Upward traceability: how can one overcome it?

[kik1977]

I'm a deep Bitcoin enthusiast, I believe in the revolution this currency can bring to the world and I do my best to spread the word using my job.

BUT I think and think and think about a problem and I'm not able to find a solution... please help me!

We all know how the media like to call Bitcoin the "anonymous" currency and all the usual stuff. I see it from a different perspective: isn't it too transparent?
I imagine buying something from a friend or someone close to me. Once I give him/her my bitcoins, I am now able to see how much he/she has in that particular wallet and more interesting, how those bitcoins are going to be used. I make the example of a friend or a relative for a reason. If I go and spend my bitcoins in a sexyshop or to buy drug online, I certainly don't want anyone, but particularly a close person, to know about it.

I see this as a huge problem in the view of a large adoption of Bitcoin. What do you think about it, is there a way to prevent this? Thank you guys for your help!

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[jbreher]

Once I give him/her my bitcoins, I am now able to see how much he/she has in that particular wallet

No. You are now able to see how many XBT are on that _address_. Which is why there is a recommendation to always employ a new address for every transaction.

[DannyHamilton]

Use a new address for every transaction.

Then when they send you bitcoins, they have no way of knowing what other bitcoins you own.

Only spend bitcoins at locations that use a new address for every transaction.

Then when you send the bitcoins, nobody will know what the address is for.

[kik1977]

Once I give him/her my bitcoins, I am now able to see how much he/she has in that particular wallet

No. You are now able to see how many XBT are on that _address_. Which is why there is a recommendation to always employ a new address for every transaction.

Thanks J, that's what I meant, you can now link that person to a specific address (not his entire fortune, just that specific address), and now see what he does with that money. Even if he's going to use different wallets to do different things, at some point he will use that money..

Let's imagine I give to a friend 1BTC because he sold to me his old laptop.. now there are two possibilities:
1. he will never mix the money in that wallet with the other BTC he has, but he will spend it someway and I will be able to see where the money goes..
2. he will mix that coin with other he already has (maybe to buy something more expensive than 1BTC) in a transaction.. now I am able not only to see where those bitcoins went, but also to link other address(es) to him and see where he got that money from, how much money he had in that address, other expenditures he had, etc.

Sure you can use a different address for each payment (ok, not so sure, read below) but at least I will be able to see where the money I sent goes. On a larger scale, this will be an issue also when/if a company pays the salary to an employee in bitcoins.. they will be able to monitor his transactions. Maybe he will use a different address each month, but the point is the same!

Last point, we can expect a person with an average/good computer knowledge to take precautions like changing address for every transaction, not from everyone. And my point is exactly that I see this as a possible obstacle to a larger adoption of Bitcoin.
What I want to understand is if this is a known issue which has been already addressed by the guys working on the protocol or by some kind of software..

I hope my thoughts are clearly explained! Thanks for your comments and help! 

[zvs]

Once I give him/her my bitcoins, I am now able to see how much he/she has in that particular wallet

No. You are now able to see how many XBT are on that _address_. Which is why there is a recommendation to always employ a new address for every transaction.

Thanks J, that's what I meant, you can now link that person to a specific address (not his entire fortune, just that specific address), and now see what he does with that money. Even if he's going to use different wallets to do different things, at some point he will use that money..

Let's imagine I give to a friend 1BTC because he sold to me his old laptop.. now there are two possibilities:
1. he will never mix the money in that wallet with the other BTC he has, but he will spend it someway and I will be able to see where the money goes..
2. he will mix that coin with other he already has (maybe to buy something more expensive than 1BTC) in a transaction.. now I am able not only to see where those bitcoins went, but also to link other address(es) to him and see where he got that money from, how much money he had in that address, other expenditures he had, etc.

Sure you can use a different address for each payment (ok, not so sure, read below) but at least I will be able to see where the money I sent goes. On a larger scale, this will be an issue also when/if a company pays the salary to an employee in bitcoins.. they will be able to monitor his transactions. Maybe he will use a different address each month, but the point is the same!

Last point, we can expect a person with an average/good computer knowledge to take precautions like changing address for every transaction, not from everyone. And my point is exactly that I see this as a possible obstacle to a larger adoption of Bitcoin.
What I want to understand is if this is a known issue which has been already addressed by the guys working on the protocol or by some kind of software..

