Traditional centralized banks ensure privacy by limiting access to the private databases where they store the transaction history, balances, etc.
“The traditional banking model achieves a level of privacy by limiting access to information to the parties involved and the trusted third party.”
Bitcoin essentially inverts this model. In the Bitcoin network, all transactions are publicly announced so there is no way to limit access to who sees what transactions. However, Satoshi argues that there is still a way to maintain some level of privacy if the public keys of the users are kept anonymous.
“Privacy can still be maintained by breaking the flow of information in another place: by keeping public keys anonymous.”
Since public keys are represented as hashes, people can see the transactions happening in the network, along with any hashes which are associated with these transactions, but they cannot link them to a specific person.
Satoshi suggests that in order to increase privacy, we should create a new key pair for every new transaction.
“The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone.”
This way, every transaction you send comes through a new public key, making it harder to trace a single Bitcoin address throughout its entire history of transactions.
Nonetheless, Satoshi says that it will still be possible to link transactions to a single address. And he was right. For several years, governments all around the world have been trying to trace Bitcoin’s transactions. This is because by linking transactions to fixed wallet addresses, governments have an even better means of doing forensic analysis.
In one ClubHouse session with Katie Haun, who previously spent a decade as a federal prosecutor focusing on fraud, cyber, and corporate crime, she said that government agencies actually preferred Bitcoin because it’s easier to trace crimes.
In any case, it is because of such concerns that privacy-enabling coins such as Monero, Zcash and Dash were built. Beyond that, there are new breakthroughs such as zero-knowledge proofs, which serve as promising routes to having private transactions.