In The first chapter, we discovered the origin of this misconception that Bitcoin is a criminal currency. We've also seen why censorship resistance is an inalienable characteristic for Bitcoin.
In The second chapter, we focused on the application and the consequences of a possible Bitcoin ban.
In this third and final chapter, we talk about the Bitcoin privacy model. You will discover that finally, Bitcoin is far from being an optimal tool for criminals.
Bitcoin is not an anonymous monetary system
Among the general public, many still think that Bitcoin is an anonymous payment system and that you cannot trace your transactions. However, this statement is false. Bitcoin privacy is a much more complex subject than that.
First, it's important to understand Bitcoin's privacy model by comparing it to the traditional banking system model. In the traditional system, your bank account is linked to your identity. The banker is in a position to know which bank account belongs to which customer, and what are the associated transactions. However, this flow of information is cut between banking and the public domain. In other words, it is impossible to know the balance and transactions of a bank account that belongs to another individual. Only the bank has access to this information.
On Bitcoin, the peer-to-peer constraint requires us to publicly disseminate the payment register. Making these transactions public helps avoid double spending. Each user is in a position to observe past transactions, and therefore, to verify that the coins sent to them have not already been used in another previous transaction. In other words, the public nature of blockchain makes it possible to avoid double spending.
This way, anyone who has access to a network node can observe the transactions of other users. It is then naturally impossible for Bitcoin to adopt the same privacy model as the banking system. But it's also not desirable for all of every user's financial information to be publicly available.
So, instead of breaking the flow of information between the transaction and the public, on Bitcoin, we break this flow between the transaction and the identity of the issuer. That is, all transaction information is public, but cannot normally be linked to any identity.
The whole issue of respecting the user's privacy on Bitcoin lies in this break between the transaction and the identity of the parties involved.
Maintaining this breakup is not an easy thing. There are many tools and techniques to optimize your privacy, but they often require a thorough understanding of how Bitcoin works. Since the registry is public, the slightest error in its strategy often leads to a loss of confidentiality.
Even with optimal use of all the best existing tools on Bitcoin to remain anonymous, a user will never be able to achieve the same level of confidentiality that a simple payment with a physical medium provides.
However, that was the original objective of Bitcoin. As the title of the White Paper points out, its aim was to bring to the Internet a currency comparable to cash in its characteristics. This was part of the motivations of Cypherpunks to write code to produce software that allowed each individual to assert their fundamental right to privacy on the Internet. Satoshi Nakamoto even devotes an entire portion of the Bitcoin White Paper to this issue of privacy.
Finally, Bitcoin is not an absolutely anonymous and untraceable monetary system. It provides a certain degree of confidentiality to the user, in terms of how they use it. This confidentiality can be increased, without becoming absolute, through the use of tools at the application level and the adoption of best practices.
If we rely on the speeches of certain media or certain political figures, we can believe that Bitcoin is mostly used by criminals. However, the various existing statistics on this subject tell us something else entirely. Indeed, as Chainalysis tells us in its report Crypto Crime Trends for 2022, the rate of illicit transactions on cryptocurrencies was 0.15% in 2021, i.e. in the order of 10 times lower to that observed on state currencies.
This rate is decreasing every year due to the democratization of these technologies. In addition, this same report tells us that the majority of illicit transactions at this rate are linked to hacks on the various “DeFi” (decentralized finance) systems, which is completely independent of Bitcoin.
It can therefore be admitted that the rate of transactions on Bitcoin related to illicit activities is extremely low compared to other payment systems. This is probably due to the lack of default privacy on Bitcoin, and the additional cost of using methods to improve it.
Indeed, when we observe the behavior of some criminals with respect to Bitcoin, we see that many are more and more reluctant to use it as a means of payment. For example, we have observed that more and more ransomware put in place incentives so that their victims do not pay in bitcoin, while giving them the opportunity to do so. The most recent ransomware often offers a ransom payment in Moneros at a certain price, and a payment in bitcoin at a higher price. Since the tools to break Bitcoin tracking are generally expensive and complex to use, they pass on this additional cost to the victim.
Many bitcoiners are worried about this evolution in the criminal use of Bitcoin because they think it is a vital indicator for this system. This is the case, for example, of Edward Snowden, who affirmed in 2021 that Bitcoin was failing when it came to privacy.
Bitcoin is really failing comprehensively on the privacy angle. (Translation: Bitcoin is really failing globally when it comes to privacy.) - E. Snowden, Ethereal Summit 2021 conference.
Beyond this issue of online payments, Bitcoin is definitely a bad option for criminals when it comes to physical payments. As its name suggests, Bitcoin is a system for making electronic payments. Thus, regardless of the measures put in place, any electronic payment necessarily leaves more traces than a physical payment.
By nature, Bitcoin cannot be as confidential as a payment in cash, gold, or any other tangible asset. However, the majority of payments in connection with criminal activity can be made through a physical exchange. It is therefore illogical, for the majority of criminals, to use Bitcoin when they can simply use cash.
All these reasons surely explain to us why Bitcoin is very little used by criminals in proportion to other currencies.
Conclusion
We discovered that in reality, Bitcoin is not an anonymous and completely opaque system. The subject of privacy on Bitcoin is much more complex, and requires a lot of nuances.
Since Bitcoin is an electronic payment system, it naturally cannot achieve the same level of privacy as simply using cash or any other tangible asset. This surely explains why bitcoin is proportionally much less used for illicit activities than state currencies.
