Part 4: Understanding the Blockchain

How Blockchain privacy protects consumers while thwarting mass surveillance.

Privacy: old vs new

After explaining the fundamentals (part 1, part 2) we moved on to high-level concepts. The first was about increasing trust (part 3) through removing the central control of money. This article, part 4, is about using privacy to protect consumers and resist mass surveillance.

Bitcoin is usually written about with words like privacy and anonymity. These words are not winning. Privacy, once linked to democracy and freedom, is now reserved for medical records or sex. Anonymity has taken it the worst: modern political lingo uses anonymity as a synonym for terrorism.

Let’s ignore the argument for anonymity (it’s nuanced and important, yet doesn’t relate to Bitcoin) and focus on why privacy matters. I think the Bitcoin/blockchain model for privacy is a killer feature, often overlooked and misunderstood. Privacy is critical to keeping systems in the digital environment secure. Simply put: If you can’t keep information private you can’t keep it safe.

Traditional banking achieves privacy by limiting information access to the parties involved and the trusted third party — usually governments or banks. Yet, as we’ve seen again and again the hackers get the information, too. In the modern age, it’s increasingly difficult to secure identities on the internet.

Public blockchains are designed to function in hostile networks where access is open to all. For this reason, Bitcoin keeps identity information separate from transactions. This is a new privacy model where “accounts” (in the banking sense) relate only to public keys. When a bitcoin transaction is broadcast over the network, anyone can see the amount sent and the public keys involved in the transaction. Verification is possible without requiring identity information. The overall security of the system is high because there is (obviously) no identities to hack. No information, no hacks. This is a huge plus for consumers — billions of dollars are lost every year due to identity theft!

Here’s what this looks like:

As a side note: Bitcoin privacy is far from perfect; individuals need to be careful not to link their public keys. The standard practice is to use a new key for each Bitcoin transaction. The banking equivalent would be to open a new bank account each time you want to receive money. Imagine how much that would cost! For the curious reader, I recommend looking at Zcash — a cryptocurrency that can fully protect the privacy of transactions.

The implications of Bitcoin’s new privacy model are even more far reaching. Blockchains can go way beyond advancing badly needed consumer protections in the financial sector.

In the 1970s the US government passed the Bank Secrecy Act (BSA) for detecting and preventing money laundering. Secrecy is probably the wrong word. The regulation requires financial institutions to expose the identities of everyone for the purpose of finding a few bad guys.

Can the blockchain privacy model fit into the BSA regulation? Not at first glance. If we inserted one or more intermediaries that “know” identity information we immediately lose the blockchain’s security and efficiently benefits. Let’s go back to first principles and rephrase the question: Can blockchains help catch criminals in ways that centralized financial systems cannot? I believe the answer is definitively yes.

Download the blockchain and you have a forensic trail. Law enforcement can find a thread, like a sweater knit from ball of yarn, and trace all transactions from that source. Each and every account involved can be exposed while all other accounts stay safe and remain private. In most cases, attaching identities to a transaction will require law enforcement to seize equipment. That requires due process (court action). This is a net positive th

at reinforces constitutional protections such as the Fourth Amendment:

“[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

Here is the key difference between secrecy and privacy: privacy as an individual right can be maintained with blockchains, whereas secrecy overall cannot. Privacy is the right of individuals not to be surveilled. Bitcoin is highly resistant to totalitarian surveillance.

Why should that matter? Let me leave you with a quote to think about:

“There is no historical precedent for the proposition that the procedures of totalitarianism are compatible with the system of enlightened, individual and democratic self-governance. Such an argument would be doomed to failure. It is enough to say in opposition that omnipresent invasive listening creates fear. And that fear is the enemy of reasoned, ordered liberty”.
Eben Moglen

As citizens we either defend our rights or we lose them. Totalitarian surveillance, even for the financial system, should not be acceptable in a democratic society.

Continue with part 5: Going beyond money: open, borderless, neutral, and censorship resistant exchange.