The European Commission published an“action plan” (pdf) for stricter regulations against methods that help terrorists get financed. The paper showed prepaid cards and Bitcoin as two payment methods that would be impacted by these regulations if they are approved by the European Parliament by June.
In Bitcoin’s case, the rules will force the verification of users whenever they want to convert their Bitcoins into real currencies.
EU Commission Vice President Valdis Dombrovskis said:
“We must cut off terrorists’ access to funds and enable authorities to better track financial flows to prevent devastating attacks such as those in Paris.”
However, in a post published by the European Union’s own website two weeks ago, experts were warning MEPs that they shouldn’t overstate the risk of Bitcoin, especially when cash is even more anonymous than Bitcoin:
"In fact cash is likely to be a much more anonymous means of transferring value," said Sean Ennis, a senior economist from the OECD. "The ownership string for virtual currency is public and that allows a tremendous amount of analysis of transactions."
This is backed by the EU’s own law enforcement bodies such as Europol, who so far haven’t found any reason to be worried about terrorists being funded through Bitcoin:
"Despite third party reporting suggesting the use of anonymous currencies like Bitcoin by terrorists to finance their activities, this has not been confirmed by law enforcement."
Bitcoin isn’t anonymous by default, but it is pseudonymous. All transactions from a Bitcoin address are permanently logged into the Bitcoin blockchain, and anyone can see which addresses exchanged money.
To actually identify the person behind the address, law enforcement would also need to tie that Bitcoin address to a real person, in the same way that all web tracking happens. Intelligence agencies and law enforcement have become adept at tracking people online, so tracking down a Bitcoin user is no different.
The only time Bitcoin is truly anonymous is when people use Tor to create the addresses and then transact from them, also over Tor. The moment someone’s identity is tied to a certain “anonymous address,” they become exposed.
The European Union’s solution is not to ban Tor (at least not yet), but to force Bitcoin users to reveal their identity the moment they try to exchange Bitcoin for real currencies. Most, if not all, of the major digital currency exchanges in the EU are already heavily regulated and demand photo IDs and proof of address before they enable your account, so it’s not clear at whom this regulation is targeted.
Bitcoin and other digital currencies or blockchain-based platforms are only just beginning to gain traction with big companies, so there is also a worry that heavy regulations could stifle these technologies before they get a chance to get off the ground.
Lucian Armasu is a Contributing Writer for Tom's Hardware. You can follow him at @lucian_armasu.