Blockchain and Cryptocurrency Confidentiality Issues

Although cryptocurrencies provide significant benefits over fiat currencies, they store information on a “blockchain” for all to review. Therefore, in order to provide counsel, it is important to have a basic understanding of how blockchains work, how cryptocurrencies utilize blockchain technology, and the confidentiality and privacy issues associated with blockchains. The blockchains used by pseudonymous cryptocurrencies provide unlimited access for hackers to figure out the identities of the owners of addresses. Additionally, there are numerous companies in the business of linking identities with addresses and then commercializing that information. If one can link addresses on the blockchain with the identity of its owner, one could see with whom that owner is transacting business, and how much is spent and received. Disclosure of this information creates issues for organizations that intend to keep it confidential.

There are also privacy considerations related to customer data. It is unclear how regulators will respond to privacy issues associated with the data stored on blockchains. Their transparency potentially exposes personally identifiable information (PII) that organizations would have a duty to safeguard under other electronic payment methods, while the immutability of the blockchain prevents organizations from removing that data upon request.

Cryptocurrencies like Zcash, Dash, Monero and Bytecoin are promising examples of how cryptocurrencies can adopt technologies that maintain privacy. It is only a matter of time before cryptocurrencies like Bitcoin also develop and adopt similar technologies.