Anonymisation on the blockchain

March 15, 2018 Niamh Cassidy

Cryptocurrency is a hot – and controversial – subject. Over the last few months, crypto values have fluctuated wildly as governments, spooked by their perceived “anonymity,” have begun to investigate the possibility of regulating or even banning the exchange of new currencies. But despite these concerns, the crypto craze doesn't show any signs of slowing.

Clearly, there’s a lot of misinformation out there. So how does anonymity really affect cryptocurrency, and how worried should we be?

It depends on who you ask. Onfido Chief Architect and co-founder Ruhul Amin contends that though this generation of crypto is relatively anonymous, it's really “no different to cash”. Meanwhile, CEO and co-founder Husayn Kassai counters that this very anonymity is what keeps crypto from widespread adoption.

We put them head to head to see who could convince us of the pros and cons, and just how identity fits into it all.

Q. What’s the deal with anonymity?

‘Anonymous’ as an absolute term is actually a misrepresentation; the blockchain ledger records the history of every single transaction. That might sound antithetical to the concept of anonymity altogether – but it’s the wallets themselves that are often held anonymously. At cryptocurrency’s current stage of development, that makes it extremely difficult to link a person’s identity with any given transaction.

Ruhul: “Some people want it to be anonymous because that enables criminal activity, but to be honest, it’s no different to cash.”

Husayn: “Cash transactions are hardly anonymous. If you go into the bank with a hundred thousand dollars cash, it will raise suspicion. Banks have cameras. In theory, it might be anonymous, but each dollar bill has a unique code which may be tracked. The real problem is the confusion between privacy and anonymity. Anonymity implies that no one knows anyone’s identity – but most users actually care more about privacy and security. If they’re comfortable with one or two trusted parties in the network having a record of their identity, and especially if it strengthens the credibility of the whole network, wouldn’t that be the better option?”

Q. What’s so bad about anonymity anyway?

Privacy and discretion in financial dealings are normal. If you’re at the pharmacy buying a cream for that rash that just won’t go away, you might not want your bank to know. The same goes for- leaving it open to discovery on the blockchain. But the relative anonymity of cryptocurrency might be what keeps it from directly replacing mainstream currency.

Ruhul: “I don’t necessarily want anyone to know about my transaction history – but that’s not because it’s a criminal activity.”

Husayn: “Regulators cannot take the current generation of cryptocurrency seriously; if it is anonymous, it could be used to launder money. In an increasingly high-security alert environment, the regulators are extremely unlikely to accept that.”

Q. How’s cryptocurrency different from traditional banking?

Because the blockchain ledger is anonymised, many harbor the misconception that the only use of cryptocurrency is for criminal activity. That's a bit like saying the only reason to go on holiday is for the duty free at the airport. In an era where trust in institutions is eroding, cryptocurrency offers a way of taking back personal power over financial dealings.

Ruhul: “Currently, there’s a big bias against banks. A lot of people feel that the banks are making obscene amounts of profit and that they shouldn’t be in control of our money. With the rise of FinTech, people need physical banks less and less...cryptocurrency has grown out of the same sentiment”.

Husayn: “I agree that crypto is here to stay as an infrastructure and a technology. But the current version of cryptocurrency poses clear problems – so it’s not going to replace banking anytime soon.“

Q. Does it need to be anonymous?

Maybe not. Husayn argues for a model based on privacy instead, where one trusted party (such as the broker who sells the cryptocurrency), would be aware of a person’s identity. Beyond that, the identity would largely remain hidden, but if necessary for legal or regulatory purposes, the identity could be released. In principle, a transaction could be traced back to an individual, but only if there were a valid legal reason for it.

Ruhul: “Functional identity protection is absolutely necessary. Among many practical reasons that identity must be kept as private as possible, a primary example is that individuals known to hold large amounts of cryptocurrency are particular targets for cyberattack.”

Husayn: “A system of privacy rather than anonymity will highlight cryptocurrency’s benefits, such as speed, direct verification, and lack of transaction fees curtailing potential nefarious uses: When you marry trust in transactions and trust in people, you get all of the good stuff of the crypto without the bad.”

Q. And what’s identity got to do with it?

Identity verification provides many legal, as well as practical benefits. Identity verification is necessary to comply with financial regulation, and linking identity to a cryptocurrency transaction would streamline that. In a criminal matter, linking a person’s identity to a particular transaction could provide valuable evidence – all verifiable within the blockchain. Under a court order, the broker who facilitated the exchange of the cryptocurrency and verified the alleged criminal’s identity would release the details that linked them to the transaction.

Onfido’s mission is to weave such a verification system into the practical and philosophical fabric of cryptocurrency. This would grant cryptocurrencies a legitimacy that would enable them to enter the mainstream – keeping regulators happy, and delivering the benefits of crypto to everyone else.

Ruhul: “There are myriad benefits to a trusted body performing identity verification ahead of enabling transactions. A transaction can legitimately be associated with a good actor, ICOs can be sure not to receive dirty money, and private keys encoded with two-factor authentication could halt phishing. That’s just to name a few”.

Husayn: “The blockchain is very effective at preventing cheating in transactions. There exists an obvious ethical inconsistency between that and the potential for using the anonymity of cryptocurrencies for illicit ends. But that won’t last long. By focusing on privacy instead of anonymity, we can retain the very best elements of what cryptocurrencies enable and help it go mainstream.”.

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