By Jon Matonis
Wednesday, June 5, 2013
If bitcoin exchange regulation becomes so effective that exchange
operators are required to link specific bitcoin addresses to individual
customers, then users may have few remaining choices should they want to
maintain transactional privacy. Call it the law of unintended
consequences for overarching bitcoin exchange regulation.
Two facets of the growing political debate on anonymizing
services are the traditional centralized bitcoin mixers and the newer
decentralized bitcoin mixers that require a modification to the Bitcoin
With traditional bitcoin mixers, the process could become
highly-charged politically and the regulatory status of mixing services
called into question. Reliable legal jurisdictions for operating bitcoin
mixing services would therefore gain prominence since it reasonably
could be viewed as a protected free speech issue. Potentially, Iceland could serve as a bitcoin mixing haven.
The emergence of services that mingle bitcoin for the
purpose of returning bitcoin not associated with the original input
address has had a somewhat spotty history. Also called bitcoin
laundries, these web-based services charge bitcoin holders a nominal fee
to receive different bitcoins than the ones initially transferred. The
sites never handle national currencies like the dollar or euro so
technically they are not exchanges. Also, the administrator of the
service has to be trusted to delete any archival logs and not to run off
with the coins.
The largest such service operating today is the Blockchain.info mixing service
which has a maximum transaction size of 250 bitcoins and a 0.5%
transaction fee. Transaction logs are removed after eight hours and
customers can use the taint analysis tool to verify that coins were
properly mixed. Other services include BitLaundry and The Bitcoin Laundry operated by Mike Gogulski.
Advances on the decentralized mixer front were highlighted in Olivier Coutu’s largely theoretical presentation
at the Bitcoin Conference in San Jose. Although it resolves the trusted
intermediary vulnerability, the political debate with decentralized
mixers revolves around convincing bitcoin core developers that it is
essential functionality or creating a different bitcoin client
altogether. Either development approach would subsequently require
majority support from the bitcoin mining community.
Johns Hopkins University is a method whereby the trusted intermediary
for mixing can be eliminated. The software is already written and soon
to be released as open source code. However, it requires modifications
to the core Bitcoin protocol and adoption by the majority of bitcoin
miners. With the current political climate tilting towards full
disclosure for bitcoin transactions, at least at the exchange level, it
is unlikely that Bitcoin core developers
would elevate bitcoin privacy to an “all-hands-on-deck” emergency
priority. Yes, open source projects are comprised of political animals
According to Johns Hopkins University cryptography professor Matthew
Green, Zerocoin researchers are examining voluntary compliance options
that reduce but don’t eliminate your transaction privacy, such as accountability limits
on dollar amounts of anonymous transactions. This type of alternate
approach to Zerocoin adoption would be possible without support of the
Bitcoin client software. However, not integrating Zerocoin into the
Bitcoin protocol would require third-party services to act as issuers of
its anonymizing tokens with trust problems similar to the centralized laundry services.
Also, in-person exchange LocalBitcoins.com
could act as a pure person-to-person mixing service for bitcoin users
that meet in designated places like cafés. Personal mixing has the
additional benefit of introducing plausible deniability into
the entire bitcoin ecosystem because the coins cease becoming provably
yours at that point. After seeing the LocalBitcoins selling-for-cash
section in the U.S., Carol Van Cleef, a partner in Patton Boggs’ banking
practice and adviser on anti-money laundering policies, ominously warned, “You better get yourself registered, or you better get your name off the list real fast.”
Vitalik Buterin of Bitcoin Magazine argues that Bitcoin is not
losing its soul through regulation and that the core principles of the
bitcoin protocol, such as user-defined anonymity and user-defined
transactional privacy, remain intact due to optional mixing services.
This is a critical point because, when it comes to bitcoin oversight,
regulators and law enforcement must comprehend that which can be
constrained versus that which cannot be constrained.
Otherwise, legislators and government officials risk inadvertently
steering Bitcoin advancements in the direction of even more liberating
decentralized architectures. Remember, it was the forceful and horrific
crackdown on casual file sharers that provided the impetus for the
remarkable BitTorrent technology.
One can only defer the bitcoin privacy issue for so long. At some
point, Bitcoin core developers, mining operators, lobbyists, and
industry thought leaders have to take a principled position and decide on what side of history they wish to stand.