The Myth of ‘Censorship-Resistant’ Crypto
“Ah, employee No. 267359, we see here that a digital wallet address connected to your loyalty program account at Mega Retail Corp. transferred two beers’ worth of bitcoin to a digital wallet the local VFW hall uses to pay their liquor wholesaler. And you did so on the same night that it had been rented out by union organizers. Security will escort you off the premises.”
Welcome to the world of “censorship-resistant” cryptocurrency payments.
The idea that crypto payments are tough to censor has been a big point made over and over in the crypto community — most recently by Ethereum creator Vitalik Buterin, who tweeted on Aug. 24 that “people continue to underrate how often cryptocurrency payments are superior not even because of censorship resistance but just because they’re so much more convenient.”
People continue to underrate how often cryptocurrency payments are superior not even because of censorship resistance but just because they’re so much more convenient.
Big boost to international business and charity, and sometimes even payments within countries.
— vitalik.eth (@VitalikButerin) August 24, 2022
Convenience will grow along with the network of merchants who accept crypto payments, but censorship resistance is another matter entirely — and one that’s somewhere between and hype and fantasy.
The argument goes like this: Because bitcoin’s blockchain exists on tens of thousands of individually-operated nodes spread across the planet, and transaction are immutable once written onto the blockchain, no government can control it or stop it.
Which is true as far as it goes, but that isn’t as far as most people think.
As the number of companies accepting crypto payments grows, and the number of exchanges and businesses that collect identifying information about their customers grows, user privacy will decrease exponentially.
To start with, censorship come in a variety of forms, the two most important being “stop the message” and “silence the speaker.” Stopping the message — the bitcoin transaction from being sent and received — is very, very difficult as long as users have internet access and digital wallets.
Stopping the speaker, however, really means identifying the speaker. That runs head-on into the myth of crypto anonymity, which is getting less anonymous by the day, particularly as crypto payments become more common.
We’ve delved into bitcoin anonymity before, explaining that it’s really pseudonymity, meaning that while the identity of the person who made a crypto payment is hidden behind a private key code, every transaction is trackable, one to the next, on its publicly — and permanently — viewable blockchain.
“Sometimes there is a lack of knowledge … that crypto is far more transparent than traditional finance, and it’s actually really easy to investigate crime, to do compliance in crypto,” Michael Gronager, CEO of blockchain data firm Chainalysis, told PYMNTS’ Karen Webster recently. “We follow the funds.”
Chainalysis has worked with and trained personnel at many federal law enforcement and intelligence agencies, helping crack cases ranging from drug smuggling and child pornography to terrorism by tracking blockchain data.
By connecting a single transaction to a person and following the web of transactions, blockchain intelligence was allegedly able to connect a $500 Walmart gift card purchase by a known person to the proceeds of a $4.5 billion hack of the Bitfinex exchange in 2016. Two arrests were made in February and $3.6 billion worth of allegedly stolen crypto was seized.
That kind of tracking is still difficult and time-intensive, but as know your customer (KYC) requirements kick in for exchanges around the world — and almost all crypto owners need them to on- and off-ramp fiat currency — it’s going to be easier for governments and businesses to track who’s spending what. And once you connect one purchase with a wallet address, anyone can follow it and all other purchases made by that wallet.
But won’t exchanges keep that information private? Well, the larger, more honest ones will, except by court order.
However, the retailers, social media companies, search engines and all the other businesses that track and sell customers’ identifying data will also collect the unique addresses of the digital wallets used to make purchases and connect them with other data they collected. Think loyalty programs, warranty forms, email addresses, shipping addresses, connected debit and credit cards.
Once that connection is made — or purchased — the tracking gets far, far easier and more comprehensive. That is because all of the connections and interconnections of crypto transactions and the wallets they are sent to and from are publicly available and searchable. You can even make test sends to ensure an address is accurate — there is no mechanism to have a wallet address refuse a transaction.
On an individual transaction basis, this can be done by tools like Blockchain Explorer, but anyone can run a bitcoin node and have a copy of the entire transaction history of a blockchain that is updated in real time.
That data won’t tell you whether your employee bought a Heineken, a Budweiser or a hotdog unless the merchant cooperates. But the fact that you bought it and who you bought it from are becoming easier and easier to learn.
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