Friday, April 05, 2013
But nearly every day, I see one or more persons extolling Bitcoin for being "anonymous." And it. Is. No. Such. Thing.
It is possible to be anonymous while conducting transactions in Bitcoin, but that anonymity has to be achieved independently of the Bitcoin transaction process -- because that process is not only not anonymous, it is completely the opposite of anonymous: Every Bitcoin transaction is logged, and the log of those transactions (the "block chain") is publicly viewable. See, for example, here.
So, if a Bitcoin address can be associated to you, anyone who's willing to go to even a little trouble can examine each and every transaction you've ever made using that address (want to try it for yourself? Grab my semi-permanent Bitcoin address from the sidebar "donate Bitcoin" button and plug it into the service linked above -- voila, you'll see every bit of activity associated with that address). And if the accounts on the other ends of those transactions can likewise be associated with particular people, anyone can know whom you're dealing with and to what extent in Bitcoin.
Some of the bigger wallet providers / market makers / payment processors are also already cooperating with governments, requiring users (at least users who transact in large amounts) to "verify their identities."
Now, that is not to say that all hope of anonymity is lost. There are steps you can take to protect your anonymity.
For example, you can use one of the wallets that isn't bending over for Uncle Sugar on the ID thing.
You can come to that wallet electronically disguised via proxies or using public Wi-Fi instead of your home Internet connection or whatever.
You can frequently change the Bitcoin addresses associated with that wallet (indeed, some automatically create new addresses with each transaction, although previously used addresses remain functionally linked to the wallet for re-use). That's not bullet-proof protection -- if the bad guys get access to the wallet, with a warrant for example, they can know which addresses are associated with which accounts -- but it's at least a layer of obfuscation.
Using Bitcoin anonymously is something you have to proactively work at. The system itself is not, was never intended to be, and was never advertised as, anonymous.