Is Bitcoin Private Enough To Maintain Our Financial Freedom?

Bitcoin's inherent characteristics create financial transparency, but proper use can allow users to retain their privacy and preserve freedom.

This opinion editorial is by Kudzai Kutukwa. He is a passionate financial inclusion advocate and was named by Fast Company as one of South Africa’s top-20 young entrepreneurs under the age of 30.

(Source Photo: John Webb on Unsplash )

Privacy is an essential human rights that is being taken as a given. Privacy is not about hiding something. It's about being able to choose to reveal your true self to the world, and thus exercising control over your life. To protect our privacy, we use physical devices such as doors, windows, safes, drapes, and locks. We live in a society where privacy is being overridden by the desire to share and be transparent. In its current form, the internet is not secure and users are not protected. The state, Big Tech, and hackers have access to our personal data and can exploit it. The availability of digital tools, which allow you to share everything from precious moments and exact locations, has made sharing a default.

Although social media platforms make communication across long distances easier, digital footprints that are being created online every day by billions, compromise privacy and, by extension, personal security in many ways. Cyberbullying, data hacking, and online stalking are just a few of the many examples. The sharing culture has made it difficult to preserve privacy and is therefore viewed as suspicious. If you don't have anything to hide, why would privacy be necessary? We continue to live in the false illusion that we are free, but our decisions and actions can be remotely controlled by those who collect our data. Privacy is not illegal or a luxury. Freedom is only possible with privacy.

Due to the widespread use of commodity money like gold, and later on cash, financial privacy was not possible until recently. Transacting freely was possible without having to reveal any personal information to merchants, or expose any purchases to the bank. However, cash usage has declined over the years due to the advent of digital payment channels, and sometimes due to legal restrictions. These restrictions are intended to combat tax evasion and money laundering as well as organized crime. Although digital payment channels are more private than cash, there is a set of laws that limit who can view your financial information and legal processes that must be followed before any financial institution discloses your financial information. Although they are not foolproof, they do provide basic financial privacy protection. Bitcoin transactions, which are pseudonymous currencies, can be seen by everyone and anyone. Your financial information (as far as the bitcoin wallet address is concerned) will be permanently available to anyone who can link your identity to it. There are no legal procedures required to access this information. Governments worldwide are targeting applications and services that protect cryptocurrency transactions' privacy.

The US Treasury's Office For Assets Control sanctioned Tornado Cash, an Ethereum smart contract mixer that allows people to keep their financial privacy online. It was also added to the Specially Designated Nationals List (SDN). This effectively means that all Americans, residents, and entities are prohibited from interacting in any way with TC. Privacy-enabling tools such as TC enable people to transact without revealing their entire financial activities. They are also useful in protecting financial privacy when transactions on-chain are involved. OFAC claims that TC was used to launder $455 million worth of cryptocurrency by the Lazarus hacker group, which is supported by the North Korean government. OFAC had sanctioned Lazarus in 2019. It also points out that TC received funds from both the Harmony bridge and the Nomad bridge.

Historically, OFAC sanctions were applied to individuals and entities. However, what is unusual about this particular situation is that TC is not a natural person nor a juristic person. It is open-source code. The First Amendment protects code as speech (Bernstein, v. DOJ). Just as a written musical score can be used to communicate among musicians, code can also be used "as an expressive means for the exchange information and ideas" among computer programmers (Junger V. Daley). The First Amendment protects the creation and distribution of open-source software code, just as music, books, and films.

Open-source code can be used by anyone, and publishers don't receive any commercial gain. It is therefore free to use. Law-abiding citizens as well as criminals can use the internet, roads, and banking system. But bad actors are those who are targeted and not the infrastructure. According to their FAQ section, SWIFT admits this fact. They respond to the question: "What's SWIFT's role in relation to financial sanction imposed by regulators?" "and "Does SWIFT adhere to all sanctions laws?" "They state the following:

SWIFT doesn't monitor or control messages sent through its system. This is up to the financial institutions that handle them and the competent national and international authorities. SWIFT's primary goal is to assist its users in complying with international and national regulations. SWIFT acts as a messaging service provider. It has no control or involvement in the financial transactions mentioned in messages by financial institution customers.

They are implying that, as a neutral communication network, they are not subject to OFAC. Therefore, the financial institutions responsible for enforcing sanctions are directly accountable. The same logic can be applied to open-source protocols that enhance privacy, such as TC, which can be used by both law abiding citizens or criminals. Any rational person who observes the absurdity of all this could be forgiven for believing that the intention of this action was to send a message not only to discourage mixing but also to curtail its development. By default, OFAC's sanction implicitly presupposes guilt by anyone seeking financial privacy. It also requires full disclosure of user's information (i.e. their entire on-chain financial record). This is more than a sanction for TC. It's a gradual creep towards the outlawing of all open-source privacy-enhancing software or software deemed illegal.

A Financial Times article recently reported that a Treasury official, unidentified, commented on the sanction of TC.

"We believe that this action will send out a really critical message about mixers to the private sector,' adding that it was designed to 'inhibit Tornado Cash or any kind of reconstituted versions to continue to function. Although today's action against a mixer is the second by Treasury, it will not be the last em>

If that isn't an open declaration against financial privacy, then I don’t know what it is. OFAC's sanctioning of an open-source protocol sets the precedent for criminalizing indirectly the act of seeking financial privacy. It creates uncertainty in the open-source community as developers could be held responsible for creating code that can be used later by criminals. Despite the fact open-source code creators have no control over how their code is used, Alex Pertsev, one of TC’s contributing developers was taken into custody by Dutch authorities. He is being charged with money laundering. He is currently in police custody. This is the slippery slope we are on. Decentralization and censorship resistance are essential.

