Photo Credit To Techno Loader Via Flickr
Wallets ( Cold Storage and Cryptocurrency Hardware Wallets )
Cryptocurrency Wallets, narrowly speaking, are private-public key infrastructure based mechanisms that allow for storing and using virtual currencies. Broadly, these cryptographic wallets can store anything of value that can be represented as computer code; from digital cash to certificates, real estate documents, personal IDs, etc. Wallets form an important part of the cryptocurrency space as they are the backbone mechanism for transfer of value from one entity to another while acting as a fool-proof security protocol thanks to the infrastructure they are built on.
Cryptocurrency Wallets are derived from a private key, from which public key(s) can be continually generated. The private key allows the user to control and spend the value stored, while the public key allows for receiving value from other wallets. The public keys are usually represented as a hexadecimal code, that can be distributed through any medium to receive funds. A public key cannot be traced back to a private key, but a single private key can be used to generate an almost innumerable amount of public keys.
Government Tracking Mechanisms
Governments around the world have already started maintaining records of wallet addresses and their owners through several means. Most cryptocurrency exchanges and service providers are currently asked to comply with the local AML/KYC regulations, meaning that all transactions done by a particular user, who has submitted their identification documents, are stored and reported to the authorities periodically. If a person decides to shift their cryptocurrency held on the exchange to a deterministic wallet, Governments can link the new address to the person and thus add that address to that particular person’s database.
The transparency of Blockchain allows governments to continually track the flow of value from wallet to wallet. The identity of users can also be determined every time someone uses cryptocurrency to exchange something in the real or virtual world. Using cryptocurrencies to buy from online portals, paying everyday utilities such as bills, taxes, etc., are all trivial ways of determining identity through the wallet addresses.
Most often, a simple search is enough to establish the identity of users based on their wallet address as numerous people broadcast their public key on social media or personal blogs or e-commerce portals to communicate that they are willing to accept cryptocurrencies.
If a particular wallet is “non-trackable”, it is only a matter of time until it is, because eventually it will interact with a “registered” wallet.
The Fear of Misuse
Governments are triggered by the use of cryptocurrencies mostly because cryptocurrencies function outside the purview of their oversight. As there is no intermediary involved in between the parties transferring value, it becomes hard for authorities to collect data and determine the true nature of the flow of value. Plus there is also the grave concern of a the existence of a non-sovereign medium of exchange. Other concerns portrayed by most regulatory authorities is the use of cryptocurrency for scrupulous practices, such as money laundering, terrorist financing, etc.
For these reason, it can be understood why Governments are skeptical, if not outright against, the development of cryptocurrencies. For the first time in the history of money, there exists a mechanism for a medium of exchange that doesn’t require constant oversight, regulation and periodical monetary policy considerations.
A Voluntary Approach
The ability of governments to mandate the registration of cryptocurrency wallets is the center of a huge internal debate. Most cryptocurrency supporters argue that mandating registration of wallets negates the major reason why cryptocurrencies were created in the first place; to protect the privacy of the users. Governments constantly tracking usage makes cryptocurrency just another form of bank account.
For someone determined enough, it is not hard to find the identity linked to a wallet address, unless the wallet has never been connected to the internet or used to transact funds. Thus, it is inevitable that addresses will be used to locate people behind them. But the main concern is that when a mandate is released to register wallets with an intermediary, it becomes a central point of attack for anyone wishing to get ahold of information. Just like the numerous cases we’ve seen before about agencies being hacked to access the information, wallet databases will be similarly breached.
Wallet registration defeats the very purpose blockchain based mechanisms were built in the first place. The distributed nature of blockchain allows incredible resilience against outside attacks, as it is almost always not worth the time, effort and resource to hinder the database. Forming a single point of failure repeats the circle and opens the vulnerabilities of the previous paradigm to the new one.
In my opinion, instead of mandating persons to reveal their identity, a voluntary set up will prove to be more useful. Nudging the user to reveal information by setting up checkpoints for availing and using government resources will increase the confidence of the public to give away information.
In a scenario where a person has set up multiple wallets, it makes sense to voluntarily give up information of one of them. For example, a person can give up the identity of a particular wallet to the tax authorities for scrutinizing his income flow and determining taxable income. Same can be done with credit agencies, which allows the user to showcase their financial health and credit history. Numerous other applications can be identified, where the voluntary surrender of information proves to be incredibly helpful in ascertaining the identity and historical procession.