Why is it Not a Good Idea to Track Bitcoins on Blockchain?
Do you know what the advantage of hardcore money is which sometimes makes it seem better than bitcoins? It is the fungibility it offers. Irrespective of whether a currency note is a crisp, brand new one or an old, crumpled one, its value tends to remain the same.
Similarly, it doesn’t matter, where the note came from. The source could be a standard shopping transaction or a drug dealer, but it would be equally valuable. And this is something; we usually tend to overlook and take for granted.
But now, with bitcoins and cryptocurrency having made its way into the financial arena, we are in for a big surprise. The bitcoins do not offer the kind of fungibility that real money does. Attribute it to the precise transparency the new blockchain technology allows. Though the transactions and financial data are quite secure on the network, the journey of funds is out in the open for all to track.
This is a risk that no one gave much thought to till recently, when a startup named Bitfury, launched a new set of software tools called Crystal. These tools were introduced to keep track of the illegitimate activities that are carried out on the public ledgers of Bitcoin. The step was taken to clear the image of bitcoins and help them to get out of any probable association with black marketing transactions. With Crystal, it would now become simpler to track whether the bitcoin address from which the funds are coming in is legal or not.
It is important to note that this fantastic set of software tools offered by Bitfury is not the first of its kind. There have been similar tools in the market for quite some time like Elliptic, Chainalysis and Skry.
These tools, true to their words, are coming in handy to track various frauds and illegal methods associated with bitcoins. This, in turn, can prove helpful for the innocent people, who might just be victims in the whole deal.
Another breakthrough that has come forth with the offering of these tools is an enhanced trust among traditional financial institutions and banks, which till now had been shying away from being associated with anything bitcoin. The reason they cited was that they did not want anything to do with an arena which is wrought with illegal transactions. Now, with tracking of funds flows having become possible, they have become more open to the whole idea, as it is now possible for them to prove that the clients they are associated with have nothing to do with illegal transactions. A definite advantage that comes in this wake is that small business owners and startups can now continue to be associated with their banks, thanks to them being more forthcoming.
However, everything is not as rosy as it seems. There is also a downside to using blockchain for tracking bitcoins.
Balances Being Blacklisted
One of the most important downsides of using blockchain to track bitcoins is that if a particular balance has been used for an illegal transaction, it loses its value. However, what is worrying is that not only the units that were part of the deal are affected but all the other bitcoins in the chain too, become illiquid. This means even the innocent partners who had nothing to do with the illegitimate tasks would also be at a loss.
This is an apparent danger of cryptocurrency, which is known to the developers. They have been trying to improve the privacy of these bitcoins such that they can maintain the fungibility of the funds, which is currently at risk, thanks to the widespread use of blockchain.
Some of the initiatives in this respect that had been earlier introduced, which included ring signatures and zk-snarks which had been integrated with altcoins like monero and zcash. These have proved to be beneficial in preventing the loss of fungibility of the altcoins.
A similar approach is now being worked on for bitcoins that would safeguard their privacy as well as fungibility. However, experts believe that the primary challenge that these analytic tools would face would be in keeping in line with the changes that come forth on these cryptocurrencies, especially the ones that are designed to maintain anonymity.
Also, these are sure to augment the problems for the bodies that are responsible for introducing rules and regulations into the whole sector. Like, if too much privacy is extended into a bitcoin address, it is possible that this will hurt the entire market. For instance, in Japan, where it is imperative for the cryptocurrencies to be approved by the Financial Services Agency before they are released on to the list of licensed exchange, there are very slim chances that the bitcoins with high-end privacy would ever get a whitelisting.
However, if these features are not introduced into the bitcoin arena, the chances are rife that all the financial transactions, bad ones to be precise, dating many years back may get exposed. This may be a significant setback for the whole economy and would be worse than the traditional banking methodologies.
A Double Standard of Sorts
Cryptocurrency was introduced in the first place with the idea of injecting clean money into the economy. Tracking the origin and flow of currency notes was impossible which is what led to the emergence of this approach.
It was developed to help people to conduct transactions over the internet without having to worry about being cheated or left in the lurch. Though the system proved to be quite beneficial for all, there was a price to be paid. This came in the form of transparency of all transactions, which meant that each little deal was out in the open. People thought that since pseudonyms were being used for the wallet accounts, they could control their privacy and prevent it from leaking. However, this was not to be.
Transparency in the system that is offered by Blockchain technology is indeed a benefit for the government and business organizations. As far as the bitcoins are concerned, these too bring in some benefits for the average users like keeping track of withdrawals from the accounts of the exchange can help in tracking a possible fraud.
But, sometimes, the transparency offered by the system can be a deterring bug for even the law abiding citizens who are part of a chain which consists of illegal or fraudulent transactions. Thus, though blockchain might be a blessing in disguise for a lot of sectors, it does not seem to be a fitting tool for tracking the bitcoins. It seems to be doing more harm to the whole system than benefitting it.
Of course, if the present system can be rectified with tools that improve the privacy of transactions and maintain the fungibility of cryptocurrency, then this could be a possibility to curb illegal deals. However, as of now, this could only lead to problems for innocent people too.
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