In May 2018, Japan banned Dash from national crypto exchanges. Japanese officials carried out the ban because they believed Dash to be a privacy-oriented coin that gives criminals and bad actors a way to circumvent the legal system. The government also pressured exchanges to stop trading of Monero and Zcash, two well-known privacy coins. Japan did not, however, ban Bitcoin or other cryptocurrencies.
Dash does include a feature known as PrivateSend that allows users to obfuscate the trail of transactions on the network. However, Japanese officials are mistaken if they think Dash is more private than Bitcoin. While Dash often gets lumped in with privacy coins due to its PrivateSend feature, the reality is PrivateSend is only a small part of Dash’s overall offering. It’s a mistake to ban Dash on the basis of privacy alone.
Blockchain Privacy: A History
Traditionally, financial transactions remain private because a third party (bank) keeps a secret ledger of accounts and transactions. In exchange for this service, banks extract enormous wealth from lending, managing, and investing their depositors’ accounts. In the 2008 crisis, it became apparent that banks were no longer interested in protecting depositors’ funds and lending responsibly. Instead, they were out to make as much money as possible, even if reckless lending and securitization of loans led to economic collapse on a global scale.
Frustration with the excesses of banking and the government’s willingness to bail out banks after their poor decisions is a big part of what prompted the creation of Bitcoin. Satoshi wanted a digital cash that was trustless. You wouldn’t need to rely on and entrust your funds to a bank anymore, because cryptography and technology could digitize and secure funds on a peer-to-peer network.
Bitcoin relies on anonymity to guarantee privacy. Otherwise, when you send someone $1 in Bitcoin, they can view the sending address and see how much you have in your wallet! Anyone in the public can access the Bitcoin ledger and view transactions. However, identities are obscured and not linked with wallet information. Anyone can create as many wallets as they’d like, and those wallets remain anonymous. Bitcoin never collects personally identifiable information, making it difficult to regulate or subpoena. Anyone can review the ledger at any time, so it’s more transparent than traditional banking. However, there’s no way to know who owns what account, short of someone sharing their public address with you.
In the early days of Bitcoin, this anonymity was seen as a dark feature. Bitcoin became associated with the darknet, illegal transactions, and money laundering. While some users certainly took advantage of Bitcoin’s privacy in those ways, the majority of Bitcoin transactions–even in the early days–were for legitimate purposes.
The Importance of Privacy
One line of argument asserts that it would satisfy regulators and law enforcement if we just required personally identifiable information for each Bitcoin account. However, there’s a strong case to be made for privacy, outside of illegal activity. The right to privacy is one of the core freedoms in a democratic society, because it protects freedom of thought, expression, and affiliation.
For example:
- You don’t want your employer knowing that you donated to a certain political cause
- You don’t want another company knowing how much you make and currently have in your account before you enter into negotiations
- You’d rather your landlord not know that you have to pay for expensive medication each month in addition to rent
- You’re buying something online, and you know companies use dynamic pricing algorithms–including your transaction history–to try to get you to pay the highest price possible
- It turns out someone who used the Bitcoin before you participated in an illegal transaction, and that coin is now tainted with its history, possibly affecting its future value
Privacy is also important because it leads to the fungibility of a currency. The best example of this is fiat currencies, like the dollar. If you receive a paper dollar that the U.S. government printed, you trust that it’s valuable. Even though the dollar may have been used in an illegal transaction or passed through the hands of a criminal before it came to you, there’s no way of knowing that. Cash is untraceable, and therefore it’s fungible. Every dollar is equal, and a dollar’s history doesn’t affect its value.
So, privacy in itself is a virtue, not a cause for concern. Government officials only worry about blockchain privacy tokens because they can’t view the ledger, even if there’s a legal need to review transactions. On Bitcoin and Dash, however, the ledger is publicly available. If a government official knows a user’s public key, then they can review the transactions associated with that public key. Whereas privacy tokens like Monero obscure transactions by default, Dash and Bitcoin are both transparent about ledgers and transaction history.
Privacy Rubric: Traceability vs. Anonymity
Before we get into the specifics of Bitcoin and Dash’s privacy features, it’s important to understand the foundations of privacy. At its core, blockchain privacy consists of two main pillars: anonymity and untraceability. They’re two separate issues that contribute to a currency’s privacy.
Anonymity has to do with whether personally identifiable information is associated with a wallet or account. All blockchain tokens since Bitcoin are anonymous. Wallet addresses are purely a string of characters, and access to a wallet requires knowledge of a private key. The benefit is account privacy, since identity is decoupled from transactions. However, the challenge is if you lose your private key, there’s no way to recover your account.
Just because your wallet is anonymous, however, doesn’t mean there aren’t ways of discovering you. Since transactions are traceable on the public ledger, an interested party could piece together a web of transactions that help them determine your location, interests, past purchases, and even identity. Additionally, as soon as you give away your public address, anyone can see any past transactions you’ve made with that address.
Bitcoin’s Privacy Features
Bitcoin is anonymous, but transactions are traceable. You can follow a Bitcoin as it moves from wallet to wallet. If you know a person’s public address, you can learn about all the transactions, incoming and outgoing, from that address. Bitcoin’s ledger is fully public. Anonymity on Bitcoin, and therefore privacy, comes from the fact that you don’t have to associate identity information with your wallet. You can also create as many wallets as you want.
