From a privacy and security perspective, an ideal payment system would permit payment transactions with the anonymity of cash but would also deter fraud. It would protect against identity theft but also discourage money laundering.

Although reasonable people may disagree about whether Bitcoin is that ideal payment system, Bitcoin is worth studying for its privacy and security lessons and its potential to emerge as an important additional payment system.

1. Limited Collection and Use of Information.

One of the defining features of Bitcoin is the ability to process transactions with limited sharing of personal information. The merchant provides its Bitcoin address to the customer. In a physical store at point-of-sale, this can occur through the merchant showing a QR code that the customer scans with his or her mobile Bitcoin digital wallet App. Because each Bitcoin is accounted for in a public register of every transaction in the Bitcoin network, the customer, there is no chargeback risk once the merchant has received confirmations against the public register. There is no need to collect or use information about the customer for the purpose of the transaction (although information may be collected for points programs, warranties, and delivery of products, etc.). Unlike cash, there is less need to be concerned with fake bills.

2. Consumer Safeguards for Transaction.

Bitcoin permits the use of disposable addresses and each transaction is cryptographically protected. A merchant or customer can create a new address to which a person can send or receive Bitcoins for every transaction. In addition, the cryptographic nature of the currency means that each transaction is supported by a public and private key. Provided that the private key is kept secure by its owner, the ability to conduct a fraudulent transaction is substantially reduced. In processing a transaction, the merchant does not have access to the private key information that would be necessary to allow a third party to fraudulently use the consumer’s wallet. The merchant is responsible for safeguarding the merchant’s wallet; the consumer is responsible for safeguarding the consumer’s wallet.

3. Ability to Trace Bitcoin Chain and Gatekeeper Nodes.

Although the jury is still out, there is no prima facie reason why there cannot be gatekeeper nodes to deter money laundering...

Another defining feature of Bitcoin is that each transaction is recorded in a publicly verifiable chain of transactions. This means that it is possible to trace all exchanges involving particular Bitcoins. What is interesting is that even though it is possible to maintain a high degree of anonymity in connection with the transaction itself using techniques that go beyond this brief note, there will be certain instances where anonymity will not be possible, such as when exchanging Bitcoins for a national currency or vice versa. Although the jury is still out, there is no prima facie reason why there cannot be gatekeeper nodes to deter money laundering.

Whatever one thinks of Bitcoin’s future, these privacy and security measures are worth further thought and analysis when considering digital payment systems.

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[Tim Banks is a partner and the Canadian Lead for the Privacy and Security practice at Dentons. He advises clients on data lifecycle management, privacy disclosures, privacy and security contractual requirements, cross-border data transfers, cloud computing, and data breach management, as well as consumer contracting requirements, unclaimed property and gift card regulation.

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