Is Blockchain Anonymity Good for Privacy, or Is it Too Risky?

Blockchain enthusiasts praise the technology’s security and transparency, especially the immutability of cryptocurrency transactions and access to network records. The perks of blockchain technology also include speed and transaction affordability. Generally, users agree on the importance and benefits of most decentralized blockchain networks. However, some consider the technology’s inherent anonymity a problem.

Although cryptocurrency transactions are public, transaction data cannot be used to identify wallet owners in most cases. This promotes privacy on the blockchain, allowing users to initiate and conclude transactions without worrying about prying eyes. The anonymity also protects people who patronize online merchants and service providers, like online casinos that allow players to enjoy gambling without proving their identities or providing personally identifying information. Since there are now many of these establishments, Techopedia’s Kane Pepi compares anonymous casinos by analyzing their other features, including game library, bonuses, accessibility, cashback offers, and staking yields. Despite the perks of blockchain anonymity, there are several reasons to worry about the downsides of complete privacy on the blockchain.

The Dangers of Blockchain’s Anonymity

The decentralized nature of blockchain technology is attractive to criminals because they can conduct transactions outside of the government’s reach. Unfortunately, this makes it easy for them to commit crimes like money laundering via decentralized cryptocurrencies. According to a Chainalysis report, four deposit addresses received over $100 million in illicit crypto funds in 2022, and have received more than $1 billion in total. 

One example that describes the extended use of crypto for these nefarious activities is Silk Road. Launched in 2011, Silk Road was an online black market on the dark web that allowed users to sell and purchase illegal items via Bitcoin. Before the FBI shut it down, Silk Road facilitated the sale of fake driver’s licenses and several illicit drugs, including opioids, ecstasy, and psychedelics. The platform serviced more than 100,000 buyers while it was active, generating $183 million in sales and commissions worth $13 million.

Blockchain and Privacy

Notwithstanding the likelihood of illegal activity, there are several arguments in favor of preserving blockchain’s anonymity. In addition to financial privacy, medical startups use the blockchain to keep patient data private. The technology is a trusted way to secure medical records and ensure data security even when cross-chain interoperability is necessary. In addition to medical utility, blockchain can also be used to preserve user anonymity during a voting exercise.

To address the issue of maintaining privacy while promoting accountability, several solutions that help to manage the need for privacy and the requirement for legal compliance have been introduced. For instance, there are decentralized identity protocols and zero-knowledge (zk) proofs that support transaction validation without compromising sensitive data.

The Way Forward

The best option is to promote solutions that maintain the need for privacy with specific checks and balances. Any solutions that lean heavily toward either side risk limited support depending on their chosen side of the divide. For instance, Austin-based startup Arkham Intelligence has a mission to deanonymize the blockchain. The company’s whitepaper explains that the aim is to show users the entities behind blockchain activity and reveal behavior analysis. Unfortunately, blockchain users who believe in privacy have heavily criticized the company for this mission. On the other hand, Arkham’s position is that deanonymizing the blockchain helps to sanitize a sector disturbed by criminal activity.

Blockchain anonymity will always be a divided subject because while privacy is a right, involvement in criminal activity erodes the average person’s right to privacy. Nevertheless, to curb illegal activity on the blockchain, it is necessary to balance the need for transparency with a user’s right to privacy. 

Image by Gerd Altmann from Pixabay