If you only use one wallet for holding your Bitcoin, receiving income, and issuing payments, then your entire financial history is available to anyone who knows your public address. Since you need to share your public address in order for someone to make or receive a payment from you, you’re essentially giving away your transaction history and account balance to everyone you interact with. Even if someone doesn’t know who owns a public address, they can still use context and the web of transactions pointing to that address to learn a lot about a person.
Always a step ahead, Satoshi made provisions for this challenge in the original Bitcoin white paper. The solution was to create a new wallet for every new incoming or outgoing to keep them from being linked to a common owner. Doing this manually would soon get cumbersome, as it involves the management of many private-public key pairs and keeping track of balances in each wallet. However, most modern Bitcoin software clients now do this automatically. Anonymity is therefore a default on Bitcoin, protecting user privacy.
New Bitcoin Improvement Protocols (BIPs) include provisions to increase the privacy of Bitcoin transactions. Some are arguably more robust than Dash’s PrivateSend, even, as we’ll see in a moment. These BIPs promise to limit the traceability of Bitcoins and increase the fungibility of the currency, while also boosting the ease and accessibility of using anonymous wallets. It requires some foresight and knowledge, but when used properly, Bitcoin is entirely private.
Coin Mixing Services
In addition to Bitcoin’s built-in anonymity, there are ways to obfuscate the provenance of the coins in your wallet. Many coin mixing services offer to accept Bitcoins from one wallet and replace them with different Bitcoins in a different wallet you control. This effectively eliminates traceability from the coins you control, since the coins get lost amongst the noise of mixing between many wallets.
Coin mixing works by creating multiple new wallets and combining your coins with other coins as part of a general fund. These coins get passed between many anonymous wallets and the final deposit is into a completely new and anonymous wallet that you control. To fully take advantage of coin mixing, you’ll need to create new wallets, both on the regular internet through your own ISP and on Tor, a private browser. You’ll also need to find a coin mixing that you trust to handle your funds and mix them properly. However, if performed correctly, coin mixing makes Bitcoin completely anonymous and highly untraceable. Along those lines of reasoning, Japanese officials could also say Bitcoin is a privacy coin, when in reality anonymity and coin mixing are possibilities for nearly all cryptocurrencies.
PrivateSend: Dash’s Solution
Dash’s PrivateSend solution makes Dash seem like a privacy-focused coin simply because “private” is in the name of one of its features. However, PrivateSend isn’t much different from using Bitcoin with a coin mixing service. With PrivateSend, Dash builds the mixing service directly into their core wallet. Instead of needing to access Tor and find a third party coin mixing service, as you would with Bitcoin, PrivateSend allows users to premix their coins before using them.
Use of PrivateSend is completely optional. In fact, only 1% of Dash transactions take advantage of PrivateSend. For the most part, users are satisfied with the level of privacy provided by creating a new address for every transaction. However, when users take advantage of PrivateSend, they’re essentially using an enhanced version of existing privacy measures in Bitcoin.
Dash is far from a privacy-only coin. It aims to be usable in the real world. InstantSend via its masternode network is arguably a much more attractive and significant feature for Dash users. Additionally, most of the new improvements planned for Dash focus on increasing usability and scalability of the payments system, not on untraceability.
Private Transactions on the Blockchain
Japanese officials are making a mistake when they lump Dash in with privacy coins. When you consider how infrequently users utilize PrivateSend, it’s clear that Dash’s main appeal isn’t privacy. Furthermore, Dash is potentially less private than well-managed Bitcoin wallets and third party coin mixing, especially in the face of new BIPs that prioritize privacy for Bitcoin.
More broadly, privacy itself isn’t something to be feared. Governments should seek to protect the privacy of financial transactions for most citizens. Unfortunately, illegal activity and money laundering are concerns for regulators, and cryptocurrencies are like cash in that they’re difficult to track. We’ll need new types of anti-money laundering laws that respond to these changes, including reviewing current standards on know your customer regulations as they apply to cryptocurrency exchanges and fiat gateways.
The teams working on cryptocurrency privacy are facing a big technical challenge. As analysis of the public ledgers behind Bitcoin and Dash get more sophisticated, bad actors will be able to glean information about the lives of ordinary users. In that sense, strengthening privacy is an arms race for individual liberties. That’s a goal governments should be supporting, not opposing.
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Thank you for reading. I hope I could have been educational as I endeavor to provide my knowledge as a free public service. Please note that all the materials and information on this blog are general analyses made available for the public’s general informational purposes only. These analyses are not in any way intended to serve as specific legal advice to be applied in your particular situation. Although I am an attorney, absent a signed retention and engagement letter, I am not your attorney. There are no exceptions to this rule. Moreover, you shall not rely on the information I am providing you, as it is only for your general knowledge and educational purposes, since this information would likely change based on any additional facts. Thus the transmission and receipt of information on this blog by anyone does not form or constitute an attorney-client relationship. My knowledge of laws is limited to California. Anyone receiving any information on this blog should not act upon the information provided without first obtaining the services of professional legal counsel licensed in their respective jurisdiction. Best of luck.
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