Two anonymous activists have proposed an alternative to Bitcoin, which would fork the protocol to retain more anonymity for users. Labelled "Bitcoin 2", the currency would modify the existing bitcoin code to maintain what they call “the original long-term vision”, stripping out elements of the protocol that they feel are damaging, and building in support for anonymity protocol Zerocoin.

The paper, entitled Bitcoin 2: Freedom of Transaction, points out several things that it says are problems for Bitcoin, and worries that the protocol could “develop into a system that is a complete perversion of the original vision – a completely transparent payment system with very few points of control which has been totally absorbed by the established financial and regulatory environment.”

“It's another altcoin,” says Bitcoin core developer Jeff Garzik. “They are attempting to ride the coattails of the Bitcoin brand, but other than that, experimentation is a good thing. The marketing of most altcoins is inevitably Bitcoin-critical, as they want to distinguish themselves from the main competitor.”

An aggressive proposal

This proposal goes further, though. Not only does it want to present an alternative to bitcoin, but it hopes to harvest Bitcoin’s users over time. “We do not lobby for making our proposals part of the current Bitcoin system, but will do a hard fork,’ says Gonzales. “Whoever wants to stay in the old system, can. Whoever wants to switch can as well. And we think this can be done without the problem of a hard asset reset which limits competition to Bitcoin (as in, starting from scratch in mining, market, etc.).”

The authors are particularly concerned about the Bitcoin Payment Messages system scheduled for release along with version 0.9 of the cryptocurrency. That mechanism would allow merchants to request payment from customers, rather than simply providing them with an address to send payments to. Payments would be completed using digital certificates owned by the merchants, and would contain customer and merchant metadata linked to specific transactions.

Most jurisdictions require merchants to issue receipts where possible so that taxes can be levied, the paper asserts. It worries that Bitcoin Payment Messages will make it possible – and therefore mandatory – to issue receipts, playing further into the hands of the regulators.

The authors also worry that bitcoins used in merchant transactions can already be traced back to the exchange where the coins were purchased. In theory, a customer purchasing from a merchant could use different identities to do so. But Know Your Client (KYC) rules dictate that an exchange must identify a client buying bitcoins with fiat currency, meaning that if the bitcoins used in a transaction were traced back to the exchange, the customer’s true identity could be discovered.

“Software to analyze financial flows for money laundering patterns in the traditional banking system is widely available and it could be adapted to Bitcoin easily, which would make it harder to conceal ones identity,” the paper says.

“It is one of the concerning developments, not too dangerous in itself, but problematic in combination with other changes, miner centralization, regulatory pressure etc,” says Gonzales of the new payments mechanism.

Fear of increased regulation

The proposed system would also include forced mixing with Zerocoin, the anonymity technology developed by Matthew Green. However, the implementation is partial, mixing only some of the coins in the chain, and designed to solve a specific challenge envisaged by the authors.

They worry that in the future, regulators may force merchants to decline transactions in which the identity of the customer cannot be estimated with a certain degree of certainty. This “KYC scoring” would make it difficult to make anonymous transactions, he says.

“If Bitcoin grows much more and ‘money laundering’ remains a problem from the regulator's point of view, they simply have to require the use of KYC scoring from exchangers and merchants,” Gonzales says. “Thereby, ‘clean’ bitcoin (bitcoin sent through a mix or laundry) would become practically unspendable (because the KYC score would be too low).”

Garzik argues that these features are not needed. “A corporation that wishes for its finances to be auditable by the world at large will not want these proposed anonymity features,” he says, adding that pro-anonymity tools and services can be layered on top of the protocol. “Wouldn't it be wonderful if major corporations or governments published completely open, transparent, auditable, cryptographically proven accounting? Bitcoin technology enables that.”

Another thing that the paper’s authors want to introduce is a regular-sized block chain. The Bitcoin block chain is always increasing, because a block is added every ten minutes, and all of the blocks remain in the chain. The paper argues that the increasing block chain size makes full clients less feasible over time, increasing centralization.

Instead, this protocol would delete the oldest block from the chain when a new one was added, to keep the block chain at a set length. Any money still held from transactions in these blocks would be freed up, and released back to the network in the form of a lottery.

That would no doubt annoy Satoshi Nakamoto, who is said to have around $100 million in unused bitcoins. However, Gonzales says that bitcoin hoarders could simply refresh their coins with a transaction (between two addresses that they control) to avoid losing them.

Lopping old blocks from the chain would make it difficult if not impossible to explore transactions beyond a certain age, because all the transactions could not be explored. But Gonzales is fine with this.

“Transparency is a double-edged sword. Transparency in money creation and supply is absolutely something good,” he says. “Transparency in knowing who owns how much money or how he uses it is a major evil. The sliding block chain increases the transparency when it comes to money creation and money supply knowledge, but it decreases (combined with other proposals in the paper) the transparency of payments.”

Other significant changes include the ability to choose miners based on their reputation. The authors included this capability to counter the possibility of miner regulation, in which miners may be forced to impose rules on which transactions are mined. It would also serve as useful protection against groups of miners gaining control of the network, they say.

Several of the problems raised in the paper, such as KYC scoring and miners with overly stringent guidelines on which transactions they will mine, have not yet happened. Are these authors overly-paranoid, and scared of imaginary spectres?

“We might sound rather pessimistic to you, but we have been in the digital currency industry for almost two decades now. Things usually go ways you didn't plan for, simply because you did not have the power necessary to defend yourself against regulatory pressure,” Gonzales says.

Who's behind it?

Who are these authors, anyway? The mail addresses that they use are operated by Cryptogroup, which is a secure messaging gateway operated by a closed online network. This network is run by Cryptohippie, a company offering secure communication services.

“We decided to stay pseudonymous for several reasons: First, the paper is about the message and not about personalities. Second, it is potentially counterproductive for the project to have faces attached, especially if it gets implemented,” Gonzales says. After all, it worked for Satoshi.

But then, Satoshi also wrote code. Will this be implemented? Gonzales and his partner have neither the time or the inclination, he says, adding that the authors simply wanted to get this off their chests, and predicting that it will change little. “We will probably see some discussions now and we will be called all sorts of names, mostly by people who didn't even read the paper. Then the paper will be forgotten and Bitcoin will develop more or less the way we predicted into a completely transparent and regulated payment system,” he says.

It’s an interesting intellectual exercise at present, then – almost a manifesto for the preservation of opacity in Bitcoin. But as Goethe said, a really great talent finds its happiness in execution.