Anonymity
BIS Innovation Hub presents its ‘private CBDC’ project
The Bank for International Settlement’s Project Tourbillon features two eCash prototypes, the first providing “unconditional payer anonymity” and the second being “more resilient” in security terms.
The Bank for International Settlements (BIS) Innovation Hub has presented the final report on its private central bank digital currency (CBDC) initiative, Project Tourbillon. The prototypes built in the project’s framework could allow payment anonymity for CBDC transactions.
The 46-page report, published on Nov. 29, explores the concepts of privacy, security and scalability on the material of two prototypes based on the designs of one of the pioneers of cryptography, David Chaum. The prototypes were called eCash 1.0 and eCash 2.0. While the former provides “unconditional payer anonymity,” the latter has “more resilient” security features.
According to the report authors, “it is feasible to implement a CBDC that provides payer anonymity while combating illicit transactions.” Project Tourbillon achieves that with the complete anonymity of the consumer during the transaction with the merchant, the report says:
“A consumer paying a merchant with CBDCs is anonymous to all parties, including the merchant, banks and the central bank.”
The merchant’s identity in this scheme is known to the payer and is only disclosed to the merchant’s bank as part of the payment. The central bank doesn’t see any personal payment data but can monitor CBDC circulation at an aggregate level.
Related: The ‘godfather of crypto’ wants to create a privacy-focused CBDC. Here’s how
However, in the first stage, all users must undergo a Know Your Customer procedure at a commercial bank to use the CBDC. As in the current financial system, the merchant’s bank remains responsible for ensuring that transactions comply with regulatory requirements such as Anti-Money Laundering, Countering the Financing of Terrorism and tax evasion laws.
The report concludes that Tourbillon’s payment process is easy to integrate into today’s payment landscape as it uses existing technologies such as QR codes, proof-of-stake protocols and account relationships between customers, merchants, banks and central banks.
The BIS spearheads global CBDC adoption, assisting the Swiss National Bank in wholesale CBDC development and collaborating on joint platforms with central banks in China, Hong Kong, Thailand and the United Arab Emirates, among others. It is also working on a transaction tracker proof-of-concept with the European Central Bank.
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Why anonymity is key to self-autonomy — And how crypto helps freedom movements win
The Agenda podcast chats with DarkFi to explore how Rojava is experimenting with cryptocurrency and why encryption and anonymous spaces are critical for building self-autonomy.
In the mid-2010s, the Islamic State was rapidly advancing through Iraq and Syria, conquering territory and terrifying residents. However, one group of Kurds in Northern Syria representing the de facto autonomous Democratic Federation of Northern Syria, in an area known as Rojava, successfully fought back the Islamic State and captured the attention of the world.
Many people from around the world went to Rojava to fight, but one lesser-known story made ripples in the crypto world: Some volunteers traveled there to help build blockchain and technological literacy and experiment with the potential of cryptocurrencies like Bitcoin (BTC) to serve as a tool for revolutionary change. After all, Rojava promotes decentralization, autonomy and self-empowerment — sound familiar?
On Episode 10 of The Agenda, hosts Ray Salmond and Jonathan DeYoung were joined by Rachel Rose-O’Leary and Kato, who discussed their work volunteering in Rojava and how those experiences inspired and relate to their current work developing DarkFi, an anonymous blockchain protocol.
Rojava’s blockchain and crypto experiment
O’Leary traveled to Rojava in late 2018 after feeling disillusioned with the crypto space and how far it had seemingly strayed from its early cypherpunk roots. “I was convinced at that time that Rojava was a place where the ideals of crypto were being fielded and tested,” she said. O’Leary was inspired by Amir Taaki, an early Bitcoin pioneer who himself traveled to the region to volunteer.
Meanwhile, Kato first discovered crypto while already in Rojava. “I basically got interested in crypto and in privacy technologies because of the actual need of the people,” he shared. “I saw the actual use cases, and a lot of people at that time already around the world started using crypto for practical means, like for sending money around.”
“If you don’t have a working banking system or you don’t have access, which is true for most of the world, it’s much more efficient. And also especially if you’re facing persecution and political oppression. And often, it’s actually the only way that you have.”
O’Leary spent much of her time “volunteering very much with building educational infrastructure, especially in terms of technology” — including introducing people to crypto and blockchain. “It’s a very interesting environment for crypto because of the fact that there are no banks,” she shared. “Also, there is no state. So, cryptocurrency is a really interesting like financial paradigm for that kind of a context.”
