Bitcoin traceability, Big Brother: the law doesn’t like mixers

Twitter has once again become a source of information and debate igniting the community as a user criticizes the way Paxos uses chain analysis: for some people, Bitcoin traceability remains a problem.

Wtf?? Apparently you are not allowed to do what you want with your bitcoin once you own the keys. Fortunately that's not how Bitcoin works, but the level of chain analysis here is alarming. What is a correct response? @MartyBent @matt_odell @vandrewattycpa pic.twitter.com/BhMDThLHGc

— matt (@mattmcbits) January 28, 2020

Paxos is a company whose services include a small exchange and a stablecoin pegged to the dollar, as well as a digital token linked to the value of gold.

A screenshot of a user shows that, after a bitcoin withdrawal, the company has traced the customer’s transaction by monitoring the route to the destination. 

The bitcoins went to a mixer, which is able to mix the transactions of different users by separating them and making it impractical to monitor the complete traceability by a tracking system.

The company follows AML / KYC standards and must monitor suspicious behaviour, which is why it does not reject cryptocurrencies from mixed addresses but tracks the user and records their behaviour.

Sorry if we were unclear. We wouldn’t necessarily outright deny service to someone who has used a mixer, but we do monitor for alarming patterns. As a regulated financial institution, it is within our responsibility to ensure that… (1/2)

— Paxos (@Paxos) January 28, 2020

This is nothing new when one considers the rules imposed on the traditional banking sector in the vast majority of industrialized countries.

The regulation of the sector, and therefore the emergence of these dynamics, affects the sensitivity of a part of the community.

When talking about crypto communities, we are referring to a heterogeneous movement of people united by a passion for cryptocurrencies. 

However, it is not possible to unite this group under the same flag, within the community, there are people with different backgrounds, political ideas and cultures. 

The more the system grows and evolves, the wider the spectrum of ideas, it could be called: the process of normalization.

For this reason, there are standards, the size of the system is now such that it is subject to regulatory constraints. 

Traceability of Bitcoin by design

Everyone knows by now that one of the characteristics of this system is traceability. It has been built with clear rules which may allow it to survive the law of man thanks to a mechanism which allows easy social control. 

Privacy in Bitcoin does not provide for anonymity, the anonymity that ZCash and Monero allow through complex cryptographic systems, which completely remove the history of transactions on the chain.

The year 2020 has opened towards regulation and all companies that base their businesses within a state with clear laws will have to comply or will be forced to close.

Paxos demonstrates once again how the link with the business world is a cold shower for those who challenge the current regulations.

Bitcoin evolution

The wheel is considered one of the most important inventions in the history of man, in the early days, it was used to shape clay and make pottery. 

Perhaps that was not the killer application, but only one of the first uses that man of the time imagined. Nowadays it is known that its revolutionary application led to transportation.

This is useful to understand how the first application of bitcoin and blockchain as electronic money established around it ideas for specific use cases. 

The Cypherpunk movement took the wheel and started using it by adapting it to its principles. 

Whether Satoshi Nakamoto was the inventor of the wheel and liked pottery doesn’t prevent his grandchildren from cycling.

Big Brother seems to like Bitcoin as it is: will it stay that way for much longer? 

This complex technological and social system full of information technology, economics and mathematics now also involves the law.