Anonymous and pseudonymous, are they bitcoins black holes?

by Lumai Mubanga

Secret societies and other underground groupings involved in both illicit and dangerous activities are usually associated with anonymity and pseudonymity connotations.  Secret organizations and underground groupings do not want to be tracked and latter prosecuted. Anonymity is thus a protection mechanism.

Bitcoins have similar connotations associated with it. Besides, there have been reports of some illegal activities such as drug dealers taking advantage of the anonymity of bitcoins to conduct their illicit businesses. In recent years, there have been reports of hackers demanding ransom payments in cryptocurrencies.  This has, unfortunately, led some to conclude that bitcoin is a dangerous cryptocurrency perpetuated by drug dealers and secret societies. But is it? Why is bitcoin and other related cryptocurrencies free from such accusations and negative reports? Why is anonymous and pseudonymous used in its design?

It is noteworthy to appreciate that even the founder of bitcoin is still anonymous to this day. However, there are basic underlying reasons why bitcoins and other cryptocurrencies have these two properties. We discuss these one by one.

Anonymous.

By anonymous, we mean that all users on the platform are nameless, or they cannot be identified by their real names. This hides the real person in all transactions. Since the original designers intended to have no central authority, it follows that even the users will have no need to register their real names and addresses. The advantage of this in real life is that, it will be difficult to know who owns what and who transacted what to whom. It’s more about privacy as opposed to open identification. Anonymity is thus not about hiding illicit information as much as it is about protection, which, as most don’t realize, applies to anyone and everyone. Just like we all need personal protection, anonymity offers that to cryptocurrency traders and users. Thus, bitcoin is anonymous for good reasons  although  that attracts the ‘bad guys’ to misuse it and benefit from that characteristic.

Pseudonymous

Bitcoin was designed as the first ever decentralized, pseudonymous, system for transactions, and this was achieved in combination with  blockchain. However, most blockchains are not anonymous. Instead, most blockchains are pseudonymous. In most blockchains, publicly viewable but arbitrary identifier such as the Bitcoin address is used. What this means though is that everyone has everyone’s data. Users can see which addresses interact with each other, how much cryptocurrency each address has, and the like. Considering the normal user which may not go out of their way to obscure their digital identity and activities with additional protection, it’s easy to see how their transaction history and balance can be exposed to their detriment. It’s clear that blockchains are not anonymous by default. Fundamentally, blockchains take a central database and distribute it. However, this now means that you no longer have strong access control over your own data. All of the data stored in the blockchain is public by default, so everyone sees everything. To guarantee some levels of privacy, there’s the pseudonymous property attached to the use of cryptocurrencies.

Thus, for all good intent, bitcoins remains anonymous and pseudonymous.