Related: ‘Privacy has become a taboo,’ says crypto-anarchist project DarkFi
When asked about whether crypto education is continuing in Rojava in 2023, Kato responded, “There are technical academies and education centers in Rojava, and even new ones have been opened over the last years.” However, the work remains difficult, as “the war is a huge pressure, not just on technical education but on all social fields.”
Privacy is paramount
Both Kato and O’Leary now work on DarkFi, an anonymous layer-1 blockchain protocol. For O’Leary, privacy is essential for the ability of communities to operate freely and autonomously, and the anonymity provided by encryption represents a 21st-century tool for people to express themselves fully:
“If people are under constant surveillance and monitoring by an enormous surveillance apparatus and a surveillance state, then they’re being prohibited from exercising [...] their moral and political society.”
When asked about the future of privacy and whether it’s possible to break free from the mass surveillance paradigm, Kato said that “we’re going to have that struggle for a long time, and for much longer than decades,” adding: “It’s maybe the most fundamental struggle of human society.”
But is there light at the end of the tunnel? Kato believes that through decentralized tools like blockchain, “we have this technology to be able to develop our own financial and economic systems that are actually democratically managed by the people who use them according to what they actually need.”
“There are moments in history where technology reconfigures the nature of power, and the printing press is a very common example,” added O’Leary. “I think we have a similar situation now happening in cryptocurrency, where it’s hard to see now because we’re just at the onset of it. But the basis of power is in the process of being reconfigured by virtue of these technologies.”
To hear more from Kato and O’Leary’s conversation with The Agenda — including their takes on venture capital funding, decentralized finance, and solarpunk vs. lunarpunk — listen to the full episode on Cointelegraph’s Podcasts page, Apple Podcasts or Spotify. And don’t forget to check out Cointelegraph’s full lineup of other shows!
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This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Anonymity in Crypto Must End, Says Top US Regulator at CFTC – Here’s Why
A member of the U.S. Commodity Futures Trading Commission (CFTC) is reportedly calling for the anonymity of crypto transactions to curtail illicit activity. According to a new Reuters report, CFTC commissioner Christy Goldsmith Romero says that tighter governmental and industry controls on digital assets are needed to curtail risks to national security. During remarks at […]
The post Anonymity in Crypto Must End, Says Top US Regulator at CFTC – Here’s Why appeared first on The Daily Hodl.
Trezor Enables Coinjoin for Trezor T Model to Bolster a ‘New Era of Privacy’
According to Trezor, the crypto hardware wallet manufacturer, owners of the Trezor T model can now use a Coinjoin feature to preserve their privacy. Trezor had announced the Coinjoin feature’s impending arrival on the hardware wallet seven months ago, and the feature went live on April 19. Trezor Adds Coinjoin to Software Suite Owners of […]Btcpay Introduces New Coinjoin Plugin for Enhanced Bitcoin Privacy for Merchants
On Monday, Wasabi Wallet and the open-source bitcoin payment processor Btcpay announced a new plugin for the Btcpay server. The plugin implements Wasabi’s Wabisabi coinjoin coordination protocol, allowing merchants to benefit from privacy enhancement. By activating the newly launched plugin, all the funds that merchants receive and send will be coinjoined, or mixed together with […]Ethereum Could Benefit From Stealth Addresses Implementation, Says Vitalik Buterin
Ethereum co-founder Vitalik Buterin published a research post that suggests using stealth addresses to enhance privacy-preserving transfers. Buterin detailed that stealth addresses can be implemented fairly quickly today on Ethereum and would significantly boost user privacy on the blockchain network. Buterin Suggests Stealth Addresses as a Solution to the Privacy Challenges in Ethereum Ecosystem Three […]Blockchain could help anonymously document war crimes
Blockchain combined with decentralized storage could ensure data preservation and anonymity when reporting war crimes.
Human rights investigators appointed by the United Nations (UN) have confirmed war crimes have been committed by Russian forces in Ukraine. A report developed by the Independent International Commission of Inquiry on Ukraine was created in March 2022 to provide a framework for UN human rights investigators to report war crimes in the region.
Erik Møse, chair for the Independent International Commission of Inquiry on Ukraine, stated in the UN’s article that “investigators visited 27 towns and settlements and interviewed more than 150 victims and witnesses.” Møse also noted that “sites of destruction, graves, places of detention and torture, as well as remnants of weapons,” were inspected.
While the report developed by the commission has allowed UN investigators to document war crimes in Ukraine, tools and protocols are still needed to enable individuals to accurately and securely report these acts. Additionally, the need to preserve war crime evidence has become critical as the War in Ukraine enters its seventh month.
