How to be Anonymous Online: Step-by-Step Anonymity with Tor, Tails, Bitcoin and Writeprints (2016)
Section: Bitcoin is NOT Anonymous
Think of Bitcoin as digital cash. Until recently, it served as a means for high-risk currency trading, gambling and drug dealing. It was popular for these transactions because it was unregulated, easily used internationally and could be traded for government-issued currencies on exchanges, the most famous being the now-defunct Mt. Gox.
Here is a tiny history of Bitcoin. It was introduced to the world in 2009 via the white paper “Bitcoin: A Peer-to-Peer Electronic Cash System.” Just about nobody cared about Bitcoin until 2011 when the price of one Bitcoin went from $1 to $32 and back down to $2. After this first crash, financial nerds figured Bitcoin was just a cheap thrill that would soon fade away. After creeping up to $14 by the end of 2012, Bitcoin reached $1240 on December 4, 2013. Now, Bitcoin has scrutiny. Venture capitalists, FBI agents, and Academics are all over the technology, and, for various reasons, are dedicating resources to tracking and identifying users. The IRS and DEA showed that they are in the game by making the high-profile arrests of Charlie Shrem, CEO of BitInstant and Robert Faiella, aka BTCKing, from the Silk Road on January 27th, 2014 (read a brief of the events at https://howtobeanonymousonline.info/bitcoin/busted/.
Before I go into why Bitcoin is not anonymous, I want to mention why Bitcoin is awesome:
· It makes online transactions easy without involving third parties.
· It avoids big payment processing fees.
· It gives the little guy a chance to have fun trading currencies with limited funds and minimal commissions.
· It has no central authority.*
While I am not going into all the details of Bitcoin’s inner workings, I am going to dispel the misconception that Bitcoin is anonymous. In fact, Bitcoin is the most public payment system in the world. Previously, it was considered “anonymous” because no entity cared enough to track transactions and identify users. Well, as I just mentioned, they care now.
Tracking Bitcoin is manageable for those with ample resources because every Bitcoin transaction is broadcast to the world through what is known as the Blockchain (visit https://www.blockchain.info to see). The Blockchain prevents a person from double spending a Bitcoin. Since every transaction is broadcast to the public, the “anonymity” comes from the fact that an individual's Bitcoin wallet address is publicly displayed instead of their actual identity. This is known as pseudonymity, not anonymity.
Here is a liberal scenario to help explain why this is a problem.
· We have one $5 Bill and three people using fake names, Xavier the Addict, Yasmin the Dealer and Zack the Maker.
· For $5, Xavier the Addict buys a crack rock from Yasmin the Dealer.
· Now, Yasmin the Dealer takes the $5 and goes to Zack the Maker to buy fresh crack rocks for future sales.
· Xavier, Yasmin, and Zack worked on the “down-low”, so nobody saw their activity. Since they did not raise anyone's suspension, nobody will try to backtrack the trail of the $5 Bill (that links Xavier to Yasmin to Zack), or investigate their real identities.
Let’s rework this scenario with a Bitcoin.
· We have one Bitcoin (β1) and three people using fake names, Xavier the Addict, Yasmin the Dealer and Zack the Maker.
· For β1, Xavier the Addict buys a crack rock from Yasmin the Dealer.
· Now, Yasmin the Dealer takes the β1 and goes to Zack the Maker to buy fresh crack rocks for future sales.
· Even though Xavier, Yasmin, and Zack are fake names, since they used a Bitcoin, their fake names (i.e. wallet addresses) and the chain of transactions that link them together are broadcast to the world.
Using Bitcoins, Xavier, Yasmin and Zack thought they were on the “down-low” since all of their activity was done behind their computers using fake IP addresses and randomly generated "anonymous" Bitcoin wallet addresses. So wrong they are!
There are a number of ways to track Bitcoins along their transaction chain . In fact, many stolen Bitcoins have never been used because there are no places to spend them without the risk of being identified. If they are traded on one of the major Bitcoin exchanges for government-issued currency, to be useful, the money must eventually be transferred to a bank. Subpoenaing an exchange would reveal where the money was transferred to or from. Subpoenaing the bank would identify who owned the account (Subpoenaing an exchange is one of the means the Feds used to identify BTCKing, from the Silk Road, as Robert M Faiella). If the Bitcoins were used to purchase physical goods, those physical goods would need to be physically delivered, exposing the receiver to the risk of identification or the goods to possible seizure. Selling a lot of Bitcoins in person is unrealistic since a well-informed person would not buy an enormous volume of Bitcoins from a mysterious seller knowing we now live in a world where the FBI can and has seized illegally obtained Bitcoins (read about Ross William Ulbricht).
Thank God for Bitcoin "laundry" services! They will scrub those dirty, traceable Bitcoin's clean... Right? Maybe?? Hopefully???
Using a Bitcoin laundry service assumes two things; First, they will wash your Bitcoins. Second, you can trust them for anything else.
Washing a Bitcoin is no simple task. The laundry service needs to mix your Bitcoin with LOTS of other Bitcoins. Then, those mixed Bitcoins must be divvied up and sent through LOTS of separate transactions where, again, they are mixed with new Bitcoins and re-divvied up at every step. That must happen to the point where it is statistically impossible to prove the link from a fraction of the Bitcoin at the beginning of the process to a fraction of the Bitcoin at the end of the process. That just is not going to happen. In fact, researchers tested out some Bit-Laundry services. The results? The Bitcoins were stolen, or the same Bitcoins were returned . I am no genius, but, I would say if you took your dirty shirt to the cleaners and it came back dirty, you got f-cked. If you took your dirty shirt to the cleaners and they stole it, you got double f-cked.
Using a Bit-laundry service also brings us back to the third party trust issue. This entity could be tracking or sharing data, susceptible to subpoenas or under siege by Kim Jong-Un. Seriously, when is the last time you went to the cleaners, and it was not run by Koreans? I certainly can't remember.
So what the heck!
As with everything else cyber-related, there are computer geeks working on a solution. Last year, the John Hopkins University Department of Computer Science began developing Zerocoin, an add-on to Bitcoin to anonymize Bitcoin transactions. This year, the Zerocoin developers joined another group of developers and renamed the project Zerocash.
Zerocash will make use of two new crypto-currencies, a new ‘Zerocoin’ and a yet-to-be-named ‘basecoin.’ Zerocoins will be anonymous, and the basecoins will not.
If a user cannot initially obtain Zerocoins through a transaction, she will purchase or accept basecoins, and then convert those to Zerocoins. Once the user has Zerocoins, they can be spent without revealing the coin amount or addresses of the parties involved and without relying on a central authority. Importantly, the Zerocoins will not need to be spent in the same amount as the original basecoin conversion (an improvement upon the original Zerocoin project). In other words, a user can convert two basecoins into two Zerocoins, and then only spend one. As long as the two parties in the transaction are willing to accept Zerocoins, there will be no need to convert back to basecoins, although that will be an option. The Zerocash project remains in the testing phase.
In my opinion, for crypto-currencies to achieve widespread use, they must incorporate anonymity. Imagine if all of your financial records are public. Your coworkers will see your income. Your useless friend that needs a loan or your needy pastor that wants to remodel the chapel will know your bank balance. Your nosy neighbor will tell everyone you are broke and a month behind on your Mercedes payment. If the current Bitcoin becomes a dominant currency, this will be your reality.
On my blog (https://howtobeanonymousonline.info/) I will keep you up to date on crypto-currency anonymity innovations.