Exposed

Happy Sunday and welcome back! Since today’s send is all about financial privacy, we wanted to start things off with a good ol’ privacy joke. But truth be told? All the privacy jokes we could find were pretty bad…(Which part of the hospital has the least privacy? The ICU.)

But today’s topic is no joke. We’re taking a look at one of Bitcoin’s most overlooked issues: privacy. Let’s dive in.

—Angelina

Bitcoin’s Privacy Problem

Bitcoin is often portrayed as a super anonymous network favored by secretive teenagers and mafia bosses alike for its ability to lock up your secret transactions and throw away the key. From the nightly news to your Twitter feed, Bitcoin has been hailed for years as a beacon of financial privacy and anonymity.

But in reality? Bitcoin is hardly the gold standard of privacy. In fact, it has a real privacy problem—which isn’t just a red flag. It’s a deep crimson one.

Here’s the thing: Bitcoin isn’t an anonymous network. It’s a pseudonymous one.

• Every Bitcoin user has an on-chain identity represented by their public key. The Bitcoin blockchain is an open record of transactions, not people, which makes it pseudonymous.

• Think of it as an online multiplayer game. You know the avatars and levels of other gamers, but only by their in-game name. Your teammate could be anyone—your college classmate or Ryan Reynolds.

• Pseudonymity is not a privacy guarantee. Transactions are encrypted, but that doesn’t mean they’re untraceable. And once the public key is traced back to an individual, the Bitcoin blockchain is an open book.

These days, it’s easy to match Bitcoin transactions to real people. How?

KYC procedures. If you sign up for a crypto exchange like Binance or Kraken, you usually have to disclose some personal information (name, phone number, email). If there’s a data breach, anyone could use that information to read up on your Bitcoin holdings.

IP addresses, web trackers, and cookies. Exchanges and other centralized crypto service providers may collect data on your (online) whereabouts. Again, data breaches could put that information into the wrong hands.

Custodial wallets. Because they store users’ private and public key pairs, online wallet service providers are prime targets for hackers. If there were to be a data breach…you get the point.

But opportunistic criminals aren’t the only ones who capitalize on Bitcoin’s lack of true financial privacy. Law enforcement agencies also love Bitcoin because it makes cybercriminals easier to follow—and subsequently bust.

But let’s talk about the elephant in the room: Privacy should be a fundamental right (regardless of whether you have something to hide). It gives you control over your data, protects you from ill-intentioned opportunists, and allows you to set personal boundaries.

So…where do we get a do not disturb sign for our crypto dealings? How can those of us who just want a little privacy ensure that our IRL identities remain untraceable?

First, you can use a new Bitcoin address for each transaction. You’ll get a new public key along with it, making it harder to trace all of your transactions to the same address.

You could also use mixing protocols like CoinJoin, which obscure the origin of Bitcoin transactions by throwing together various transactions into one big pot. (Caveat: Relying on mixers isn’t the safest bet. As we’ve seen with the sanctioning of Tornado Cash, regulators feel threatened by the privacy that crypto mixers provide.)

Lastly, good internet hygiene practices are a must. Disabling trackers, using VPNs, and installing applications like the Tor browser can help minimize the amount of data third parties collect about you—and that doesn’t only apply to crypto.

Bottom line: The solutions above can go a long way, but they aren’t sufficient to solve Bitcoin’s privacy problem. And since Bitcoin is here to stay, more and more centralized service providers will pop up and try to collect our data.

Criminals exploiting personal information aren't the only things we’re worried about—in the face of increased financial surveillance (CBDCs, the removal of cash, CO2-scoring on credit cards), it’s in our best interest to continue working on building better privacy solutions for Bitcoin.

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When you use RAILGUN, you’re protecting yourself against fraud, impersonation, and malicious actors whilst still enjoying degen DeFi delights. Check out RAILGUN here.

And that’s what you need on your radar this week in crypto. How important is financial privacy to you? Hit that reply button and let us know. See you back here on Tuesday!