The crypto-ring of Gyges
Plato covered the problems of true anonymity in The Republic. In this story, he detailed a fictional character called Gyges of Lydia who found a magic ring that enabled him to escape all review with the ability to go completely invisible at will.
H. G. Wells revisited the story in “The Invisible Man” with a modern twist on the retelling.
In the Republic, Plato recalls Glaucon’s remembrance of the story of Gyges.
Suppose now that there were two such magic rings, and the just put on one of them and the unjust the other; no man can be imagined to be of such an iron nature that he would stand fast in justice. No man would keep his hands off what was not his own when he could safely take what he liked out of the market, or go into houses and lie with any one at his pleasure, or kill or release from prison whom he would, and in all respects be like a god among men.
Then the actions of the just would be as the actions of the unjust; they would both come at last to the same point. And this we may truly affirm to be a great proof that a man is just, not willingly or because he thinks that justice is any good to him individually, but of necessity, for wherever any one thinks that he can safely be unjust, there he is unjust.
For all men believe in their hearts that injustice is far more profitable to the individual than justice, and he who argues as I have been supposing, will say that they are right. If you could imagine any one obtaining this power of becoming invisible, and never doing any wrong or touching what was another’s, he would be thought by the lookers-on to be a most wretched idiot, although they would praise him to one another’s faces, and keep up appearances with one another from a fear that they too might suffer injustice.
— Plato, Republic, 360b–d (Jowett trans.)
This is the reason why bitcoin is pseudonymous. Anonymity does not help people become more private for privacy is not the absence of control.
Bitcoin is money, first and foremost, it is peer to peer electronic cash.
Privacy allows people to hide their transactions yet at the same time to offer proof when it is needed. This is a big difference with so-called privacy coins that seek anonymity. Fungibility is not about an unknown but rather a proof of valid ownership.
When you make a purchase at the store, you do not seek to have complete anonymity but rather a level of privacy that allows you to make a purchase without being traced. Bitcoin can provide this. At the same time, the ability to provide proof of payment is necessary. An exchange requires that you can show how you made a purchase. If there is a problem and you need to go to court, you need to provide evidence of the purchase.
All contractual exchange requires offer and acceptance with consideration. This requires proof of the exchange is available and that cannot be done using a completely anonymous coin. It is in the customers interest to be able to demonstrate that they made a payment to a merchant. Otherwise, that user can make an overpayment and the merchant can simply say they received nothing. No proof remains and trade becomes less likely.
All governments have source of wealth laws. With bitcoin you can prove the source of your income and yet remain private to the greater world. With anonymous coins you can easily be stopped and filtered. The myth of censorship resistance requires the ability to prove where a transaction originated from. We see this in physical cash with serial numbers and receipts. On trading merchants provide a receipt of the exchange.
The truth of anonymity is that it is not privacy.
Anonymity only helps corrupt governments and criminals. It is these people in these groups who seek to hide in the shadows. It is not privacy they seek, but the ability to defraud others and hide what they are doing. Bitcoin allows a user of money to prove that they had a valid right to that money. They can show receipt and ownership. Yet at the same time they can remain private.
The issue with bitcoin and privacy stems not from bitcoin itself, but as a result of poor implementations. BIP32 for instance is a hierarchical system that allows the determination of every branch of keys. The problem with bitcoin is not that it is pseudonymous but that the implementations in wallets are poorly configured. Yet, rather than improve on these people have attacked the concept of pseudonymous transactions saying that privacy must come through complete anonymity.
This is false.
With mere privacy and not anonymity governments become accountable. It is only when the source of money cannot be traced that black operations can exist. It is only when money can be hidden easily without a source that corrupt politicians can act against the interest of their voters and take money from corrupt corporations and criminals.
It is a myth to think that bitcoin needs to be anonymous. It requires privacy and that comes from the implementation of a wallet, not a change to the protocol.
Those who push for anonymous solutions are not pushing for cash but rather seek a means to allow corrupt governments and corrupt officials to hide money that they do not have a right to.
If you believe that corruption needs to be stopped, that Democratic governments only work when people cannot be paid off with slush funds and under the table payments from criminals and corrupt organisations, then you will never believe that bitcoin needs to be anonymous.
Bitcoin is cash (BCH).