Bitpay working with Chainalysis, Is Bitcoin Fungibility at Risk?

A post on reddit’s /r/bitcoin brings up concerns that Bitpay maybe  working with the company Chainalysis.

user /u/dnale0r posted:

I just asked Marcel Roelants, general manager of BitPay at the bitcoin meetup in Amsterdam if they actively cooperate with a company like chainalysis. It turns out they do.

They check incoming payments for suspicious transactions. They also collect consumer data, certainly for some kind of transactions like buying / selling gold and actually are in favour of putting identity in a bitcoin wallet.

I hope the video will be released soon so we can share this on r/Bitcoin

Chainalysis was one of the first companies created to specifically data-mine the bitcoin ledger. Wherein different analytical tools are used to compile a possible history of the inputs and outputs that comprise  a bitcoin account. This analysis can be used to construct a picture of where bitcoin transactions may have originated prior to being spent at a bitpay merchant.  In effect, creating a blacklist/redlist system where bitpay may reject certain transactions.

The rise of companies like Chainalysis has been an extremely controversial development.  One which has been warned about in the past by people like Adam Back the father of Hash Cash and a Bitcoin Developer.  Back has been very outspoken about the risks, that these tools could be used to attack the  fungibility of bitcoin. As far back as November 2013 Back posted on bitcointalk.org  his concerns with redlist/blacklist services:

Its based on significant misunderstanding about bitcoins value proposition – destroy its fungibility and the costs float up to meet credit cards and paypal..

Fungibility has long been considered a key characteristic of money, the concept that one dollar or bitcoin is the same as any other.   In order to protect Bitcoin’s fungibility Back has expressed the need for stronger privacy tools in bitcoin, to make it harder or impossible to conduct these types of data mining.

Here is a talk Adam Back gave in February of 2014 regarding, Fungibility, Privacy and Indentity in Bitcoin.

 

Clearly if it turns out that Bitpay, the larget Bitcoin payment processer, is working with Chainalysis it would bring into question bitcoins fungibilty in consumer transactions.

However one interesting development is that Segrated Witness which is a proposal to scale bitcoin, may also enable new privacy measures in bitcoin, diminishing or negating Chainlsysis business model.

A recent proposal appeared on the Bitcoin Development List piggyback on Segragated Witness to enable confidential transactions.

 

The segregated witness[2] proposal by Pieter Wuille allows to reduce the
blockchain to a mere utxo changeset while putting all cryptographic proofs
(redeemscript/pubkeys/signatures) for the inputs into a witness part.
Segwit also allows upgradable scripting language. All can be done with a
soft fork.

We propose an upgrade to segwit to allow transactions to have both
witnessIns and witnessOuts.

We also propose 3 new transactions types: blinding, unblinding and
confidential. Valid blocks containing any of these new transactions MUST
also include a mandatory special output in their coinbase transaction and a
new special confidential base transaction.

Hopefully these new developments will bring about stronger privacy and anonymity in Bitcoin and insure its future fungibility remains intact.

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