Bitcoin Masterclass Day 1: Confidentiality in Bitcoin and blockchain

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This is the first article in a series covering Dr. Craig Wright’s The Bitcoin Masterclasses. Dr. Wright gave a talk on confidentiality, how it differs from anonymity, and why it is crucial to distinguish between the two concepts.

Confidentiality is very simple. It is to ensure that the right people have private information. – Dr. Craig Wright

Bitcoin is not anonymous

Dr. Wright explains that security needs three elements: authentication, integrity and confidentiality. No identity on Bitcoin means we can’t authenticate people. Bitcoin is about data integrity, individual authentication and privacy.

Dr. Wright reminds us that identity is firewall from the blockchain in the Bitcoin White Paper. That doesn’t mean it doesn’t exist – this is not an anonymous system. Authentication of people is essential for several types of transactions, and anonymity makes this impossible.

What are some reasons why we might want to authenticate people when they perform transactions? Regulations, taxes and receipt of goods are some examples. For example, if we buy a TV on Amazon (NASDAQ: AMZN ), we want to receive it, get a warranty, potentially return it, etc. We can’t have it delivered to Central Park behind the oak tree—we have to share our address and identity.

Confidentiality and maintaining privacy

Confidentiality means that we share our identity with the right people, the authorities and those we deal with. This means that the right people have private information. It is not losing information or being anonymous.

How do we maintain privacy in a fully traceable system? Not reusing addresses is one method. “It’s a public blockchain,” emphasizes Dr. Wright, noting that anyone can look up anything.

Splitting payments, mixing direct and indirect payments, and storing coins in different wallets help privacy. Some who are extremely concerned about privacy can even send transactions back and forth between different wallets. Even if no one else can tell what these transactions are, the relevant person or company will still have a record of the transactions if they are ever needed.

Dr. Wright points out that there are also cases where someone may need to prove who they are without publishing that information on the public blockchain. The registration of the transaction can be on the blockchain and can thus be validated for many years to come without the personal data of the two transaction parties being publicly known.

“Who else knows?” Dr. Wright asks, “it comes down to who needs to know.”

For example, someone may share the information with relevant government entities and insurance companies when purchasing a car.

Dr. Wright explains how we can maintain privacy when sharing information related to transactions while ensuring that those who need to know have the information they need. Using PKI certificates, which contain attributes such as personal information and which can be linked to registered, certified keys, and thanks to Merkle trees in Bitcoin, which allow selective disclosure, we could verify information such as that a document was issued from a given country without necessarily revealing anything else.

As it is easy to see, Bitcoin has revolutionary implications for financial transactions, computing and exchange. It can introduce real privacy without crossing the line of anonymity. It could also usher in a new era of accountability, recording exactly who accessed information, when and why on an immutable public blockchain. Non-fungible tokens (NFTs) can play a role in all of this, and Dr. Wright will elaborate on this later in the lecture.

IP-to-IP transactions and identity certificates

Dr. Wright reminds us that the original version of Bitcoin was IP-to-IP. He acknowledges that with IPv4 this is less than ideal. However, he maintains that as long as the users have identity certificates, man-in-the-middle attacks will not happen. Why?

“Because there is no man in the middle,” he says. “If I have a certified key, you know it’s mine. Likewise, I know who the other organization is.”

These peer-to-peer transactions with verified identities also have other benefits. They make tracking and tracing easier for business purposes, such as issuing refunds. They also make it easier to prove real transactions between distinct parties that took place by things like audits. Dr. Wright mentions Worldcom and Enron, which notoriously engaged in laundering. It would be much easier to prove that no other party was involved in a transaction with a system like this.

How the quest for anonymity killed previous attempts at digital cash

Dr. Wright points out that without an identity, you cannot sign with a digital signature. He explains that digital signature legislation dates back to 1986 in the UK, but ultimately derives from Roman legislation.

“There is no such thing as an anonymous signature,” he says. There may be signatures with pseudonyms, for example company names, but they are ultimately all connected to people.

Referring to previous attempts to create “cryptocurrencies” like karma, Dr. Wright says they all failed because everyone, including university lecturers, got one thing wrong: they all tried to be anonymous and not private. This led to the illegal use of bad actors and subsequent repression by the authorities.

The problems with bank accounts and how Bitcoin is different

Dr. Wright outlines some of the problems with bank accounts and identifies the fact that they often immerse you in your finances and ask you to explain transactions. They are inferior to cash in terms of privacy for this reason.

Other problems include the fact that many people do not have bank accounts in many parts of the world and that others who may be joint account holders can see our transactions.

Bitcoin is analogous to taking cash out of your bank account. Yes, there is traceability, but no one needs to know exactly where it went or for what. Paying for something, such as an item from Amazon, from three wallets gives you additional privacy. The buyer and Amazon can prove it, and it can be proven in court thanks to the key that connects the addresses, but third-party observers can’t see what’s going on.

In this way, Bitcoin has many of the advantages of bank accounts and cash combined. It allows for privacy, like cash, while also making it easy to keep track of what was spent.

Register for free to attend the next The Bitcoin Masterclasses with Dr. Craig Wright in Ljubljana, Slovenia, 22-23 February 2023.

See: Bitcoin Masterclasses Highlights: Identity and Privacy

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