How Anonymous is Bitcoin? A Backgrounder for Policymakers

Bitcoin is often described as a way to transact anonymously. But just how anonymous is it?
First off, it is useful to draw a basic distinction between anonymity and privacy in the context of financial transactions. We will call a transaction ‘anonymous’ if no one knows who you are. We will call a transaction ‘private’ if what you purchased, and for what amount, are unknown.
Let’s draw a simple matrix and locate different kinds of financial transactions within it:
Cash or barter are the most intrinsically private and anonymous means of transacting.
In the opposite corner are transactions which are neither anonymous nor private. This includes, say, campaign contributions over a certain amount. We may also include in this quadrant credit card transactions: although not public knowledge like a campaign contribution, your identity is nevertheless connected to every purchase you make, and this information is available to the merchant, credit card network, issuing bank, and’ – ‘if subpoenaed’ – ‘law enforcement.
Certain financial transactions are private but not anonymous; for example, the donor wall at the local art museum, which identifies the names of donors but not the amounts donated.
Bitcoin, by contrast, is anonymous but not private: identities are nowhere recorded in the bitcoin protocol itself, but every transaction performed with bitcoin is visible on the distributed electronic public ledger known as the block chain.
The anonymity provided by bitcoin is at once a point of attraction and a challenge for financial regulation. As the pace of adoption of the currency grows and as it comes under scrutiny by the legal and financial systems, particularly with regard to compliance with applicable anti-money laundering (AML) statutes and know-your-customer (KYC) controls, its true level of anonymity will become an increasingly closely studied subject.
For many users of bitcoin, who access the currency through one of the popular online wallet or exchange services, their participation at the outset entails linking their personal identity to their bitcoin holdings. Bitcoin for these users is effectively no more anonymous than a bank account, although this loss of anonymity takes place at the point of entry into the currency and is not a feature of the bitcoin protocol itself.
For those who wish to take advantage of bitcoin’s intrinsic anonymity, they must find an alternative entry point, such as acquiring bitcoin in a private transaction, as compensation for goods or services rendered, or as a reward for mining. Subsequent bitcoin transactions can then be anonymous, since real-world identities are not recorded on the block chain ledger: the only identifying information recorded there are the bitcoin addresses, whose corresponding private keys are held by the owners as proof of ownership.

This post was published at Coin Desk on January 25, 2015.

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