Friday, March 5, 2021

Addressing Anonymity with Electronic Currencies

With the surge in online shopping and the need for less contact, electronic payments have increased significantly during this pandemic. We do know that both the Ethereum and Bitcoin blockchains are open and -- while they are theoretically anonymous -- as soon as any crypto account touches a bank account tied to your identity, you are in direct contact with the pool, which could be recording your IP address and associating it to your cryptocurrency account. 

Many might recall that the cryptocurrency industry was initially portrayed as "anonymous digital cash." While experts were quick to point out that this was not exactly the case, Bitcoin (BTC) found initial popularity in darknet markets such as Silk Road, where merchants sold illegal goods ranging from light drugs to, allegedly, hitman services. Founded in 2011, Silk Road thrived for the next two years until the Federal Bureau of Investigation shut it down in 2013. Authorities later revealed that completely free blockchain explorers aided their investigative efforts.

Some cryptocurrencies (such as Zcash and Monero) are explicitly designed to address traceability concerns, incorporating several security mechanisms, including:

Ring Signatures, which allow signed messages to be attributable to “a set of possible signers without revealing which member actually produced the signature” ...

Stealth Addresses, which refer to methods for key management in which public keys are derived separately from private keys for the purpose of obscuring the public keys, and

Confidential Transactions, which use Pedersen commitment schemes to restrict disclosing the amounts transacted to anyone other than the transacting parties.

Some are thinking up ways to successfully implemented privacy-enabling cryptocurrency, so that metadata associated with transactions would be hidden. Online, data flows or the ledger would not reveal relationships among transactions or any information about the transacting parties.

As more central banks consider how to embrace the digital economy, new ideas will flourish. Unlike traditional money, cryptocurrencies aren’t issued by countries or central banks. On the contrary, one of the hallmarks of these products is the lack of regulation and oversight by a central authority. Most US banks have been slow to introduce software that allow peer-to-peer payments for things like splitting the bill on a meal. In some scenarios, central banks could directly issue digital currencies into users’ online wallets without involving banks and other middlemen. Americans could also potentially hold accounts at the Federal Reserve for making transactions using a digital dollar, simplifying the process and lowering the cost of exchanging payments.

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