Given these challenges, industry experts believe that blockchain technology has the potential to solve many of the issues faced by individuals and organizations documenting war crimes. For example, Jaya Klara Brekke, chief strategy officer at Nym — a platform powered by the Cosmos blockchain that protects the privacy of various applications — told Cointelegraph that Nym is developing a tool known as AnonDrop that will allow users to securely and anonymously upload data. She said:
“The intention is for AnonDrop to become a tool that democratizes the gathering of evidence that can be used to pursue human rights cases. In the current climate in Ukraine, this would be particularly important for the purpose of securely documenting and sharing evidence of war crimes anonymously.”
“The core technology of Nym is a mixnet, which takes data from ordinary users and mixes it together using encryption to make everything look identical. It protects against people watching the network, along with metadata surveillance and IP tracing,” she elaborated. While Nym provides an anonymity layer to allow users to transmit data without revealing who they are, information then gets stored on the decentralized storage network, Filecoin.
Will Scott, a software engineer at Protocol Labs — a company working with Filecoin on its decentralized storage solution — told Cointelegraph that some of humanity’s most important information is stored on Filecoin to ensure that data remains publicly available.
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A blockchain network combined with decentralized storage could be a critical tool for documenting war crimes since it allows individuals in regions like Ukraine to anonymously report, share and retain data. A Wall Street Journal article published in May 2022 stated that “Prosecutors say that, with Russian forces having occupied so much of the country, it is impossible to process all of the evidence of every potential war crime.” Moreover, Ahmed Ghappour, Nym general counsel and associate professor of law at Boston University, told Cointelegraph that it’s becoming critical for witnesses of human rights violations to come forward without fear of retaliation. He said:
“In Ukraine, where witnesses of war crimes are facing a technologically sophisticated adversary, network level anonymity is the only way to guarantee the safety and security needed to provide evidence to prosecute perpetrators.”
A work in progress
Although the potential behind AnonDrop is evident, Klara Brekke noted that the solution is still in its early development stages. “We took part in the Kyiv Tech Summit Hackathon this year hoping to find individuals who could help us extend AnonDrop’s functionality. For instance, AnonDrop’s user interface is not fully up yet and we still need to find a way to verify the authenticity of images uploaded to the network,” she explained.
Ghappour elaborated that verification is the next critical requirement for making sure evidence uploaded to the Nym network can be used in court. “I think one of Russia’s greatest strengths in this war is the region’s ability to deny that any evidence is valid. Russia’s use of deepfakes and misinformation is another strength. We need to guard against these attacks.”
In order to combat this, Ghappour mentioned that image providence features must be implemented within AnonDrop to enable easy verification when documents are examined in a court of law. Even though such processes for image verification currently exist through tools like SecureDrop — a solution that allows individuals to upload photos anonymously for media outlets to use — Ghappour believes that these are limited to siloed organizations.
“We want to take image verification a step further by democratizing the process, ensuring this feature is available to users rather than just media outlets.”
Once image providence is implemented, verifying war crimes could become easier for court officials. Brittany Kaiser, a human rights legal expert, told Cointelegraph that she believes such a tool could help advance the human rights documentation space, where often individuals feel too at risk to submit findings themselves.
“Through images alone, it is possible to verify typical indicators of atrocity crime, including, but not limited to, mass graves, torture marks, binding of hands, executions and other violations of international human rights law that amount to war crimes or other atrocity classifications,” she remarked.
Given the potential for this use case, it shouldn’t come as a surprise that AnonDrop isn’t the only blockchain application focused on the preservation and verification of war crimes. Starling Labs — a Stanford-based research lab focused on data integrity using cryptography and decentralized web protocols — is also using blockchain technology to report war crimes. However, verifying the integrity of data remains the biggest challenge for both Nym and Starling Labs, even with image providence in place.
For instance, Scott pointed out that progress must be made in order to make sure images are legitimate and that verification works well. He further remarked that access to the internet in various regions of Ukraine is censored: “There are distribution questions that are important to consider here.”
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Challenges aside, it’s notable that organizations responsible for prosecuting war crimes are considering using technology to help advance traditional processes. For example, The International Criminal Court (ICC) in The Hague noted in its strategic plan for 2016 to 2018 that it could “support the identification, collection and presentation of evidence through technology.”
The report further noted that the ICC is interested in developing partnerships with non-governmental organizations and academic institutions to facilitate the use of technological advancements for war crime documentation. In the meantime, Ghappour emphasized that Nym will continue to push forward with enabling AnonDrop to be used in regions like Ukraine: “Russia has prolonged wars in the past, so we need to progress with this project no matter what.”
