A single Bitcoin transaction can compromise years of careful privacy practices, according to Cake Wallet chief operating officer Seth for Privacy.
Speaking on the Bitcoin Rails podcast this week, Seth discussed several ways users can protect themselves when using Bitcoin and said privacy needs to be treated as essential in the West.
Bitcoin privacy has moved back into focus after Samourai Wallet developers went on trial last year and were later imprisoned. This week also brought a separate development: the U.S. Department of the Treasury scrapped two long-stalled crypto surveillance proposals, which the report described as a major win for privacy advocates and the digital asset industry.
The risk of mixing KYC and non-KYC coins
Seth said users can quickly expose their identity if they spend non-KYC Bitcoin together with coins tied to KYC. Wallet software may do that automatically if left to choose inputs on its own.
He said, 「If you ever spend your no-KYC coins with one of your KYC coins — which if you just let the wallet do its thing, it could do because it doesn’t know the difference — you immediately connect all of the non-KYC Bitcoin that you spend in that with your identity.」
He was referring to UTXO management, also called coin control by some wallets.
Why UTXO management matters
Bitcoin wallets do not hold one unified balance. They hold a set of separate unspent transaction outputs, or UTXOs, with each UTXO representing a distinct coin from a previous transaction.
When a payment is larger than any single UTXO, the wallet selects several of them and combines them as inputs in the same transaction. Seth said this is an easy mistake to make, and one that can damage privacy.
Privacy attitudes in the West
Seth said that unlike parts of the global South, where people have lived under more oppressive states, citizens in the West may need to 「feel pain」 before they understand how important privacy is.
Even so, he said the mood has been shifting and more people are becoming serious about protecting themselves.
He said, 「It has been shifting, in the last five or six years a lot of people — even in the West — are starting to think [privacy] really matters, we really need to think about this seriously now.」
Cake Wallet and Lightning
Cake Wallet is a privacy-focused, self-custody, open-source wallet. Earlier this year, it integrated Bitcoin’s Lightning Network into the platform.
According to the report, the second-layer network is not only faster and cheaper, but also offers more privacy than Bitcoin’s main chain.
His view on Monero
Although Cake Wallet supports other cryptocurrencies, including privacy coin Monero, Seth said he would be fine with Monero disappearing if Bitcoin privacy became strong enough.
He said, 「If Bitcoin’s privacy got good enough that you could use it and have at least almost as good privacy as Monero without massive hoops to jump through, and Monero ceased to exist, that’s fine.」
He added, 「I would much rather the thing that more people use has better privacy than a more niche tool that has perfect privacy, and that’s something that less people are using because it’s less well known.」
The article first appeared on Bitcoin Magazine and was written by Mathew Di Salvo.