Impact of Blockchain Analysis – Anonymity vs Auditability

The issue of privacy is one that has always been of utmost concern to individuals especially with regards to their finances. Everyone wants their financial assets safely guarded; ranking from individuals down to companies or firms.

However, in the craze for safeguarding financial assets especially digital ones, technologies have risen to hide transactions or provide anonymity. This thread of anonymous transactions has made a cover for illicit on-chain activities to thrive thus the need for blockchain analysis came up.

Blockchain Analysis

According to Wikipedia; “Blockchain analysis is the process of inspecting, identifying, clustering, modeling and visually representing data on a cryptographic distributed-ledger”.

It involves services that revolve around gathering, tracing and analyzing crypto trade information on the blockchain. Blockchain analysis is set to discover useful information about the different actors transacting in cryptocurrency.

The aim of the rendition of this service is done with a hope of enhancing transaction transparency through the monitoring of on-chain trades which in turn, reduces likelihood of illicit transactions.

No Cause For Agitation

Despite how interesting the description of this service sounds, reports have emerged of privacy protection advocates refusing this service. They strongly oppose the continuity of such analysis in the industry. According to them, the analyses are simply tools for government surveillance and invasion of privacy into the activities of crypto holders.  How true could this be? Let’s see.

Reuben Yap, Project Steward at Firo, tells Coinstituency, that  the fears of crypto holders clamouring for privacy should not be; that, there should be no cause for them to worry. In a bid to allay their fears, he explains that the analysis in itself is not the enemy. 

He says;

Blockchain analysis alone should not be feared. It is a natural progression of things. Blockchains without privacy features and transactions that are etched permanently on a public ledger will be analyzed whether you like it or not. We have to realize that governments are not the only ones that surveil; researchers and anyone with the right tools can also analyze blockchains to varying degrees. The only advantage that larger entities have is perhaps better access to other metadata sources to help narrow the search further.

Yap further explains that the true enemy to privacy is not blockchain analysis itself, instead it is when individuals buy into the narrative promoted by these blockchain analysis companies that blockchain analysis is the only way to do AML/KYC, and therefore the chains with privacy features that make blockchain analysis difficult should be banned from exchanges.

Privacy Protection Build up

Long before now, there have been varieties of technology build-up that are geared towards allowing financial privacy of crypto holders while still allowing them to get the maximum use of these technologies. 

According to Liam Hunt financial writer at cryptocurrency users interested in anonymity have a number of tools that can bypass analysis techniques from third-parties, such as the use of TOR, Wasabi, Coinjoin, and Electrum Personal Server for connecting one’s hardware wallet. Privacy-minded cryptocurrency enthusiasts can further protect their transactions from third-party analysis by avoiding mobile wallets and by running a VPN at all times. 

Furthermore, users can run CashShuffle to mix their coins and “shuffle” their Bitcoin and altcoins, which makes it more difficult to trace by blockchain analysts. A coin mixer, such as CashShuffle or Coinjoin, effectively renders Chainalysis and other prying eyes powerless.

Yap, in also assertion to the above notes that Zcoin as  the first privacy digital currency, enables untraceable transactions and true financial freedom from the prying eyes of large corporations, financial institutions, and oppressive governments. Zcoin advocates privacy as a fundamental human right, and enables users to regain control of their money. As a leading technology innovator, Zcoin designed a simple burn and spend model that strengthens privacy, while making it more broadly accessible.

Complimenting Technologies

There are many existing methods of controlling illicit activity, even with privacy-preserving blockchains, such as targeted regulation of VASPs within the existing framework.  A recent whitepaper released by Perkins Coie states; 

Regulators impose specific AML obligations of VASPs that provide services and facilitate transactions to assist them with carrying out their respective legislation mandate, because the financial system is the most effective section when it comes to detecting signs of money launders. This VASPs often accept their role in preventing financial crimes and view it as a benefit to society. 

Even in the case of privacy coins, VASPs should and will remain the primary subject of AML and CFT regulations, just as they do in the traditional financial transaction.

The current regulatory structure provides suitable protection for both consumers and investors in addition to promote fairness and preventing crime. 

This structure should be adapted as much as possible to new technologies, like privacy coins so that complaints expectations are known and innovation remains unstifled.

It however concluded that “Where on-chain surveillance tools cannot be used, a VASP would still have ample controls to address AML risks of privacy coin transactions.” 

Striking a Balance; Anonymity vs Auditability

We identify a range of alternatives between these two extremes, as we consider  potential compromise approaches that can offer both the auditability required for regulators and the anonymity required for users. 

A lack of appropriate regulation or monitoring, generally burdens cryptocurrency users with practical limitations and risks. The risks include the lack of financial products and services, the inability to earn interest, basic consumer protection, and the absence of legal infrastructure for adjudicating disputes thus making the check or monitoring useful.

Second, most cryptocurrencies are not as privacy-enhancing as is commonly perceived, and as such still prone to illicit actions. Example; Privacy coins like Dash and Zcoin allow users to conduct transactions with greater privacy, but that doesn’t mean they provide total anonymity.

The two cryptocurrencies’ privacy features — both in how they are built as well as how they are used in the real world — leave room for investigators and compliance professionals to investigate suspicious or illicit activity and maintain compliance. So, a little to the left, a little to the right, strikes the balance.

We All Want What Is Good

There is absolutely no need to create a storm in a teacup. We all love good things. We all know good things. Every crypto holder wants the best. Infact, we just love to eat our cakes and have it (If possible). 

However, what needs to be done has to be done. In as much as we all clamour for privacy, it is an undeniable fact that surveillance is a tool that needs not be taken for granted. When freedom is cheap, licentiousness becomes inevitable. While we enjoy little privacy, allowing for this data analytic tool to carry out its service to the industry won’t be a bad idea. 

It is difficult to discourage blockchain analysis due to the nature of the tech and the accessibility individuals have if they possess the right tools. In reality, it should be viewed as merely a data analytics tool for publicly available data. The danger therein lies when too much focus is placed on it as a necessary tool for AML for cryptocurrencies”,  Concludes Yap 


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