Is There Market Demand For Fungibility and Privacy?

Nico Porter

May 30, 2020

Good money in the Information Age is (1) recognizable, (2) scarce, (3) censorship resistant, (4) durable & indestructible, (5) extensible, (6) salable, (7) portable, (8) fungible, (9) private and (10) divisible.

In this article, we will examine the undisputed digital monetary product, Bitcoin, and see whether there could be market demand for an alternative product that provides greater fungibility and privacy.

Bitcoin, enough privacy?

The Bitcoin protocol revolutionized computer science, creating a peer-to-peer digital currency that is scarce, secure, open and censorship-resistant.  It enables individuals to conduct trust-less, permission-less transactions anywhere in the world.  For more than ten years, Bitcoin has proven to be the world’s most secure public ledger, running on a network of over 10,000 nodes with a market capitalization of nearly $170 billion.

Could it be that Bitcoin’s success and steadily growing popularity will ultimately deprive its users of the privacy and control that some may be seeking?  Is there an alternative coin or protocol that enables greater privacy while ensuring security, scarcity, and fungibility?

Blockstream Chief Strategy Officer Samson Mow said, "Money needs to be private and fungible in order for it to be a 'good' money. With Bitcoin, every transaction is open for anyone to see, so we still have a lot of work to do to get it there. Without privacy and fungibility, money can be used as a tool for oppression or financial surveillance. Bitcoin is the future of money and the future of money shouldn’t be Orwellian."

In this March 2020 interview with Blockstream CEO Adam Back privacy and fungibility are major topics.

Are these solutions good enough and coming to market fast enough? Even with these advancements will there be an opportunity for a new base layer coin to work in a complimentary manner with Bitcoin to satisfy market needs?

The Briefest of Histories

Since the early 1980’s, computer scientists have been on a quest to develop a payment system or currency that guarantees individuals’ privacy and sovereignty over their assets.  The challenge was to create a form of cryptography that hid the personal information of the parties involved in a transaction from the eyes of third parties. Another was to develop a process that issued new Bitcoin on predetermined, regular intervals but limited the ultimate supply to a finite amount of 21 million – thus ensuring its scarcity value.

There were several attempts to create a safe, secure digital currency in the 1990s.  None came to fruition but all proved to be significant stages in the evolution of cryptocurrencies as we know them today.  The true seminal event of this evolution occurred in 2008 with the publication of the Bitcoin white paper.  In January 2009, the Genesis Block of the Bitcoin blockchain was mined, followed within days by the release of the software and the first transaction.

Within years, developers were introducing Bitcoin-like alternatives (“altcoins”) to the cryptocurrency universe.  These coins were typically issued with specific use cases in mind and are each unique due to the use of various scripting languages, consensus algorithms, transaction organization schemes, security protocols, etc.  The most successful of these altcoins is Ethereum.  Introduced in 2013, ETH is a blockchain based smart contract platform used by developers to build decentralized applications.  Other successful altcoins were created from forks in the Bitcoin and Ethereum blockchains.

According to Nomics, there are currently over 8,500 altcoins in circulation with 2,800 being actively traded although most have small volumes and insignificant market capitalizations.  According to the data company CoinMarketCap, at the time of this writing the total capitalization of the cryptocurrency market is about $255 billion.

Bitcoin’s capitalization represents about 66% of the total market at $169 billion.  Ethereum is next, holding 9% of the market.  The numbers drop off significantly from there with the next 10 largest cryptocurrencies combined representing 15% of the total market capitalization.

The Bare Bones Basics of Pseudonymous Bitcoin

In the 2008 Bitcoin white paper, a person (or persons) called Satoshi Nakamoto described a system of secure, encrypted digital signatures that would not require a third party to verify a transaction.  The system also addressed the  “double-spending” problem (i.e. ensuring that users were not able to transfer assets that had already been transferred).  This was accomplished via a blockchain – a public ledger distributed across a network of computers called nodes, each with its own record of all the transactions.

There is no centralized third party such as a bank or a clearinghouse required to confirm and maintain records.  Transactions are validated via a “proof-of-work” based consensus protocol and the resulting data stored in blocks by “miners” in the peer-to-peer network.  Miners compete to find a solution to a totally random problem by solving a complex computational problem and broadcast the valid block filled with transactions to the network to be verified according to the consensus rules.  Successful miners are rewarded with newly created Bitcoin for their efforts.  The security of the blockchain relies heavily on the overall computational power dedicated to the system by the miners.

The blockchain is a public immutable record of all Bitcoin transactions including the addresses and amounts. The nodes provide an auditable record of the current supply of Bitcoin as well as a complete historical ledger of transactions. Each transaction utilizes two “keys” – a visible hash of a public key that is assigned to the transaction and published on the blockchain and a private key that is known only to the user and acts as their signature.

