The spectacular collapse of a leading Bitcoin exchange last week prompted an odd combination of gloating and disbelief: Why would anyone – aside from drug dealers and speculators – put their money into a currency that is “virtual” when there are “real” ones available?
There are several reasons, but perhaps the most powerful is that “real” currencies have become tools for surveillance. Every check, every credit card purchase, every wire transfer leaves digital traces that can be collected and analyzed. Given what the world has learned about the reach of government snooping over the past year, it’s easy to understand the yearning for more private ways to send and receive money.
Our money did not always spy on us. Gold coins and greenbacks have no memories. But over recent decades financial transactions increasingly have taken place over computer networks. And computer networks have memories that the police, the taxman and intelligence services can gather.
As anyone who has looked through a year-end credit card summary can attest, even a partial record of our transactions can offer details on our daily concerns and desires – including not just what we buy but how much, from whom and when.
There are limits on how such information can be used, but even private companies, such as data brokers, build profiles of individuals by gaining access to their financial histories. For that reason, some of Bitcoin’s appeal is more nostalgic than futuristic, with users craving a degree of privacy in their economic choices that once was routine but now is almost impossible to achieve for people unwilling to deal in stacks of cash.
This may seem like an abstract concern for people unlikely to draw attention of the National Security Agency or the FBI. But what about a health insurance company? A prospective employer? A divorce attorney? A hacker? As they say in Silicon Valley, data want to be free. Perhaps the best way to guard against unwanted disclosures is to ensure that no sensitive data are created in the first place.
The irony is that while this is key to Bitcoin’s appeal, many privacy advocates believe that Bitcoin itself is not private enough. Every Bitcoin transaction gets recorded in a ledger, called a “blockchain,” that’s publicly available online. It doesn’t list names of buyers or sellers, but it does carry data that could help decode their identities. These digital traces aren’t as detailed as credit card transaction records yet they may be enough to undermine the anonymity some are seeking in Bitcoin.
That’s why many people in the world of virtual currencies are working on alternatives to Bitcoin that are engineered differently, with anonymity hard-wired into the functioning of the monetary system itself.
“The thing that will kill Bitcoin,” said computer security expert Ryan Lackey, “ is a better virtual currency, or hundreds of other better virtual currencies.”