I hope my thoughts are clearly explained! Thanks for your comments and help! 

i can't think of anyone that I know personally that cares too much about the anonymity of bitcoin.  why would your average joe that knows very little about computers care about this?  we can assume he's not mining bitcoins or anything like that, so it wouldnt be for purposes of evading income taxes. 

maybe purchasing drugs or firearms or something?

[DannyHamilton]

What I want to understand is if this is a known issue which has been already addressed by the guys working on the protocol or by some kind of software..

I hope my thoughts are clearly explained! Thanks for your comments and help!  

Yes. This is a known feature of bitcoin.

No, as far as I know, nothing is being done to the protocol to change this.

However, plenty of things can and will be done outside the protocol to change this.

Someone could set up a service.  Perhaps accounts at this service will be insured against loss and theft, and the service will submit to a regularly scheduled financial and security audit. The service could supply you with a new receiving address for every transaction. When bitcoins are received at the service, they can use the receiving address to determine whose account to update in their database, and then forward all the bitcoins to a cold storage address controled by the service.  On a regular basis the service would transfer some necessary funds from cold storage to a hot wallet address controled by the service. Whenever any user sends bitcoins from the service, the service will spend bitcoins from the hot wallet.  This service can charge a small fee for protecting your bitcoins and providing anonymity.  If they get the permission of their users they could lend out a fraction of the cold wallet and collect interest on the loan.  In exchange for being allowed to do this, they could pay a portion of that interest collected to those with funds on deposit.  They could get merchants to open accounts with them as well.  Then if you pay for something at an authorized merchant, your transaction wouldn't even need to go over the blockchain or wait for confirmations.  The service would simply reduce the amount in your account and increase the amount in the merchant's account.  The service could issue small plastic cards that users could use at merchants, and could issue hardware devices to the merchants to read data from the plastic cards to speed up the payment process.  The service could then charge the merchant a fee for providing fast, easy access to bitcoin customers.

Hey, here's an idea.  We could call that service a "bank".

[al.matic]

We all know how the media like to call Bitcoin the "anonymous" currency and all the usual stuff. I see it from a different perspective: isn't it too transparent?

It is a transparent public ledger. Not even near anonymous, exact opposite of anonymous, especially if you trade/buy/sell personally with somebody you know.

[kik1977]

i can't think of anyone that I know personally that cares too much about the anonymity of bitcoin.  why would your average joe that knows very little about computers care about this?  we can assume he's not mining bitcoins or anything like that, so it wouldnt be for purposes of evading income taxes. 

maybe purchasing drugs or firearms or something?

To say the truth, at least 70% of the people I know are "concerned" about privacy and I am more than sure that they would be concerned a lot about the lack of privacy they would have knowing that, if they receive bitcoins from someone, this person would be able to see what they do with those bitcoins. And I can tell you that they are not criminals involved in anything illegal, they simply would hate the idea of being traced by someone.
One can argue that that's what your bank or your credit card's issuer can already do but I believe people can be even more scared to be judged in their expenditures by an acquaintance rather than a third unknown party.

Hey, here's an idea.  We could call that service a "bank".

Ahahah, In the beginning I thought you were talking about Gox..

[DannyHamilton]

Hey, here's an idea.  We could call that service a "bank".

Ahahah, In the beginning I thought you were talking about Gox..

No.  MtGox is neither insured nor audited as far as I know.

Perhaps accounts at this service will be insured against loss and theft, and the service will submit to a regularly scheduled financial and security audit.

However, disregarding insurance and transparency for the moment, ALL shared wallet services (MtGox, inputs.io, localbitcoins, etc.) are essentially "banks" in that they have full control of the bitcoins, and simply provide you with a promise to honor any request you make to have that bitcoin sent somewhere.  We don't really know for certain what any of them are doing with the bitcoins they are holding, and can't even be sure that they are maintaining 100% reserve.  Several of them may be engaging in fractional reserve banking and we'd have no way of knowing unless/until there is a run on the service and they don't have enough bitcoins to honor all withdraw requests.

[justusranvier]

However, disregarding insurance and transparency for the moment, ALL shared wallet services (MtGox, inputs.io, localbitcoins, etc.) are essentially "banks" in that they have full control of the bitcoins, and simply provide you with a promise to honor any request you make to have that bitcoin sent somewhere.  We don't really know for certain what any of them are doing with the bitcoins they are holding, and can't even be sure that they are maintaining 100% reserve.  Several of them may be engaging in fractional reserve banking and we'd have no way of knowing unless/until there is a run on the service and they don't have enough bitcoins to honor all withdraw requests.

A lot of people are going to get burned by this sooner or later.