For each transaction, the bitcoin blockchain records the public keys of the participants, the amount of the transaction and the time it took place.  While users may be pseudonymous regarding their interaction with a particular address, nevertheless, all of the addresses, amounts and transactions are available to the public on an immutable blockchain. Satoshi Nakamoto discussed this characteristic of Bitcoin in section 10 of the Bitcoin whitepaper.

The Rise of Exchanges, ICOs, Regulators and Scrutiny

It should not be surprising that a variety of governmental regulators would become interested as the crypto market grew.  Not only were new cryptocurrencies attracting significant amounts of capital investment using Initial Coin Offerings (“ICOs”), there were also a large number of exchanges opening to facilitate the trading and even the custody of investors’ crypto tokens.  In fact, it was the 2014 failure of the largest Bitcoin exchange in the world at the time, Mt. Gox, that likely accelerated regulatory interest in cryptos.

Many cryptocurrency trading exchanges provide a platform for crypto holders to execute transactions against fiat currencies – for example, exchanging US Dollars for Bitcoin or Bitcoin for Euros.  The exchanges must collect personal information about their account holders to satisfy KYC (Know Your Customer) and AML (Anti-Money Laundering) rules and the Travel Rule.

The information collected varies by the money transfer rules in the exchange’s jurisdiction but it typically includes the account holder’s name, address, phone number, email address and IP address. In addition, some exchanges and wallet service providers manage their customers’ Bitcoin holdings and therefore have access to private keys.

Many of the thousands of altcoins were originally issued in exchange for capital or as a way to participate in a prospective investment.  Since there were no specific regulations dictating the issuance of digital tokens, as there is with equity or fixed income issuance in traditional financial markets, and there are many bad actors looking to make a quick buck, consequently, many ICOs were fraudulent or manipulated. This predatory activity naturally set off alarm bells with regulatory agencies worldwide.

Bitcoin and altcoins are novel, highly technical, digital creations and are borderless by design.  Governmental regulation has been slow and sporadic as a result.  The US Securities and Exchange Commission believes that many tokens issued via ICO in exchange for investor’s capital are essentially securities and likely need to be registered.  Meanwhile, commodities regulators such as the CFTC in the US have ruled that Bitcoin and other proof of work coins like Litecoin and others are commodities and subject to regulation under the Commodity Exchange Act.

This has given rise to CFTC regulated Designated Contract Markets and Derivatives Clearing Organizations that enable trading in spot and derivative markets on Bitcoin, Bitcoin Cash, Litecoin, Ether, etc. like the CME, LedgerX, ErisX, Bakkt and unregulated markets like Deribit. Interestingly, despite the widely accepted designation of cryptocurrency, most national central banks do not categorize Bitcoin as a currency and therefore do not regulate it.

Regulations vary widely from state to state and nation to nation and there is no established, standard legal status for Bitcoin.  There are several countries that have banned its use entirely while others limit its use to specific types of financial entities.

Tax authorities have also weighed in on the legal status of cryptocurrencies as they endeavor to collect taxes on the proceeds from capital appreciation or trading gains.  The U.S. IRS issued its first notice on the subject in 2014 and has since subpoenaed Coinbase, a large US exchange, for customer data.

The IRS has contracted several companies that specialize in blockchain forensics in order to analyze the activity of specific blockchain addresses for potential criminal activity, fraud and tax evasion. Some governments, like Canada, even require tax residents to disclose their public keys for wallets and transactions so that the agency can verify taxpayer returns and others, like the IRS, have considered doing so also.

There are some countries that implement a wealth tax which is a tax on an entity's or individual's holdings of assets. The rates that apply on an annual basis to the value of wealth vary by country but some examples are Argentina's Impuesto a los Bienes Personales in 2019 with 0.75%, Canada with 0.4%, France with 1.5%, Spain's Patrimonio with 3.75%, the Netherlands with 1.2%, Norway with 0.85%, Switzerland with cantonal rates ranging to 0.94% and Italy's IVIE of 0.76% and IVAFE of 0.20%. Thus, even a hodler who makes no transactions would still generate tax liability on their Litecoin, Bitcoin or other digital assets.

Where Does That Leave Bitcoin Privacy?

So the cypherpunk dream of an anonymous, untraceable, ghost money payment system that is accepted anywhere in the world has yet to be realized.

Bitcoin’s publicly transparent design and use of public keys to document transactions were, at the time, necessary design elements for audit-ability and verification of the network.  However, for users that value privacy they, unfortunately, create fundamental weak spots in Bitcoin’s privacy shield. The effect is exponentially magnified when combined with the use of regulated exchanges that collect, database, archive and share the user’s information and transaction history.

