Bitcoin’s Traceability Leads to New Solutions to Preserve its Fungibility

July 10, 2018 / by Cathy Zollo

The last dollar bill you held in your hand almost certainly had detectable amounts of cocaine on it. In fact, 90 percent of U.S. currency carries trace amounts of the drug, and the percentage is even higher around some urban areas. 

If you’ve seen pretty much any narco movie in recent years, you know why. Those pallets of cash that such enterprises produce sit right beside the bricks of cocaine that bring the cash. Hence the residue — though, to be fair, counting machines that all dollars pass through could also account for some cross contamination.

Even so, we know that vast amounts of U.S. dollars have been tainted by contact with illegal activity, but no one claims that those dollars, because of their history, are worth less in comparison to “clean” dollars. There is concern, though, that Bitcoin’s use by criminals and its open ledger could lead to two tiers of Bitcoin because ill-gotten gains can be traced via the blockchain. Tainted Bitcoin could be treated differently.

That’s despite the recent report from The Foundation for Defense of Democracies, a foreign policy think tank, that said less than one percent of Bitcoin had ever been used in illicit activity, most of it on the dark web.

Two levels of Bitcoin could cause Gresham’s law to come into play, say experts. It’s the principle that says bad money drives good money out of an economy. More simply, if a person has more desirable money and less desirable money, they’ll spend the less desirable and hang onto the other, keeping it for themselves and thus out of the economy. In this case, the dirty money would be the ill-gotten Bitcoin. This less desirable money then become less and less valuable, exacerbating the problem.

Having two tiers destroys Bitcoin’s fungibility, the property of any commodity or currency that, all other things being equal, makes one (dollar, Bitcoin, bushel of wheat, side of beef) as good as the next — it’s interchangeableness, to use too many syllables.  

Those who would break Bitcoin’s anonymity use two basic strategies: blockchain analysis and network analysis. As we’ve discussed in other articles, Amazon and other companies are working on services specifically designed to harvest information from the blockchain. In Amazon’s case, the company would combine blockchain data with other data to draw conclusions about users and their buying habits. 

We at Crypto.IQ believe the solution is simple and has two fronts. First, we think governments should treat Bitcoin that may have been involved in criminal enterprise the same way they treat cash. That means the government does nothing, and there’s no problem. 

Another solution is for Bitcoin holders to use a mixing service as a precautionary measure. For a small fee, these services take inputs from many different users and scramble them to create “new” bitcoins out of the disparate bits and deliver them from fresh addresses, effectively masking their spending history.

Companies that offer these services include CoinMixer, PrivCoin, SmartMix and CryptoMixer.

If you have any concern about your Bitcoin, it might be a good idea to consider a mixing service to protect your investment. 

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