You’ve probably heard about the perks of crypto - faster transactions, lower transaction fees, and transparency. But have you thought about the data privacy challenges that come with it?
If you haven’t, let’s think about it for a second. 15,000 businesses worldwide already accept Bitcoin as payment, 2000 of which are based in the United States. This could only mean one thing - challenges in data privacy will continue to grow.
That said, if cryptocurrency is your next stop, or you’ve only recently adopted it, let’s talk about the main privacy issues that come with it, along with some tips on how to deal with them.
Why data privacy is important in cryptocurrency
Yes, data privacy is always important, no matter the asset. But even more so when it comes to cryptocurrency payments. Why? Because cryptocurrencies are more prone to risks such as:
- Identity theft: Cryptocurrencies are pseudonymous (we’ll explain more about this later on), but fraudsters have managed to find ways to link wallet addresses to a user’s identity. This means that they can easily compromise personal information.
- Money laundering: Because they’re pseudonymous, money laundering is also a lot easier with cryptocurrency transactions. Needless to say, you must get familiar with transaction monitoring and customer risk assessment in AML (anti-money laundering). Were your business to receive funds that were laundered, you could find yourself trapped in money laundering schemes against your wish.
- Regulatory compliance issues: Even though cryptocurrencies are known for their lack of centralization, governments are doing their best to enact certain laws for businesses dealing with cryptocurrency transactions. Failing to adhere to these could lead you to pay penalty fees or, worse, tarnish your business’s reputation permanently.
You know, customers who are willing to pay with cryptocurrencies are usually wary. They have a pretty good hang of digital currencies and are aware of the risks associated with them. So, when you implement the necessary security measures, you’re more likely to gain their trust.
Data privacy challenges in cryptocurrency
There’s nothing wrong with adopting trends, even if they’re not as traditional. What’s wrong is getting so excited about its benefits that you forget to consider the potential risks. Especially when you’re not the only one that could be affected—your customers could also.
That said, let’s get you prepared.
Understanding pseudonymity vs. anonymity
You might have heard that you can choose to hide your identity when conducting cryptocurrency transactions. And this is correct. However, this doesn’t mean you’re staying anonymous but instead pseudonymous. It means that instead of your real name, you can use a pseudonym or alias that hides it, but your transactions can still be tracked and linked to your real identity.
Criminals are having a field day with this information. They’ve learned to connect wallet addresses to real people, leading to identity theft and all kinds of fraudulent activities.
The challenge of immutability
One thing about cryptocurrency transactions is that once they’re recorded, no one can erase or alter them. This is great for those who want to keep it transparent, but there’s a catch.
Let me give you an example. Let’s say you accidentally record a customer’s transaction with their personal details, such as their email address, in the transaction notes. You won’t be able to do anything about it, as once this data is added to the blockchain, it’s permanently integrated into the ledger. So, fraudsters are left with a free pass to access this information.
Understanding public vs. private blockchains
When looking to adopt cryptocurrency as a payment, you’ll need to make one very important decision—whether to go for public or private cryptocurrencies.
Let’s go over these in more detail:
- Public blockchains: If you decide to use the most famous cryptocurrencies ever, such as Bitcoin and Ethereum, everyone on the network will be able to see your transaction details. These blockchains are designed to be transparent, which, although attractive, means that your customers’ sensitive data can be easily compromised.
- Private blockchains: You won’t have this privacy issue with private blockchains, as they allow you to choose who will have access to the transaction data. But keep in mind that private blockchains aren’t as transparent.
When you think about it, it might be more logical to implement private blockchains. Cause who wants to deal with privacy issues, right? However, the main reason why businesses started adopting cryptocurrencies is their transparency, which private blockchains unfortunately lack.
The challenge of smart contracts
Businesses that accept cryptocurrencies as payments also lean on smart contracts. You may have heard of these, but for those who haven’t, smart contracts are basically self-executing contracts that have the terms of the agreement written into code. So, what does this mean?
It means that you don’t need intermediaries to carry out transactions and agreements. Smart contracts will do this for you. Let’s say that you’re selling software.
- You’ll first specify the terms of the sale, such as the price of the software. Once you've written the contract, you’ll upload it to the blockchain so that when a customer reads it, they can learn all about what they need to do to purchase it.
- Once they make the cryptocurrency payment, the smart contract detects it and proceeds to verify whether the amount is the one you require.
- If it is, the smart contract will give the green light for the delivery of the software license to the customer and will record it on the blockchain.
As compelling as it sounds, since the most widely used blockchain for smart contracts is Ethereum, smart contracts are also immutable and transparent. This means that all of the above data privacy challenges apply to smart contracts as well, so you need to be careful.
How to deal with data privacy challenges
These data privacy challenges with cryptocurrency transactions are exactly what they are—challenges. And what do we do with a challenge? That’s right! We learn to overcome it.
We know that fraudsters will never give up on finding ways to get their hands on sensitive information. We can’t stop them, but we can learn to deal with these risks.
When you want to protect data, you must learn how to manage it. You can start by familiarizing yourself with data privacy management solutions designed to protect your customers’ privacy and secure transactions. You can use these solutions to:
- Convert sensitive data into an unreadable format. This means that even if someone gains access, they won’t be able to read it. Yes, they act as encryption tools.
- These solutions can also help you comply with cryptocurrency regulations at all times. And trust me, when it comes to cryptocurrencies, these regulations tend to change quite often, so staying updated with potential changes is more than necessary.
You can also choose privacy-focused blockchains, such as Monero and Zcash. These will protect your customers’ data with better security measures, that is, with more advanced cryptographic techniques to conceal transaction details, making it much harder for fraudsters to trace or access your customers’ sensitive information.
What you can also find useful when dealing with data privacy challenges in cryptocurrency transactions are Zero-Knowledge Proofs (ZKPs). This is also an advanced cryptographic technique that manages to maintain privacy without sacrificing security in the process.
This technique allows you to let the other party know that you know a certain value, such as a password or transaction detail, without having to reveal the information. You might find this incredibly beneficial, especially if you’re conducting transactions on public blockchains.
Staying safe and sound
It’s true that cryptocurrencies make everything easier and more affordable, which is why businesses continue to adopt them. But these transactions aren’t without challenges.
As probably one of the biggest challenges, you shouldn’t ignore data privacy. If you don’t address it properly, you’re putting your and your customer’s sensitive data at risk. It can also ruin your business reputation and make it impossible for you to bounce back.
