It was interesting to watch the reaction of regulators to the arrival of cryptocurrency. Some of that government reaction was what one might expect, a bit of overreaction based on common misconceptions, followed by a short burst of overreach. China went full crazy, banning Bitcoin outright and telling banks not to touch it. Outside China, the reaction of regulators was surprisingly cautious. In the US, there was a strongly worded letter from the Treasury Department to a handful of businesses — threatening to follow up with even more strong language in the future. In an unrelated action, the IRS declared Bitcoin to be real property, not currency, and hence taxable. Legislators are split, with some demanding outright bans, while others support a more accommodating approach. Canadians took the radical step of studying the issue before recommending any enforcement action.
The concern of law enforcement was that Bitcoin would be used to fund illegal activities including terrorism, and enable money laundering. Those are not unreasonable concerns — and basically the downsides of any stateless medium of exchange, including cash.
If Visa and MasterCard feel digital currencies are a threat to the stealth tax they levy on nearly every electronic transaction, then Dark Wallet is a tailor-made talking point for lobbyists who want legislators to crush competition.
None of those problems were new, and all regulators and Bitcoin exchanges had to do was work out a set of rules for Bitcoin traders that mitigated those concerns. There was progress in those negotiations; regulators were getting more comfortable with the concept of cryptocurrencies, more businesses accepted Bitcoin, and an influx of venture capital was moving the concept of digital currency slowly but surely toward financial legitimacy.
At MIT, students are set to become part of a giant Bitcoin experiment, as the MIT Bitcoin Club secured $500,000 in funding to give every student at MIT $100 worth of the digital currency and watch what happens. The goal of the project is to gather data about how people actually use digital currency, in hopes that information will lead to improvements in the system implementation.
Now, in the midst of those first tentative steps forward, comes an announcement by a group called unSystem about the release of a new version of the user software Dark Wallet, which beefs up anonymity in Bitcoin transactions.
Dark Wallet encrypts and then blends Bitcoin transactions to make tracking individual transactions all but impossible. If Dark Wallet works as advertised, it will be a clear message to regulators that digital currencies can’t be regulated or trusted, which is not particularly helpful if you’re one of the people hoping to see Bitcoin expand into commercial markets.
Using a process called CoinJoin, Dark Wallet creates a stream of encrypted and anonymous Bitcoin transactions, and only the private keys held by the originator will be able to decrypt and claim the Bitcoins being transferred. Basically the Dark Wallet clients test every transaction to see if it belongs to them; if the decryption works, it’s theirs. The philosophy is simple and effective.
Another wildcard is the news that MasterCard is paying lobbyists to focus on Bitcoin and digital currencies on Capitol Hill. There’s no word as yet on what position MasterCard is taking on cryptocurrency, but the fact they’re sinking a sizable amount of their corporate cash into lobbying efforts related to digital currency should raise a warning flag for cryptocurrency traders. If the companies sitting on the nation’s electronic payment system, Visa and MasterCard, feel digital currencies are a threat to the stealth tax they levy on nearly every electronic transaction made in America — and cryptocurrency most certainly is a threat to that monopoly — then Dark Wallet is a tailor-made PR talking point for corporate lobbyists wanting legislators to crush potential low-cost competitors.
It’s unlikely the push and shove in the quest for anonymity will end with Dark Wallet in any respect. Other Bitcoin developers could find a way to deny Dark Wallet transactions, setting up a developer arm’s race, and fracturing the Bitcoin user base between business interests and the more radical faction demanding absolute privacy. In the end Dark Wallet may be just one more wooden shoe in the machine of those pushing for Bitcoin financial legitimacy; another hurdle to overcome in their quest to see Bitcoin go mainstream.