Cryptocurrency and the Privacy Conundrum

Would mass adoption of cryptocurrencies improve financial privacy? And would it matter?

In many debates about cryptocurrencies you'll find one side or the other talking about which one is the best, which one has the greatest privacy features, whether or not encryption is necessary, or if the currency is actually based on a "real" blockchain. I was reminded of this once again while reading some of the comments in the latest Twitter poll for Bobby Lee's BTCC exchange.

This was the comment that got me thinking:

Please consider Monero. There is a big need for privacy, fungibility and untraceability.

I suppose the "big need" for two of these features - privacy and "untraceability" - depends on your perception of the current state of...well...the state.

If you strongly believe that individuals can only free themselves of their government's clutches by using a currency that can't be tracked back to you, then you might feel as though these features are absolutely necessary and any currency without them simply isn't worth using. The desire for privacy in this case would seemingly outweigh other factors, such as the ease of use, acceptability, fees or the lack thereof, and the speed of transactions.

But is this a reasonable view? Is privacy really that important? Can it actually reduce the power of the state? Is the privacy real?

The argument that transactions are private on any given blockchain is a little misleading. Yes, there are ways to conceal one's identity and you can certainly have a considerable amount of privacy if all of your transactions are contained within the network. The question is:

Is this practical or even possible?

In the case of the particular cryptocurrency in question - Monero - it certainly wouldn't be possible today. There simply aren't enough businesses that accept cryptocurrencies in general, let alone one of these currencies. Bitcoin is the current king of cryptocurrency and it still has a long way to go to reach mass adoption. So, there really isn't a possibility of using any of these currencies as a means to completely avoid government interference in our everyday lives.

Practically speaking, the prospect of absolute privacy or "untraceability" is much closer to a pipe dream.

First of all - every transaction on a blockchain is recorded on that blockchain. It may be difficult to determine who is who or even the specific amounts of currency being transferred, but it's not impossible. If you have the right information, any transaction can be traced back to an owner.

Secondly - if you are in business (at least here in the United States), then you are likely registered with various levels of government in order to maintain a "legal" business entity. There is no option for non-compliance with licenses and taxes. You either register your business entity and pay your taxes or you risk being shut down, financially penalized, and/or sent to prison. Regardless of what your views of the state are, the prospect of losing your wealth and sitting in a prison cell are large enough deterrents to skirting licensing and tax laws.

If you're running a legal business, then you're likely collecting all transaction information from your customers. If those customers are purchasing online and shipping the product is required, then those transactions - even if "private" via a cryptocurrency and its blockchain - will have, at the very least, a physical address attached to them in the company's invoices or transaction ledger. With an increase of online purchasing and deliveries, it wouldn't be hard for any state agency to track down cryptocurrency users, if they really wanted to do so.

So there's a dilemma for the business owner who wishes to keep their company and a dilemma for the cryptocurrency user who actually wants to purchase products with relative ease. The latter can certainly go out of their way and seek out individuals who offer certain goods or services as "illegal" businesses, but the options will always be limited and riskier in comparison and the market will be significantly smaller.

In the end, it essentially comes down to this:

Do enough people actually care?

This is the question that we always need to come back to when dealing with sentiment about any coercive state and its laws and policies...and cryptocurrency adoption. Are there enough businessmen and women who are willing to defy the state's laws and risk their livelihood? Are there enough consumers willing to go through the relatively considerable amount of effort to acquire cryptocurrencies, find those businesses that are willing to accept them and disregard compliance laws, and then personally meet with these other individuals to acquire the product so that their transactions can be more private. (And in this case, why not simply use cash?)

In a world where simplicity and speed are what consumers want and how online transaction/ordering/delivery systems are trending, there doesn't appear to be a great rush to return to face-to-face meetings for purchases.

So, are privacy and "untraceability" actually features that are needed or desired by the majority of any given society? Is this a conundrum for cryptocurrency adoption as transactional currencies? While mainstream adoption would theoretically be necessary to mitigate or even eliminate the vast power of the state, wouldn't such mass adoption simply provide a means for integration into the system that the state controls?

Can cryptocurrencies simultaneously operate beyond state influence and achieve mass/mainstream adoption?

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Image courtesy of @mynameisbrian

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