Why Financial Privacy Is About More Than Using Bitcoin to Buy Drugs on the Internet
When a random person on the street in the United States is asked about bitcoin, he or she will usually respond that it is some sort of internet currency used to buy drugs online — if they’ve heard of it at all. While bitcoin is far from anonymous and private in its current form, the desire for enhanced privacy features is not just about buying drugs from AlphaBay.
In a recent presentation at the Coinbase headquarters in San Francisco, California, Monero developer Riccardo “FluffyPony” Spagni described a variety of situations where financial privacy is desirable outside of breaking the law. “The thing that a lot of people misunderstand when we’re talking about privacy is that it’s not just about buying drugs,” noted Spagni at the beginning of his presentation.
Financial Privacy Problems for Businesses and Individuals
Although many individuals don’t care about their online privacy at all — even in a post-Snowden era — Spagni was able to point out a few issues people will face when not protecting their financial privacy online.
The first item on Spagni’s list, targeted advertising based on spending habits, may not be seen as a negative by everyone. After all, if someone is going to have advertisements thrown in their face on a daily basis, it would make sense for those advertisements to be related to their likes or interests. Of course, the downside here is that multiple other parties get to know about the individual’s spending habits, which some would prefer to be left private.
In addition to drugs, Spagni pointed out that there are also perfectly legal purchases that users may wish to keep private. Pornography is an obvious example here.
For the wealthy, financial privacy is even more important. If someone is able to see an individual’s entire balance when transacting with them, then it’s much easier to know whether that individual may be a worthy target for theft or worse.
In addition to being targeted by others, low levels of financial privacy can also cause individuals to be unwittingly complicit in criminal acts. “This is something that could happen, for example, if you’re using a tumbler and you end up with dirty coins,” explained Spagni during his talk. “And [the] next minute you deposit them into Coinbase and Coinbase closes your account.”
Spagni then sarcastically claimed that this is something that surely never happens with Coinbase accounts.
Financial privacy is also of the utmost importance for any business that wants to maintain a competitive advantage over their rivals. A lack of privacy in business transactions can lead to everything from revealing sensitive business relationships to leaking information related to salaries, profit margins and revenues.
Developers of various blockchains have been somewhat surprised at the sorts of people who have been demanding privacy improvements for these systems. For example, Zcash CEO Zooko Wilcox-O’Hearn has noted the financial industry’s assistance in helping blockchains become more private.
Transaction Censorship by Miners
One final point made by Spagni during this portion of his presentation is that a lack of financial privacy on a blockchain can lead to censorship by miners, who are the ones who decide which transactions get confirmed into each block. If a group of miners decided they did not want to process transactions signed by a specific Bitcoin address, then such a policy could be implemented today.
Of course, the effect of such a policy would be that the targeted Bitcoin address would have their transactions delayed rather than stopped. This is due to the fact that each mining pool decides which transactions to include in the next block. The censorship of specific types of transactions would require a majority of miners to effect a 51-percent attack on the network.
With better privacy features, it becomes difficult for miners to target specific users or types of transactions because they are unable to distinguish one transaction from another.