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Bitcoin

Dark Wallet and Bitcoin Regulation

Here we go again. The discussion and debate over Bitcoin’s legitimacy and its labeling as the province of anarchists and criminals is about to get louder again. Why?  Because Dark Wallet, an easy to use browser plug-in that makes bitcoin transactions far harder to trace, is coming on the scene.

The release of yet another bitcoin wallet wouldn’t be of particular consequence except that Dark Wallet makes using bitcoin easier (a good thing) and much better for illegal transactions (a bad thing).  Dark Wallet, assembled by a team of programmers called unSystem, uses a recombinant approach to making bitcoin transactions untraceable. It combines transactions from multiple transactors and then splits and recombines them multiple times. The result is a blockchain ledger containing enough blended transactions that purport to make it impossible, and certainly much much harder, to recreate original the transaction flow. That means law enforcement, the agencies tasked to “follow the money,” will have a tougher time reading the blockchain.

Remember, Bitcoin’s anonymity has been hugely overblown. The blockchain ledger makes all transaction flows transparent. Dark Wallet’s creators are building the capability to make their bitcoin transactions untraceable.

Dark Wallet’s proponents, like many of Bitcoin’s earliest supporters, view this as their right, to freely transact with whom whomever they want and for whatever purpose. That’s a form of freedom, no doubt. They also view this as a step in the coevolution of technology and society.  As some suggest, with Bitcoin and Dark Wallet, we can deconstruct and rebuild society, avoid the coercion of taxes, and more.

Putting the philosophical debates aside, my concern is that Dark Wallet and its imitators will swing the pendulum of US regulatory and law enforcement attention from “watchful waiting” into active efforts to make Bitcoin and perhaps other math-based currencies wholly illegal.  Thus far, US regulators have taken a “let’s see what happens” approach, not wanting to squelch the early bloom of innovation in math-based currencies, and largely regulated them as the currencies they claim to be. We know the Financial Crimes Enforcement Network (FinCEN) and other law enforcement agencies are aware of Dark Wallet and are watching closely. Once sufficient evidence of Dark Wallet-enabled illegal activity – money laundering, illicit goods transactions, or (worse) terrorist financing – is gathered (and it won’t take much in my opinion), Bitcoin could be forced into the shadows and lose its potential to enhance the larger universe of legitimate transactions.

Bitcoin’s long term potential has the power to challenge and change more than just how we spend.  That may be the least of it.  Bitcoin could change how we track and convey ownership of assets and even create entirely new asset classes.  That alone will force change on or remove groups of gatekeeper organizations and roles. Lawyers, trust departments, securities dealers, title companies and others will be challenged if asset conveyance is automated based on conditional programming.

While some may regard anonymity as a core piece of the bitcoin value proposition, we see greater value in the power of the blockchain (and other similar decentralized ledgers) that allow the provenance of assets to be tracked in a way that is reliable and transparent to all market participants.  Perhaps such openness is the more important potential enhancement to a democratic society.

A public ledger does not mean public disclosure. Tools that enhance privacy and security are needed to protect bitcoin ownership as much, if not more, than our need to protect our online privacy.

But going after the state itself with untraceable monies won’t be tolerated by the state. The result will be, at least, a shortened runway for the Bitcoin evolution.  And that will be a shame.  If Bitcoin becomes the payment method of choice for the shadow economy, its value on the sunny side will collapse.  Who will that serve?

If Bitcoin’s outlawed entirely, its potential for social good will evaporate. Perhaps those who live under the bell jars of techno-utopianism or the oxymoron of anarchic dogma will find the outcome desirable.  For those of us who believe that our tools give us the ability to create positive change, the next task will the development of stronger mechanisms to secure privacy and security on the Bitcoin ecosystem instead of increasing its vulnerability to regulation.

 This PaymentsViews post was written by Glenbrook’s George Peabody.