After years of huge growth in both the value of Bitcoin and the infrastructure supporting the cryptocurrency market, Bitcoin remains a very tempting target for exploitation by bad actors. Unfortunately, these trusted third parties are security holes. Nevertheless, the Bitcoin blockchain has proven to be a secure public ledger that has never been hacked in its near 11-year history. It has proven to the world that a decentralized censorship-resistant network can produce a monetary product that market participants treat as a serious store of value.

Analyzing transactions on the blockchain can reveal the identity of Bitcoin users.  There are companies that have raised tens of millions of dollars that specialize in blockchain forensics.  Their clients are regulators and institutional investors requiring network analysis to detect illegal activities or hunt for tax evaders.  These companies employ sophisticated mathematical algorithms – big data analytics - to observe and trace specific Bitcoin addresses to certain websites or to individuals. They often have information sharing arrangements in place between other exchange clients or governments.

Additionally, criminal organizations either hack these organizations or bribe employees to get lists of users, their addresses and the value of their assets.

These data and privacy leaks become sources of profit for the exchanges, governments or criminal organizations and the costs are born by the users. In all of this, the “anchor” data for this type of analysis is typically the public address for a specific transaction or a wallet address.

By design Bitcoin is not fungible

Most cryptocurrency exchanges also utilize blockchain forensics to monitor for transfers of tokens that are linked to illegal activities such as money laundering, drug dealing or terrorism.  Authorities such as OFAC can blacklist Bitcoin addresses involved in such activity and Bitcoin that pass through these addresses become “tainted” and therefore less valuable.

Exchanges are basically required to screen for addresses and map transactions to specific entities in order to achieve regulatory compliance. The ramifications of the widespread use of forensic technology are many but certainly the constant mapping, tracking and identifying of addresses in the Bitcoin ecosystem erodes the privacy of all participants.

Probably the most susceptible component of the Bitcoin ecosystem are the cryptocurrency exchanges.  The majority of transactions are carried out on exchanges located around the world which act as deep liquidity pools. If they do not comply with the law or regulations then they will either be fined or the executives jailed like Charlie Shrem or operator of the Bitcoin mixer Helix.

The Mt Gox failure was but one of many exchanges that have lost customer property either by an incompetent or corrupt operator or at the hands of hackers or fraudsters through the years.  Just like banks, brokerage houses and credit card companies, exchanges are tempting targets for hackers looking to steal individuals’ identities and assets.  Once a thief has a users’ private key, the Bitcoin is totally in their control and can be irreversibly transferred anywhere within minutes.

Further, as exchanges are regulated entities, they are required to share user’s information as required to comply with local authorities.  Government agencies are also prime targets for hackers and the databases of multilayered bureaucracies are likely less secure than many private entities.  The IRS was famously hacked in 2015 and the personal information of over 700,000 taxpayers was stolen.


The unparalleled success of Bitcoin as a digital currency and store of value over the past decade is testament to both the genius of Satoshi Nakamoto and the diligence of the many entities that have executed, maintained and upgraded the network and the protocol along the way.  Bitcoin is the category creator of the cryptocurrency asset class and with a market capitalization greater than $170 billion with hundreds of thousands of individual and corporate holders conducting over one million transactions per week and the bellwether of the cryptocurrency asset class.

Because it is so valuable as a result of its characteristics such as scarcity, portability and salability, therefore, it has naturally become the target of hackers and fraudsters looking to take advantage of users and attempt to find vulnerabilities in the protocol and the network.  The forensic blockchain analysis industry has developed sophisticated techniques that can trace transactions and ultimately disclose the identity of participants in Bitcoin transactions.

At the same time, government regulators are requiring market participants to disclose significant amounts of personal information.  The sharing and storage of this data, particularly public or private keys, by exchanges and government entities represents a separate area of weakness to the security and privacy of the participants.

Technology is constantly evolving though and developers now have a decades worth of experience and information gleaned from Bitcoin and the multitude of altcoins. Bitcoin has stood the test of time but a close study of its strengths and weaknesses reveals that there may be an unmet need in the market of product offerings for extremely scarce ghost money.

MWC is largely unknown and less than six months old but by market capitalization is already the number three privacy coin behind Monero and Zcash and the number eleven proof of work coin behind Dogecoin and Digibyte. As MWC’s brand recognition increases, exchange listings proliferate, users conduct due diligence on the superior blockchain technology of Mimblewimble that delivers mathematically provable scalability, privacy and fungibility and get more comfortable with it applied in the base layer with MWC and the remaining HODL rewards are distributed and overhang absorbed by the market then the interesting exercise of price discovery can really get started.

What does a world look like where anyone with an $80 cell phone can run an extremely scarce ghost money full node mobile wallet behind TOR and do atomic swaps with BTC or their stablecoin of choice? That is on the MWC Roadmap and will hopefully be delivered before the end of the 2020.

Just how much does the market want extremely scarce ghost money? That opinion will be arbitrated in the orderbook. Good luck MWC hodlers!