Cryptonomics 05: Identity Crisis

Anonymity. One of the best and worst features of the cryptocurrency industry. It is alluring to anti-government types, useful for criminals and distrusted by those wary of underlying sinister motives. The cryptocurrency industry, as mentioned in the previous article, has two key buzzwords that are frequently used to describe why it is so good or at least to explain why it is different. I have already addressed the notion of decentralisation and explained why I believe the term is used too freely (see here) and now I will address anonymity, why it is valued and why it is dangerous.

The underlying technology of cryptocurrencies like Bitcoin is the blockchain. Bitcoins successors have largely taken this tech idea and built upon it, adding their own unique spin to it. The blockchain is essentially a way of keeping track of all the bitcoins (for example) in circulation, without the need for any central governance. A key feature of the blockchain is that individuals are completely anonymous. Transactions take place between accounts, rather than people. Coins are stored in metaphorical ‘wallets’ rather than bank accounts. All this means that bitcoin is an extremely attractive way of processing transactions for someone who doesn’t want their identity to be known. The most obvious of those is or course the criminal population. Bitcoin provides the ideal way to launder money and pay for illegal goods and services. This has been a thorn in the side of cryptocurrencies ever since their inception.

The benefits of anonymity are vague and individual. By which I mean the gains from being anonymous in cryptocurrency transactions depends on the person doing the trading. If it is someone who values their privacy and identity highly then anonymity is worth the costs of abetting criminality. However if someone cares more about stopping illegal activities than they do protecting their privacy then they will be inclined to see anonymity as a shady, detrimental feature of the crypto world.

I must clarify, to the vast majority of traders anonymity is of little or no relevance. As I have mentioned several times in previous posts the overwhelming majority of traders in cryptocurrencies are concerned with profit and profit alone. The potential for misuse does not affect their day-to-day usage. But the effects are felt in countries where organised crime is rife and criminal gangs can use cryptocurrencies to evade capture and continue corrupting society. South America is a prime example of this, with Venezuela being one of the key producers of bitcoin and the continent itself being notorious as a stomping ground for cartels and drug abuse. The use of cryptocurrencies has moved their operations to the next level by providing an easy way to trade illegal goods without worrying about it being traced back to them.

Another issue with the anonymity of cryptocurrency is the occurrence of so-called ‘Bitcoin Heists’. Already there have been reported cases of people being forced to transfer bitcoin at gunpoint to an online address. Anonymity has meant that tracing where those bitcoins went is nigh on impossible. One example of this being the robbery of Danny Aston, owner of a currency trading firm in Oxfordshire, UK. Four balaclava-clad men broke in and forced him to transfer several bitcoins to an unknown location.

In summary, the dangers of anonymous online trading are easily pinpointed. In contrast the benefits are hard to quantify as they vary depending on your valuation of privacy. Given the decentralised nature of the industry, regulating these potential dangers would be a difficult proposition but I believe some work needs to be done on increasing the safety of bitcoin before it will be fully accepted as a legitimate currency.

Thanks for reading and stay tuned at cbeconomics.com and follow me on twitter @cbeconomic. The next post will be the first in my Be a Good Sports series, looking at how economic thinking can be applied to sports. I will also be continuing this Cryptonomics series in the coming weeks.

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