The privacy aspect of Bitcoin differs from traditional banking in important ways. Satoshi Nakamoto describes this distinction in the “Bitcoin: A Peer-to-Peer Electronic Cash System” white paper:
“The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party. The necessity to announce all transactions publicly precludes this method, but privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous. The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone. This is similar to the level of information released by stock exchanges, where the time and size of individual trades, the “tape”, is made public, but without telling who the parties were.”
As shown in the preceding diagram, the Bitcoin system simplifies the process by removing two elements from the transaction – the Trusted Third Party and Counterparty.
This emphasis on privacy as a primary benefit of the Bitcoin system again made me consider the implications of where the industry is heading. Many reports in the media and individuals commenting on Bitcoin publicly state that the privacy aspect is mainly of benefit to those engaged in criminal or black market activities. As such, there appears to be venture funded companies attempting to “legitimize” Bitcoin by removing the anonymous nature of Bitcoin. If Mr. Nakamoto designed in privacy as a substitute of the traditional banking model as Bitcoin transactions are public via the Blockchain, then it makes me wonder should emerging companies succeed in legitimizing Bitcoin, would they in turn be stripping away the primary benefit, and potentially a security feature by doing so? Would legitimizing Bitcoin make it simply on par with cash (or actually less beneficial than cash) or an existing electronic funds transfer?
However, not even a Bitcoin transaction is completely anonymous. Mr. Nakamoto describes the impossibility of perfect anonymity within the above referenced white paper:
“As an additional firewall, a new key pair should be used for each transaction to keep them from being linked to a common owner. Some linking is still unavoidable with multi-input transactions, which necessarily reveal that their inputs were owned by the same owner. The risk is that if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.”
Regardless of the lack of perfect anonymity, I find the privacy aspect of Bitcoin fascinating. Sure one can make cash purchases anonymously, but the public display of transactions for all to see on the Bitcoin network is a really cool feature. It’s really interesting to see the number and wide range of transaction amounts, something that up until now has not been available. The Blockchain literally allows us to see the electronic fund transfers that are occurring around us.
2. J.R. Sedivy. Bitcoin: A Peer-to-Peer Electronic Cash System Abstract:
3. J.R. Sedivy. The Irreversible Nature Of Bitcoin:
4. Satoshi Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System (Page 6):