The Myth of ‘Censorship-Resistant’ Crypto

“Ah, Employee #267359, we see here that a digital wallet address linked to your loyalty program account at Mega Retail Corp. transferred two beers worth of bitcoin to a digital wallet the local VFW hall uses to pay its liquor wholesaler. And you did the same night it was rented out by union organizers. Security will escort you off the premises.”

Welcome to the world of “censorship-resistant” cryptocurrency payments.

The idea that crypto payments are difficult to censor has been a big point made over and over in the crypto community – most recently by Ethereum creator Vitalik Buterin, who tweeted August 24 that “people continue to underestimate how often cryptocurrency payments are superior, not even because of censorship resistance, but simply because they are so much more convenient.”

People continue to underestimate how often cryptocurrency payments are superior, not even because of censorship resistance, but simply because they are so much more convenient.

Big boost to international business and charity, and sometimes even payments within countries.

— vitalik.eth (@VitalikButerin) 24 August 2022

Convenience will grow along with the network of merchants accepting crypto payments, but censorship resistance is a different matter altogether – and one that is somewhere between hype and fantasy.

The argument goes like this: Because bitcoin’s blockchain exists on tens of thousands of individually operated nodes scattered across the planet, and transactions are immutable once entered on the blockchain, no government can control it or stop it.

Which is true as far as it goes, but it’s not as far as most people think.

As the number of companies accepting crypto payments grows, and the number of exchanges and businesses collecting identifying information about their customers grows, user privacy will decrease exponentially.

Who’s talking

To begin with, censorship comes in a number of forms, the two most important being “stop the message” and “stop the speaker.” Stopping the message – the bitcoin transaction being sent and received – is very, very difficult as long as users have internet access and digital wallets.

However, stopping the speaker really means identifying the speaker. It goes directly into the myth of crypto-anonymity, which is becoming less anonymous every day, especially as crypto payments become more common.

We’ve delved into bitcoin anonymity before, explaining that it’s essentially pseudonymity, meaning that even though the identity of the person making a crypto payment is hidden behind a private key code, each transaction is traceable, one to the next, on its publicly – and permanently – visible blockchain.

See also: Crypto Basics Series: Is Bitcoin Really Anonymous and How Can Law Enforcement Track It?

“Sometimes there’s a lack of knowledge … that crypto is far more transparent than traditional finance, and it’s actually very easy to investigate crime, to do compliance in crypto,” said Michael Gronager, CEO of blockchain computing firm Chainalysis. to PYMNTS’ Karen Webster recently. “We follow the funds.”

Chainalysis has worked with and trained personnel at many federal law enforcement and intelligence agencies, helping to solve cases ranging from drug trafficking and child pornography to terrorism by tracking blockchain data.

Read more: Chainalysis CEO: Crypto’s strength is working together

By linking a single transaction to a person and following the web of transactions, blockchain intelligence was reportedly able to link a $500 Walmart gift card purchase by a celebrity to the proceeds of a $4.5 billion hack of the Bitfinex exchange in 2016. Two arrests were made in February and allegedly stolen crypto worth $3.6 billion was seized.

Related: Two New Yorkers Arrested for Alleged Conspiracy to Launder $4.5 Billion in Hacked Crypto

Who buys

That kind of tracking is still difficult and time consuming, but as you know your customer requirements (KYC) are coming in for exchanges around the world – and almost all crypto owners need them to move in and out of fiat currency – it’s going to be easier for authorities and companies to track who uses what. And when you link one purchase with a wallet address, anyone can track it and all other purchases made by that wallet.

But won’t exchange keep that information private? Well, the bigger, more honest ones will, except by court order.

However, retailers, social media companies, search engines and any other businesses that track and sell customers’ identifying data will also collect the unique addresses of the digital wallets used to make purchases and link them with other data they have collected. Think loyalty programs, warranty forms, email addresses, delivery addresses, linked debit and credit cards.

Once that connection is made – or purchased – tracking becomes far, far easier and more comprehensive. That is because all links and interconnections of crypto transactions and the wallets they are sent to and from are publicly available and searchable. You can even make test sends to ensure an address is accurate – there is no mechanism to cause a wallet address to refuse a transaction.

On an individual transaction basis, this can be done by tools like Blockchain Explorer, but anyone can run a bitcoin node and have a copy of the entire transaction history of a blockchain that is updated in real time.

This data won’t tell you if your employee bought a Heineken, a Budweiser or a hot dog unless the seller cooperates. But the fact that you bought it and who you bought it from becomes easier and easier to learn.

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