Marc Hochstein is the editor of CoinDesk. The opinions expressed here are his, so do not blame his colleagues.

The following article originally appeared in CoinDesk Weekly, a newsletter of order information distributed every Sunday exclusively to our subscribers.

Imagine two $ 1 bills. One is fresh and immaculate, newly arrived from the US Mint. The other is crumpled and covered with crumbs and boogers.

Each is worth exactly the same as the other. It does not matter if the crumble once belonged to a coke dealer or a Koch brother. It's always good for the bus ticket.

It's fungibility. It is one of the essential properties of money that we take for granted. But in cryptocurrency, fungibility is threatened, partly due to the transparent nature of the blockchain, where the addresses of wallets are pseudonymous but where the flow of funds between them are exposed to all.

Last week recalled this risk when Bitfury, a startup, introduced Crystal, a set of software tools to track illicit activity in the public bitcoin ledger.

As reported by Michael Del Castillo of CoinDesk, the platform is Bitfury's attempt "to help bitcoin to once and for all get its association with black market transactions". Valery Vavilov, CEO of Bitfury, said that Crystal will allow users to "see if that bitcoin address that you get from the money is green or black."

In retiring, Bitfury, which started as a mining company, is not the first company to offer this type of espionage service – as noted by CoinDesk article, Chainalysis, Elliptic and Skry (now Bloq) market.

And, of course, catching criminals, all other things being equal, is a worthy goal. (For the sake of argumentation, suppose that all "crimes" solved here are real crimes, the kind of victims.)

In addition, the oversight exercised by these companies may produce another benefit in helping other startups obtain or maintain accounts with traditional financial institutions. Banks have been reluctant to serve the sector because of its association with illegal activities. If they can demonstrate that their customers do not move "dirty" money, they could put their regulators at ease with the industry.

But using the blockchain in this way could also have perverse effects.

Blacklisted sales

As Chris Burniske and Jack Tatar write in their book "Cryptoassets":

"A danger for bitcoin, especially for balances known to have been used for illegal activities, is that if an exchange or other service listings balance, then that equilibrium becomes illiquid and probably less valuable than other bitcoin balances. "

Woe to the merchant who sells a pair of alpaca socks to a drug pusher and who can not spend the corrupted coins.

And this is not half. Burniske and Tatar continue:

"Although subtle, losing one's fungibility could be the disappearance of a digital and distributed currency, hurting the value of all units, not just those used for illegal activities."

The developers of Cryptocurrency are well aware of this danger and have been working for years to enhance user privacy, which would preserve (or restore) fungibility.

Some of these techniques, such as zar-snarks and ring signatures, were run on altcoins like zcash and monero, respectively. (The loss of fungibility, writes Burniske and Tatar, "is a problem that monero does not have to deal with.") Other privacy enhancements, such as TumbleBit, are being developed for Bitcoin itself. even.

"In the end, I think that any analytical tool will have to face the challenge of variations on cryptocurrence, with particular emphasis on the challenges posed by anonymity," said Jason Weinstein. Bitfury's strategic advisor. and former 15-year veteran of the United States Department of Justice who now practices law at Steptoe & Johnson LLP

Yet these improvements can make regulatory problems worse.

"If you make the accounting layer as private as zcash, you risk sacrificing an entire market," said Charles Hoskinson, founder and CEO of IOHK, a company developing several blockchain projects including Cardano.

For example, Japan's Financial Services Agency, which must approve crypto-currencies before being listed on the country's licensed markets, "can never whitelist a high-confidentiality token." , he said.

On the other hand, "if you do not build these types of features," once anonymized, the full financial history of a user will be exposed.

"It's worse than the conventional banking system," Hoskinson said.

Double standard?

All in all, it seems that cryptocurrency is held at a higher level for "clean money" than fiat, at least the physical version. Very few people read the serial numbers on the dollar bills. (To be fair, the comparison is not apples-to-apples, since you can not skip a briefcase full of banknotes around the world.)

Satoshi created Bitcoin so that people who do not trust each other can trade on the Internet. Exposing all the transactions on the blockchain was the price paid for the trust in the system, and he (or she or she) thought that pseudonymous addresses would mitigate the leak of confidentiality.

Radical transparency is often presented as a feature of blockchain technology, which may well be for businesses and governments. And in Bitcoin, it also produces secondary benefits for ordinary users. For example, keeping an eye on wallet withdrawals can help spot a race.

But in the case of the use of money, the opening of the blockchain could also prove to be a bug. Even for law-abiding citizens.

Dirty money image via Shutterstock.

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