Bitcoin right now is not really anonymous . While Bitcoin addresses aren’t necessarily linked to real-world identities, they can be. Monitoring the unencrypted peer-to-peer network, analysis of the public blockchain and know your customer (KYC) policy or anti-money laundering (AML) regulation can reveal a lot about who’s using Bitcoin and for what.
This is not ideal from a privacy perspective. To show some examples; Bitcoin users might not want the world to know where they spend their money, what they earn or how much they own, while businesses may not want to leak transaction details to competitors.
Additionally, bitcoins being traceable, possibly “tainted” and potentially worth less than other bitcoins is at odds with fungibility . This could even challenge Bitcoin’s value proposition as money.
One solution to increase privacy and protect fungibility is to exchange bitcoins for fiat currency without being required to identify yourself.
The Problem
Exchanges, brokerages, money transmitters and other service providers that serve as the “on-ramps” and “off-ramps” between bitcoin and fiat currency, form an important part of the Bitcoin ecosystem. But from a privacy and fungibility perspective, a heavy reliance on these companies is not ideal: Practically all fiat-facing bitcoin-companies are required to apply AML/KYC-checks on their customers.
Moreover, these checks can be (and are sometimes) combined with wider blockchain-analysis, pertaining to the past trail of bitcoins, to in some cases even monitor where bitcoins move to after leaving these services. This allows for extensive mapping of the Bitcoin ecosystem. (In a recent blog post , R3CEV Director of Market Research Tim Swanson even described this as a “de facto Kimberley Process ”.)
There are some ways to avoid these kinds of checks. Most obviously, users can exchange bitcoins for fiat outside of any exchange, for example, at Bitcoin meetups. But it becomes a bit more tricky […]