Australian state police sets up crypto division to trace transactions
The use of crypto in criminal activity has reportedly significantly increased since the AFP made its first crypto seizure in early 2018.
Law enforcement in Australia is working to boost cryptocurrency expertise and trace crypto transactions by setting up a dedicated police group.
The Australian Federal Police (AFP) has established a new cryptocurrency unit to focus on monitoring crypto-related transactions, The Australian Financial Review reported on Monday.
Stefan Jerga, the national manager of the AFP’s criminal asset confiscation command, said that the use of crypto in criminal activity had significantly increased since the AFP made its first crypto seizure in early 2018. In response , AFP decided to set up a dedicated crypto team in August, Jerga noted.
The increased focus on illicit crypto transactions comes amid AFP seizing a lot more criminal assets than the authority had originally expected. The AFP officially reported on Monday that it reached its goal of seizing $600 million from financial crimes two years ahead of schedule. The target was originally set by the AFP-led Criminal Assets Confiscation Taskforce and was expected to be reached by 2024.
Since February 2020, the AFP has seized $380 million in residential and commercial property, $200 million in cash and bank accounts, and $35 million in cars, boats, aircraft, artworks, luxury items and cryptocurrencies. Jerga noted that crypto seizures were small compared to “traditional” criminal assets like property and cash, but the additional focus is expected to provide more insights.
According to the AFP manager, the environment triggered the creation of a standalone team, opposed to a lot of officers “picking up some of this skill set as part of their overall role.” He added that the ability to trace crypto transactions across blockchains is “really, really important” alongside national security, child protection and others.
Earlier this year, an official at the Australian Transaction Reports and Analysis Centre (AUSTRAC) expressed skepticism about the transparency of cryptocurrencies. AUSTRAC deputy chief executive John Moss argued that cryptocurrencies could be used anonymously, quickly and across international borders, which made them “attractive for criminals,” including neo-Nazi groups.
Related: Law enforcement should give up trying to access everyone’s data, says legal expert
Contrary to popular belief, which supposes that Bitcoin (BTC) is anonymous, Bitcoin transactions are not anonymous. Instead, they are publicly trackable through blockchain explorers. While it’s technically possible to run an anonymous BTC wallet, it is becoming increasingly difficult to conduct BTC transactions anonymously as transactions are quite often associated with users’ Know Your Customer data.
Can the government track Bitcoin?
The law enforcers like the IRS and FBI track Bitcoin with blockchain data and collaborate with private companies in an attempt to trace criminals and taxes.
What happens with unreported cryptocurrency?
Not reporting Bitcoin despite the obligation to do so may have severe consequences for individuals’ lives and finances. The fine for making an incorrect declaration can be substantial and can even be considered a felony in certain circumstances.
Individuals may wonder whether centralized cryptocurrency exchanges actively report to the IRS. Centralized exchanges do issue tax forms to the IRS. Likewise, the IRS has issued so-called John Doe Summons to exchanges, including Coinbase, to request people’s information and catch those who try to cheat on their tax obligations.
But, such summonses are not the only law enforcement tool that the IRS uses on its quest to enforce Bitcoin taxes. Form 1040, for instance, specifically asks U.S. taxpayers whether they transacted with cryptocurrencies such as Bitcoin.
Some people may choose to avoid reporting their Bitcoin transactions, income and capital gains. When U.S. taxpayers do not report taxable cryptocurrency activity and face an IRS audit or investigative procedure, however, it may be considered tax evasion or fraud. Individuals may ultimately be obliged to pay penalties or even face criminal charges. Indeed, tax evasion is considered a felony. The penalty may extend to half a decade of prison and a fine of up to tens of thousands of dollars.
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How is Bitcoin taxed?
How to report Bitcoin on taxes and rules for Bitcoin taxation depend on the specific situation and someone’s country of fiscal residence. For instance, United States taxpayers must report cryptocurrency sales and other taxable events, and each of these transactions has different legal implications.
The fiat currency gained from cryptocurrency activities, also considered as realized gains, is taxed at different rates and can be considered capital or as income. Keep an eye out for the latest updates in terms of tax requirements and obligations.
Events may be taxable as capital gains when one sells Bitcoin for cash, when one converts BTC to another cryptocurrency or when one spends Bitcoin to purchase goods or services. According to the latest requirements, cryptocurrency capital gains in the US should be recorded by submitting Form 8949.
