Privacy Is Vital to Crypto

Unless you're listening to the outdated, false talking points of some anti-crypto crusaders, you'll know by now that bitcoin, which keeps a record of every single input and output, is not very private.

Even as the understanding of bitcoin's privacy limitations improves, and as mathematicians such as Blockstream's Andrew Poelstra seek to overcome them, the public debate over this matter still mostly misses the bigger point of fungibility.

As cryptographic tools for enhancing privacy have been incorporated into cryptocurrency projects, including zero-knowledge proofs, ring signatures and bitcoin mixers, the debate over their value to society is too narrowly viewed as a battle between privacy as a human right on the one hand and society's need to prevent criminality on the other.

Since bitcoin wasn't widely used by the general public, users inevitably had to interchange coins with fiat currency, which meant interfacing with the banking system.

Once bitcoin wallets and exchanges were subject to KYC rules, they created identifiable on- and off-ramps, which, when combined with bitcoin's permanent, immutable, blockchain ledger, created a clearly traceable record of every bitcoin transaction.

We've already seen how bitcoin's traceable history undermines fungibility.

When the FBI launched a series of auctions of bitcoins seized in that same investigation, it attracted giant bids that put a higher price on bitcoin than that quoted on exchanges.

Imperfect fungibility means that people will tend toward holding bitcoin as a speculative asset rather than using it as a medium of exchange.

Speculation is all well and good, but if bitcoin can't be used for purchases, it's an impractical form of money.

In the years ahead, as economic activity becomes increasingly digital, I believe this duality of privacy and freedom, measured by how easily our value exchange systems allow us to transact with each other, will become the defining differentiator between economic systems.