The Politics of Bitcoin Mixing Services

By Jon Matonis
Forbes
Wednesday, June 5, 2013

http://www.forbes.com/sites/jonmatonis/2013/06/05/the-politics-of-bitcoin-mixing-services/

As the cryptocurrency arms race escalates beyond identity verification at exchange endpoints, mixing services for bitcoin may emerge as the next frontier in the battle for financial privacy.

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 protocol.

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.

Zerocoin from 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 as well.

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.