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One common problem when organisations, such as charities or governments, donate money to good causes is that it becomes very hard to track where the money went.

For example, there are accusations of money unintentionally being used to purchase weapons instead of providing food. Naturally, the organisations handing out the money do their best to keep track of it, mainly relying on accounting and reporting procedures, but these chains become complex and there are many ways to obfuscate the money trail.

Is there a way, even if it is not yet implemented, that Bitcoin would be able to provide a better solution than existing in this scenario?

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By itself Bitcoin doesn't provide a complete solution however it could be used in conjunction with a trusted non-governmental entity to track charitable flows. The issue is that while Bitcoin provides public and irrefutable evidence of monetary transfers it doesn't (and shouldn't) provide information on who owns those accounts. It would require some mechanism of registering ownership of accounts similar to how an SSL cert is used to not just encrypt traffic but to also validate ownership of the site.

Using a system of cert authorities and public key encryption one could create "public and verified" addresses. This has potential uses beyond just Charities. The Bitcoin network itself should always remain psuedo anonymous. It was designed to have properties of digital cash and trying to force verified identities into the network would be a mistake.

A better solution would be building a framrwork that allows entities to volentarily have their identitiy validated. They could then be issued a digital cert which would enable them to sign an address making it public & verified.

Many businesses would benefit by linking an anonymous Bitcoin address to their real world identity to improve the trust and confidence of customers and suppliers. Remember Bitcoin is irrevocable so this present unique challenges if it were ever to become mainstream. If a major store (Amazon for example) decided to accept bitcoin and was hacked, the attacker could replace Amazon payment address(es) with their own. Unsuspecting customers would be paying the wrong entity and would have method of reversing those fraudulent transactions. The larger the sales volume the more tempting the target. In the Amazon example even if the attack was detected within minutes a sizeable amount of funds could be diverted.

To protect against this thread an entity could use a "public & verified" payment address. Wallets & browsers could implement changes to warn users that an address in unverified, similar to how browsers use SSL today to provide warnings or assurances to users.

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Yes and no, let me elaborate:

No 1) If you get a Bitcoin address from someone, you can assume it belongs to them. On the other hand, someone could pretend to be that person, and you have no way to double check using Bitcoin-only means. A wire transfer address could potentially be checked and traced to who owns it.

No 2) When you send coins to someone through Bitcoins, you can't track much, asides whether they spent the coins or not using a Block Explorer. Sending money through banks leaves a more defined trail, as the accounts are assigned to someone. Someone might try laundering money, but generally you could potentially check what they did with the money (to some extent, assuming the bank cooperates).

Yes 1) If you send someone Bitcoins, they still remain anonymous, and nobody without getting to your wallet can know how much coins you have. If you send coins to the people in need, or charities you can trust, you can be almost sure that nobody will steal coins from them (for example, if a corrupt government knows how much you have in your bank account, they can put some pressure on you to get your money).

Yes 2) If you send Bitcoins to people or organizations that are working against the corrupt government (for example, women's right movement activist in a women-oppressing country), the government has no means of cutting them away from the coins, or figuring out who supports them. This allows you to finance such people without endangering either you, or the unpopular person or organization.

All in all, Bitcoins allow you to send coins to anyone and nobody can stop either you or them from participating in the transaction. On the other hand, it requires more trust and allows for even smaller ability to trace the money once it is sent.

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    I'm unconvinced about both "No"s since they could be circumvented by mandating that each link in the money chain is attached to a known Bitcoin address that is in turn attached to a known entity (person or corporation). The known addresses don't have to be made public, just known to those checking the chain. – Gary Rowe Oct 20 '11 at 16:51
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    Yes, they can be mitigated, but those are also things you have to keep in mind. – ThePiachu Oct 20 '11 at 19:49

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