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Jeff Garzik, a member of the Bitcoin core development team, says in an email that bitcoin is not as anonymous as the denizens of Silk Road would like to believe. He explains that because all Bitcoin transactions are recorded in a public log, though the identities of all the parties are anonymous, law enforcement could use sophisticated network analysis techniques to parse the transaction flow and track down individual Bitcoin users.
"Attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb," he says.
"Attempting major illicit transactions with bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement, is pretty damned dumb," he says.
I agree that it is important for people to understand that all Bitcoin transactions are recorded in a publicly available log. However, his statement seems to imply that it is trivial to link a transaction to an identity. I believe that this is just about as incorrect as saying that Bitcoin is completely anonymous.
For instance, Silk Road has a built in coin mixer. When you add coins to your account, they are sent through a bunch of dummy transactions, split up and recombined with the coins of other people. This would make it much more difficult to associate a specific sale with a Bitcoin transaction and individual identity.
Another precaution that can be taken from the buyer's point of view is to only spend virgin coinbase transactions. These have no history so cannot be traced via information leakage (associating a previous address with your identity accidentally or purposefully). These can be obtained by mining yourself, or via "proxy mining", where a miner creates the coinbase transaction for a public key whose private key you control.
If the proper precautions are taken, I believe that nothing short of seizure of the hard drive containing the wallet can prove the link between a transaction and an identity. Further, once the transaction is complete, the used private keys can be removed from the wallet, negating even this risk.
Any thoughts?