Bitcoin may also be taxed if it is considered income when someone receives a salary in BTC or receives Bitcoin for providing goods or services. Keep an eye on specific blockchain-related events because other incentives or rewards may also be taxable (for instance, staking rewards or obtaining new assets due to a hard fork or airdrop).
On the contrary, certain situations are not taxable, for instance, when one is simply holding Bitcoin passively or when BTC donations or gifts are transferred. Depending on the situation, there may still exist legal obligations or requirements to report such events to the IRS or an alternative qualified agency.
Do the authorities know when and where Bitcoin is bought?
Apart from data analysis done alone or in cooperation with private companies, authorities may request information from centralized exchanges. Due to regulation, centralized exchanges may also be obligated to share such information. However, not all cryptocurrency exchanges collaborate with authorities.
A centralized exchange is a cryptocurrency exchange that is run by a single entity, such as Coinbase. To become a licensed operator in a certain country or territory, centralized exchanges need to comply with regulations.
For instance, to decrease cryptocurrency anonymity and the illicit use of cryptocurrencies, most centralized exchanges have incorporated Know Your Customer (KYC) checks. KYC is meant to verify customers’ identities alongside helping authorities to analyze activity on the blockchain. In practice, individuals need to submit a range of documents and their data before they are allowed to trade, invest and transact.
After KYC has been conducted, exchanges may be requested or may be obligated to share that data with law enforcement agencies. Since the exchange has individuals’ personal data and transaction data, so may the government. By using information obtained from centralized exchanges, the IRS can identify unknown Bitcoin wallets using KYC checks and corresponding personal information.
Nonetheless, not all exchanges use KYC. For example, it is difficult to make decentralized exchanges (DEXs) comply with regulations because they lack a headquarter and are not run by a centralized company or a small group of individuals.
How does the government track Bitcoin?
Bitcoin’s blockchain technology is, in principle, anonymous but also traceable due to the transparency element. Bitcoin can thus be called “pseudo-anonymous.” Government agencies are hiring cryptocurrency experts to help them with BTCtracking and identity verification.
In practice, how can authorities like the police, the IRS or the FBI track Bitcoin? Since enforcers may not directly identify the parties involved in a Bitcoin transaction, they can try to observe the blockchain and analyze BTC movements and corresponding patterns. In this manner, they seek to profile, de-anonymize and identify those that are transacting.
So, why would governments do that and with whom do they collaborate? Importantly, most Bitcoin transactions are not associated with criminal activity. Yet, enforcers like the police or the FBI still aim to catch people or organizations that use cryptocurrencies such as Bitcoin for illicit purposes, such as money laundering or fraud. Likewise, an agency like the IRS wants to track BTC owners, traders and investors in order to raise taxes from capital gains or income.
Companies like Chainalysis provide services for blockchain monitoring and analytics. These companies analyze if certain BTC moving between wallets are, in some way, associated with criminal activity and they may collaborate with the FBI in helping investigators track certain cryptocurrency funds internationally.
Does the government know who owns Bitcoin?
At the basis of cryptocurrencies like Bitcoin (BTC) stands blockchain technology. A fundamental characteristic of blockchain technology is transparency, meaning that anyone, including the government, can observe all cryptocurrency transactions conducted via that blockchain.
Bitcoin transactions are publicly accessible because of the transparent nature of blockchain technology. Besides, the history of Bitcoin transactions is permanently stored on the Bitcoin blockchain, implying that it is not hard to observe BTC transactions. The government, in the form of law enforcement authorities, may thus watch what happens on the Bitcoin blockchain.
So, can authorities like the police, the Federal Bureau of Investigation (FBI) and the Internal Revenue Service (IRS) trace Bitcoin ownership? And, do authorities know who owns which Bitcoin? The traceability of BTC transactions depends on whether someone’s transaction activity on the Bitcoin blockchain can be linked to their identity.
Anyone can observe all cryptocurrency transactions of any Bitcoin wallet address. To find out where the Bitcoin is coming from and where they are being sent, authorities can analyze the BTC addresses that are used for transacting. In this manner, authorities get insights into what is happening and when.
Many Bitcoin users reveal their identity at some point (for instance, on centralized exchanges or through interactions with known wallets). Thus, BTC transactions do not always remain 100% anonymous and the government can trace Bitcoin ownership whenever (a series of) Bitcoin transactions can be linked to one’s identity. With that new knowledge, governments can enforce duties such as Bitcoin or cryptocurrency tax liabilities or fight criminal conduct like money laundering.