Privacy on Bitcoin and Why Everyone Should Care – Hacker Noon

When Gift

Unless you’ve been living off the grid for the past twenty years, it’s pretty obvious that the world (led by Sweden in the West and China and South Korea in the East) is trending toward a cashless society. In countries that have kept pace with the latest advances in Fintech, transacting with bank cards, Paypal, Venmo and a growing list of mobile apps has become the norm. Cash payments in Europe have been consistently on the decline over the past decade, and in Sweden, more than 40% of the cash supply has been taken out of circulation since 2007. We embrace digital payment rails because they’re the most effortless way to shop these days. Convenience is always king. But there are no free rides in life, including the “free” online services we all enjoy. We ultimately pay for them one way or another.

When it comes to digital fiat payments we get hit twice:

  1. We pay small service fees that, in aggregate, enrich an elite group of companies that can become dangerously powerful (either as a monopoly, a central point of failure, or both)
  2. We knowingly compromise our privacy by handing over sensitive financial data to third-party service providers

In the absence of financial privacy, individual freedoms can be denied as every purchase we make can be traced, surveilled and censored. In this context, cypherpunk projects that gave birth to Bitcoin and a handful of privacy coins have a particularly important role to play in our future. But before delving deeper into that, it’s worth taking a closer look at the risks associated with a centralized financial apparatus in an all-digital fiat economy. If you don’t already subscribe to the cypherpunk ethos of embracing privacy enhancing technologies to achieve self-sovereignty and financial freedom, or you’re happy to sacrifice some personal liberties in the name of fighting terrorism, there’s still good reason to second-guess the benefits of a cashless fiat society.

The Risks of Centralized Financial Surveillance

The banks, credit card companies and payment providers who make our lives more convenient possess a full history of our prior transactions, and have the ability to censor payments, at will, for moral or political purposes. Not only are these gatekeepers capable of unilaterally restricting payment in cases where they disagree with certain views (as they did with Wikileaks), but they can also be deputized by governments operating in the interest of national security. In such a scenario, financial institutions can be compelled to hand over sensitive data belonging to innocent users. Once private information has been siphoned onto government servers, there’s no way of knowing how it might one day be exploited, leaked or stolen. In dystopian China, for example, the government has created a social credit rating system and according to this unsettling story, citizens can be punished for “the crime” of purchasing too many video games — yes, video games…you read that correctly.

The growing concentration of power among payment service providers goes relatively unchallenged in democratic countries, but it’s a very real issue for anyone living under an authoritarian regime. In a political context money is a form of speech and pervasive financial surveillance can be an extremely effective way of silencing dissidents and activists. In freer societies, donors who legally contribute to controversial causes like gun control or Planned Parenthood could one day find themselves on the unpopular side of a political divide and face punishment for having lent their support to a specific organization. And it goes beyond politics. Seemingly benign shopping trends that are tracked by retailers can have uncomfortable social consequences — remember Target’s creepy “pregnancy prediction scheme” that led to a father discovering his teen daughter’s pregnancy from a targeted ad campaign?

To the people who are happy to forego some liberties because they believe they have nothing to hide, put aside any bias you may have against Edward Snowden and hear him out on why privacy, financial and otherwise, is a universal pillar of civil liberty and freedom.

Study after study has shown that human behavior changes when we know we’re being watched. Under observation, we act less free, which means we effectively *are* less free.” — Edward Snowden (Q&A with RT)

A history of gross negligence in the financial services sector when it comes to protecting sensitive user information is also worth noting. Equifax compromised nearly half of the US population during a 2017 data breach resulting in the theft of 140 million social security numbers, credit card details and other personal information. JP Morgan fell victim to a cyber attack in 2014 putting 80 million accounts at risk. Clearly, our venerable financial service stewards haven’t done a great job safeguarding private data. So I’m far from convinced that they can be trusted to exercise prudence and fair practices as intermediaries in our financial transactions.

The Cypherpunk Response to Financial Surveillance

Due to its dominance in the cryptocurrency ecosystem and in a future where digital payments supplant paper money, Bitcoin is strongly positioned to remain relevant as a form of peer-to-peer electronic cash. A currency native to the Internet, it has the capacity to solve at least one of the problems described above. For example, Bitcoin possesses several critical features that prevent third parties from censoring transactions:

  • Decentralization: the Bitcoin network is highly decentralized so it’s practically impossible for governments to shut it down…summoning globally dispersed miners to boycott suspicious transactions isn’t very feasible.
  • Neutrality: the Bitcoin software protocol and its rules are derived from code that does not discriminate on a moral or political basis, and they’re very difficult to change.
  • Immutability: Bitcoin’s blockchain (or open ledger) cannot be modified; once a transaction is recorded in a block, nothing can be done to reverse it.
  • Permissionless: peer-to-peer exchanges like Local Bitcoins, and open source software projects like BTCPay Server, enable transactions without any reliance on an intermediary or trusted third party.

Hence, Bitcoin clearly shines when it comes to censorship resistance. However in terms of privacy and fungibility — core features of paper money that protect individuals’ financial sovereignty — Bitcoin in its current iteration has room for improvement. Transparency on the pseudonymous Bitcoin network has both pros and cons. On the one hand (even though no one’s asking for permission) governments tolerate Bitcoin’s existence despite it being a fundamental threat to their own centrally-issued fiat currency; on the other hand it exposes users’ private financial data to anyone able to link a wallet address with a user’s identity. For obvious reasons, no business wants their account balance or transaction history publicly available to competitors, and no Bitcoin holder wants to be the victim of extortion by unscrupulous parties.

Obfuscatory solutions like Coinjoin already exist to confound the identity of parties to a Bitcoin transaction, and other privacy-enhancing features are coming: on the protocol level, Bitcoin core developers are working on proposals like Schnorr Signatures, Tap Root, and Dandelion to help conceal sensitive transactional information, and the layer two Lightning Network provides added levels of privacy, including the use of onion routing to anonymize communication between nodes. For users who insist on more robust levels of privacy, coins like Monero, Zcash, Beam and Grin are, by design, engineered to keep the financial history and identity of users completely confidential. Of course, until we have fully decentralized crypto exchanges that utilize zero knowledge proofs and atomic swaps, the ability to achieve true financial privacy will be limited.

Parting Thoughts

Governments might not be so keen to embrace cryptocurrency projects that enhance financial privacy, and when it comes to money laundering and terrorism they have valid concerns. However, these crimes existed long before cryptocurrencies were available, and they continue to occur in the legacy financial system on a routine basis: Deutsche Bank, HSBC and Wachovia Bank have all been implicated in massive money laundering scandals over the last decade. Attempting to shut down an emerging technology in the name of national security would be a grave injustice to the majority of law-abiding users who would be otherwise powerless in an all-digital economy where governments, banks and corporations have unrestricted access and control over finances.

As the fiat Fintech “revolution” takes further hold and it becomes more difficult to spend paper money, we will continue to find ourselves in compromised situations. That’s why reading and sharing crypto-friendly reports which make the case for privacy in an open society is increasingly important. I highly recommend checking out this recent study published by Coin Center. Glen Greenwald’s TED talk on why privacy matters is also worthy of your time.

Bitcoin and other privacy coins were created, among other reasons, to protect our individual freedoms and they should be properly understood in this context. Failing to embrace this particular value proposition is self-defeating and could one day lead to regret as we inevitably head further into a cashless economy.

read original article here