After the sanction by TC, "fragility contagion" occurred, in which Github deleted the entire software repository for TC. Infura and Alchemy, Ethereum's largest node infrastructure providers, restricted access to data about Tornado Cash smart contract smart contracts. Defi Protocols such as Aave, DYDX, and Uniswap blocked access to TC, while stablecoin issuers Circle immediately frozen assets linked to TC. These companies did more than the law required. They did more than just comply with an unjust order. Anything "decentralized in the name only" (DINO), is the lowest hanging fruit. State attacks will target this low-hanging fruit first. As we've seen with the TC fallout it doesn’t take much to shake the cage. All these DINO projects will eventually be either sanctioned to extinction like TC, or co-opted into centralized financing.

This is the million-dollar question: How does it affect Bitcoin? Bitcoin is completely decentralized and resistant to censorship, so why should Bitcoiners care? First, Bitcoin transactions are not automatically private. This is compounded further by the fact that the bulk of Bitcoin trading volume can be attributed to a handful of centralized exchanges such as Binance, FTX, and Coinbase. As a result, most new entrants buy their bitcoins from these exchanges. This is problematic because you must provide personal information to these exchanges to meet know your customer (KYC). These exchanges can tie your identity to any Bitcoin you purchase. This causes three problems:

  1. Hackers and data leakages can easily access personal information stored in an exchange's central database. These data can be shared with government officials upon request, making you a target for "EO 6102 attacks."
  2. The enforcement of regulations such as OFAC's sanctions can be complicated by exchanges. They are required to comply.
  3. Your financial privacy can be compromised as the exchange can track your transactions indefinitely, even if you withdraw bitcoins from it.

These are just a few of the dangers associated with centralized exchanges. They will do anything to get their bitcoins back when they're needed. To avoid these vulnerabilities, the best thing to do is to get your bitcoin off of exchanges and to self-custody your bitcoin in a physical wallet. As it is likely that third-party custodial service will become a regulatory chokepoint, self-custody should be the standard. Next, you can buy bitcoin on non-KYC peer to-peer exchanges such as Bisq or Hodl-Hodl. To improve privacy, you can also use CoinJoining to make transactions.

A CoinJoin allows two or more people to combine their transactions into one transaction with the intent of hiding who has which coin. The CoinJoin provides forward-looking privacy by separating the historical links to your bitcoin from all future transactions. This prevents blockchain data watchers being able to trace the origin of the bitcoin. This is especially recommended for bitcoin purchased from central exchanges to preserve basic transactional privacy. CoinJoin coordinators do not take possession of bitcoins, unlike mixers like TC. They are not money transmitters but only send messages like SWIFT. However, it is important to remember that some central exchanges flag deposits that contain "mixed currencies" and reject them. This can be used as a choke point to restrict Bitcoin privacy.

CoinJoins, CoinJoins, and non-KYC Bitcoin can add an extra layer of privacy to your Bitcoin transactions. Your node acts as a gateway into the Bitcoin ecosystem. It broadcasts transactions and verifies the legitimacy of any bitcoin received. This protects your privacy. You cannot have your own node and must rely on another public Bitcoin node to inform you of your balance and broadcast/receive transactions for you. This is dangerous because it exposes information that could be used to identify your identity, such as your IP address and wallet balance. Even worse, some surveillance companies run these nodes. This information is not what you want. Your own node will ensure that you are protected against network-level privacy leaks. Mining can also be used to gain non-KYC Bitcoin. It also results in a much higher decentralized hash rate. The best way to earn bitcoin is to buy it, and to spend it rather than buying it. The bitcoin circular economy eliminates the need to use fiat on/off-ramps, gradually displacing the central exchanges and reducing the volume of bitcoin flowing through them.

Although Bitcoin is undoubtedly resistant to censorship at the protocol level it remains vulnerable at the individual level because of a lack of strong privacy protections. These are short-term measures to improve financial privacy, and in turn protect against coordinated state attacks. These steps may be tedious and inconvenient, but the effort is well worth it. To make bitcoin private, it is essential to create more user-friendly privacy tools at the application layer. Individual freedom can only be secured if financial freedom is protected. Directly or indirectly banning financial privacy is a serious breach of that freedom. It also creates a digital surveillance state that powers the panopticon. It would be risky to have a system in which every transaction is monitored, controlled, and analysed by the State, especially in a society that is constantly under threat from financial censorship (think CBDCs).

It's a good idea to recall the words of Phil Zimmermann, a cypherpunk who wrote "Why I Wrote PGP", as the war on financial privacy heats-up.

Strong cryptography is the only way to protect privacy in an information age. Strong cryptography ." is the only way to maintain privacy in an information age.

Bitcoin gave us an advantage in financial privacy and in the eventual separation between money and state. We have to protect our financial privacy as we are likely to be subject to serfdom by central banking.

Kudzai Kutukwa contributed this guest post. These opinions are not necessarily those of Bitcoin Magazine or BTC Inc.

By: Kudzai Kutukwa
Title: Is Bitcoin Private Enough To Maintain Our Financial Freedom?
Sourced From:
Published Date: Tue, 13 Sep 2022 00:00:00 GMT

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