Anonymity and the internet has had a long intertwined history. It used to be that being able to operate without anyone knowing who you are was one of the key doctrines of the internet.

Today, with technologies like IP-based geolocation, it is harder to casually remain unknown. This is especially true if someone puts forth the effort to find out who you are. Yet at the same time, users can shield themselves with the likes of Tor, which can mask a person’s identity using redirection with relays.

It is with this premise that we segue into the topic of bitcoins and anonymity. While many have proclaimed that bitcoin is not anonymous, illicit marketplaces like the Silk Road seem to thrive, unobstructed. That’s because those who are selling goods on the Silk Road are actually able to use bitcoin to their advantage, going above and beyond the basics of a transaction to further obscure who they are at the behest of law enforcement.

Bitcoin eliminates the need for third-party trust

One basic aspect of bitcoin is that it circumvents the need for third party trust by using the public ledger know as the block chain.

In traditional banking scenarios, parties rely on banks to operate as the third party. The bitcoin network doesn’t rely on third parties, which means the a casual user’s spending can be tracked with a bit of work.

In fact, researchers have been able to prove this theory by following addresses and their spending on the block chain. It takes work, but it can be done.

How private bitcoin can be is best exemplified by email communication: while it is possible to encrypt email using such technologies as PGP, sending emails via something like Gmail isn’t quite as private.

The contents of web-based email are being scanned and monitored. Google, for example, is currently fighting in court to continue their “automated processing” of emails.

Email is not anonymous. But it can be if you put some work into it.

CoinJoin

One example of how bitcoin users can hide their spending habits is through something called CoinJoin.

Developers Amir Taaki and Pablo Martin have taken a concept that was originally developed by Gregory Maxwell and created a simple to use system that does not require additional extensions that other solutions such as Zerocoin require.

Users can download the software and join a “session”, a sort of conversation thread whereby a group of users come together and mix bitcoin inputs together. It brings to the table the idea of “trustless mixing”, which completely turns the idea of trust on its head. This is because even with regular bitcoin mixing, you still have to rely on a third party.

When I asked him about CoinJoin, Taaki himself takes the banking establishment to task, bringing us back to that problematic aspect of another party being involved in transactions.

“We have one scenario where the standard (banking) is bloated with tons of features”, he says. “It’s difficult and costly, requiring huge investments of time, energy and manpower to implement. Development is centralized, and diversity is costly.”

It’s clear that Taaki’s intent with CoinJoin isn’t just based on wanting anonymity, but on mistrust in the banking system’s attitude towards digital currencies. “The monopoly starts steering the ship by introducing their own extensions for the benefit of bitcoin corporations, and not the users, businesses or black market.”

Undermining legitimacy

Bitcoin users that engage in illegal activity using consumer services such as Bitstamp or Coinbase face serious problems if they think that they can avoid law enforcement.

These companies are focused on remaining compliant with the law in order to do business, and as such they use personally identifiable verification processes that can reveal who they are under the auspices of a court order.

What’s interesting to note about this is that the companies mentioned above are doing their best to promote the positives of bitcoin as a legitimate currency.

Yet these firms are consistently being undermined in the marketplace by entities such as Black Market Reloaded that utilizes mixing or other obfuscation methods.

Andy Zinsser, who is working on his own bitcoin startup called Arbiter for mobile betting transactions, doesn’t seem perturbed about illegal purchases being made with bitcoins.

“The Silk Road is excellent evidence of bitcoin’s ability to move money better than any other medium,” says Zinsser. “Other industries should learn from Silk Road. Businesses that operate outside the constraints of regulation and status quo are always the first to adopt innovative technology. This has been true for porn in the video industry. This is true for contraband in the bitcoin community.”

Putting it all together

While it is possible to track bitcoin users, it’s not easy. Despite reports of researchers being able to follow the digital money trail, law enforcement appears to be woefully behind in terms of tracking bitcoin. So far, the Drug Enforcement Agency has seized bitcoins in a South Carolina drug-related case, but there have been no reports yet of seizures related to bitcoin-based digital black markets.

Taaki, the CoinJoin developer, is even more definitive on this subject. “Think of all the people buying drugs on the Silk Road”, he says. “None of these academic journals has managed to unmask anyone. We can also make it more anonymous over time by deploying better tools for the people.”

Indeed, it might make more sense for a researcher to try and uncover someone purchasing black market goods without any prior information on that person.

There are legal ramifications to doing something like this, which may be why this hasn’t been done publicly yet. In the end, even if it is possible to trace transactions to illegal activities, there will be those out there with libertarian and privacy motivations to continue developing anonymizing solutions for digital currencies.

How do you feel about bitcoin and anonymity? Do you think that being able to use bitcoins to acquire illegal products and services is a problem, or a path forward?