[DannyHamilton]

However, disregarding insurance and transparency for the moment, ALL shared wallet services (MtGox, inputs.io, localbitcoins, etc.) are essentially "banks" in that they have full control of the bitcoins, and simply provide you with a promise to honor any request you make to have that bitcoin sent somewhere.  We don't really know for certain what any of them are doing with the bitcoins they are holding, and can't even be sure that they are maintaining 100% reserve.  Several of them may be engaging in fractional reserve banking and we'd have no way of knowing unless/until there is a run on the service and they don't have enough bitcoins to honor all withdraw requests.

A lot of people are going to get burned by this sooner or later.

A lot of people have already been burned by this in the past (See Bitconica, BitFloor, Instawallet, etc.)

History will continue to repeat itself indefinitely.  There will always be someone claiming to be honest and trustworthy offering to hold other people's money for them.  There will always be people gullible enough to trust someone else to hold their money for a promise of convenience.  It has been this way for as long as money has existed.  I don't see it changing any time soon.

Perhaps eventually, government agencies will step in and enforce regulations on such services that at least include audits and insurance policies.

[justusranvier]

Perhaps eventually, government agencies will step in and enforce regulations on such services that at least include audits and insurance policies.

Government agencies will shortly become the source of such losses.

It will happen like this:

• Undercover agent creates an account and uses it to violate some regulation or another.
• Agency seizes the site and all their customer's bitcoins via civil asset forfeiture laws.
• If customers are given a method at all to reclaim their property, it will be via a procedure that is essentially impossible for all but the wealthiest and most lawyered.
• Everyone else is SOL.

[FreeMoney]

Let's imagine I give to a friend 1BTC because he sold to me his old laptop.. now there are two possibilities:
1. he will never mix the money in that wallet with the other BTC he has, but he will spend it someway and I will be able to see where the money goes..
2. he will mix that coin with other he already has (maybe to buy something more expensive than 1BTC) in a transaction.. now I am able not only to see where those bitcoins went, but also to link other address(es) to him and see where he got that money from, how much money he had in that address, other expenditures he had, etc.

You don't know which he does or how many times. If it gets mixed with other funds they could be his or not. Then again more mixing later, could be his or not. Even if it goes directly to a merchant and somehow you know this you still don't know what merchant.

What you can know for sure is that if the money isn't moved he hasn't spent it. But anyone can trivially remove that certainty if they care to.

And if he uses the money at your sex toy shop for example with no in-between address you could know that.

[kik1977]

And if he uses the money at your sex toy shop for example with no in-between address you could know that.

That's it, are you ok with that? I might be cause I have nothing to hide, but that's not the point. The problem here is that anybody involved as a payer in a transaction is theoretically able to trace what the payee does with that money. And I don't mean here if I send some money to Gavin or Satoshi , I know they would be careful with those bitcoins or at least aware of the fact that I can trace those coins.. I am talking here about a large scale adoption by average people. 

One can see this issue from different angles and two examples immediately come to my mind:

1. My friend Bob works for a company and his only income is the salary he receives in bitcoins. Now he wants to buy a sex toy from an online shop which accepts bitcoins. We should agree that maybe he's not so happy that his employer knows what he does with his money. Either if he buys a huge dildo because that's what he likes to play with in the evening or if he does whatever else with his money. I'm thinking particularly in a near future when probably most of the big shops and chains might have a tagged wallet.

2. The IRS or whatever tax authority around the world could easily make mandatory for your employer to declare to which address its employee Bob has received his salary. Now this authority or other LEAs can trace every expenditure Bob does with those coins..

The more I think about it the more examples come to my mind, but I believe te point is clear.
Still I would like to know whether this issue has been ever addressed by the dev team and how... or maybe I am simply paranoid and this is not seen as a problem for larger adoption
   

[al.matic]

And if he uses the money at your sex toy shop for example with no in-between address you could know that.

The more I think about it the more examples come to my mind, but I believe te point is clear.
Still I would like to know whether this issue has been ever addressed by the dev team and how... or maybe I am simply paranoid and this is not seen as a problem for larger adoption
   

Yes, there are many examples, but it is not seen as a problem (I don't really understand it either, like people are brainwashed into believing Bitcoin is anonymous; you are not paranoid). Immediately after I receive/send bitcoins from/to a person, it gets really complicated for me, because I do not want that person to track what I am doing with the money. There is about a million examples where you have something to hide from person who you are trading with (while not doing anything illegal or even immoral).