects.

Black List Balances

As Chris Burniske and Jack Tatar wrote in their book “Cryptoassets”:

“A bitter hazard, especially for balances used in illegal activities, is that if an exchange or service passes a blacklist, it becomes ilk and less valuable than other bitcoin balances.”

A merchant who brings a pair of wool socks to a drug dealer has ruined. He can no longer spend the dirty records (all he has in his wallet).

And that’s not the whole story. Burniske and Tatar continue: “Although it is a subtle matter, loss of fungibility could mean the death of the digital and distributive currency, affecting the value of all units, not just those used in illegal activities.”

Cryptocurrency developers know very well what the dangers are and have been working for years to give users the confidentiality they need. In this way, it keeps the fungility.

Some of these techniques, such as ring signatures and sn-snarks, have been brought to market by other styles such as zcash and monero. Loss of fungibility, the authors say, “is a problem Monero will not face.” Other privacy enhancements, like TumbleBit, are also working for bitcoin.

“Ultimately, the challenge is that any analytics tool keeps pace with cryptocurrency variations, with emphasis on the challenges raised by anonymity,” said Jason Weinstein, strategic consultant at Bitfury and a 15-year veteran of the Department of Justice from the US.

These tools could reach a consensus with regulations.

“If you make the accounting layer as private as the zcash, sacrifice a whole market,” says Charles Hoskinson, founder and chief executive of IOHK, a company that develops several block-building projects including Cardano.

For example, Japan’s Financial Services Agency, which has to approve cryptocurrency before they are listed on authorized exchanges in the country, “will probably never list a highly confidential coin,” he said.

On the other hand, “if you do not build this kind of function, once deanonimized, all the financial history from the beginning of history will be exposed. It’s worse than in the banking system, “continued Hoskinson

Double standards?

That being said, it seems that digital coins have more stringent standards for “clean money” than fiat, at least than the physical version. Few are the ones who read the series on the banknotes. To be fair, the comparison is not one-on-one, because you can not pull the zipper on the briefcase and send it to the other side of the world.

Satoshi created the Bitcoin for people who do not trust each other to be able to make transactions on the net. If the exposure of all transactions on the blockchain were the price paid for trust then Satoshi considered pseudonymisal addresses to mitigate the risks.

Radical transparency is often promoted as a functionality of blockchain technology. It may be for some businesses and governments. In the bitter world, it comes with secondary benefits for everyday users. For example, tracking withdrawals from wallet exchanges can help them keep an eye on the scammers who are preparing to flee.

In the case of money, transparency of the blockchain can become a bug, including for law-abiding citizens.

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