Marc Hochstein is the managing editor of CoinDesk. The opinions expressed here are yours, so do not blame your co-workers.

Imagine two US $ 1 bills. One is fresh and immaculate, fresh from the US Mint. UUThe other is wrinkled and covered in crumbs and snot.

Each one is worth exactly the same as the other. It does not matter if the crumpled belonged to a coca dealer or a brother of Koch. It is still good for the bus fare.

That is fungibility. It is one of the essential properties of money that we take for granted. But in cryptocurrency, fungibility is at risk, thanks in part to the transparent nature of the blockchain, where wallet addresses are pseudonymous but the cash flows between them are exposed for all to see.

Last week he brought a reminder of that risk when Bitfury, a startup, introduced Crystal, a set of software tools to help track illicit activity in Bitcoin's public ledger.

As Michael del Castillo of CoinDesk reported, the platform is Bitfury's attempt to "help Bitcoin once and for all overcome its association with black market transactions." Valery Vavilov, CEO of Bitfury, said that Crystal will allow users to "see if this Bitcoin address from which you get money is green or black."

Taking a step back, Bitfury, which started as a mining operation, is not the first company to offer this type of espionage service, as noted by CoinDesk, Chainalysis, Elliptic and Skry (now part of Bloq). market.

And to be sure, catching criminals is a worthy goal. (For the sake of argument, let's suppose that all the "crimes" that are resolved here are real crimes, of the type of victims).

In addition, the surveillance provided by these companies can produce another benefit by helping other startups obtain or maintain accounts in traditional financial institutions.

Banks have been reluctant to serve the sector due to their association with illegal activities. If they could show that their customers are not moving "dirty" money, they could make their regulators feel comfortable with the industry.

But using the blockchain in this way could also have perverse effects.

Balances in the blacklist

As Chris Burniske and Jack Tatar write in their book "Cryptoassets":

"A danger to Bitcoin, especially for balances that are known to have been used for illegal activities, is that if an exchange or other service blacklists that balance, that balance becomes illiquid and arguably less valuable than others. Bitcoin balances ".

Woe to the merchant who sells a pair of alpaca socks to a drug dealer and then can not spend the contaminated coins!

And that is not all. Burniske and Tatar continue:

"While it is subtle, losing fungibility could be the disappearance of a digital and distributed currency, damaging the value of all units, not just those used for illegal activities."

The developers of cryptocurrencies are aware of this danger and have been working for years to strengthen user privacy, which in turn would preserve (or restore) fungibility.

Some of these techniques, such as zk-snarks and ring signatures, have been pioneering in altcoins such as zcash and monero, respectively. (The loss of fungibility, write Burniske and Tatar, "is a problem that Monero does not have to deal with"). Other privacy enhancements, such as TumbleBit, are being developed for Bitcoin itself.

"Ultimately, I think the challenge will be for any analysis tool to keep up with the variations of cryptocurrencies, with a particular emphasis on the challenges posed by those that seem designed for anonymity," said Jason Weinstein, strategic advisor. of Bitfury and ex 15 - Summer veteran of the US Department of Justice UU who now practices as a lawyer at Steptoe & Johnson LLP.

However, these improvements can aggravate regulatory challenges.

"If you make the accounting layer as private as zcash, you could sacrifice a whole market," said Charles Hoskinson, founder and CEO of IOHK, a company that develops several blockchain projects, including Cardano.

For example, the Financial Services Agency of Japan, which must approve cryptocurrencies before they are included in the authorized exchanges of the country, "will never be able to include in the whitelist a card that is of high privacy," he said.

On the other hand, "if these types of characteristics are not created", once the anonymity has been deactivated, the "complete financial history from the beginning" of a user will be exposed.

"That's worse than the conventional banking system," Hoskinson said.

Double standard?

In total, it seems that the cryptocurrency is maintained at a higher standard for "clean money" than the fiduciary, at least the physical version. Very few people are reading serial numbers on dollar bills. (To be fair, the comparison is not apples to apples, since you can not erase a briefcase full of bank notes around the world).

Satoshi created Bitcoin so that people who do not trust each other can make transactions through the Internet. Exposing all transactions in the blockchain was the price paid for trust in the system, and he (or she or they) thought that addresses with a pseudonym would mitigate the privacy leak.

Radical transparency is often touted as a feature of blockchain technology, which may well be for businesses and governments. And in Bitcoin, it produces secondary benefits for normal users as well. For example, monitoring withdrawals from an exchange's wallet can help detect a career.

But in the case of use of money, the opening of the chain of blocks could also be an error. Even for citizens who respect the law.

Source: CoinDesk