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Bitcoin payments could be a landmine for companies

Businesses that accept Bitcoins as payment risk making the transactions publicly traceable, which could get companies in trouble with government regulators, experts say.

The privacy weakness within the digital currency's payment network was reported on Wednesday by Wired, which found troubling possibilities related to transaction tracking. The problem is in the way the Bitcoin peer-to-peer network works.

The open source payment system associates senders and recipients of money with an identification number meant to make transactions anonymous. However, all sales are recorded in the Bitcoin public ledger, so any entity could make a payment to a company and then track all other payments to that address.

This kind of information could provide interesting details of a business' supply chain, finances and spending habits, despite the use of ID numbers, the report said.

In 2006, The New York Times used search records posted on AOL's research website to identify one of the site's members, and, with her permission, interviewed and identified her. AOL had grouped each member's records with a unique number.

Bitcoin use is expected to grow as mobile payment transactions rise. The worldwide transaction value will top $235 billion this year, a 44% increase from last year, says the research firm Gartner. Money transfers account for more than 70% of transactions, with merchandise purchases a distant second at roughly 20%.

The business advantage of accepting Bitcoins is in reducing the number of more expensive credit-card transactions. However, the payment service carries the risk of hearing from federal regulators.

[Also see: Bitcoin storage service, Instawallet, suffers database attack]

"There is a lot of uncertainty today about the scope and sharing of consumer protection responsibilities -- and associated liability -- for digital and mobile financial services," said Mark W. Brennan, an attorney at the law firm Hogan Lovells and a member of its global payments team.

The Federal Trade Commission (FTC) has recommended that companies accepting new financial products and services, such as Bitcoin, take the responsibility of ensuring consumers' personal data remains private, Brennan said. In addition, companies should ensure that all financial information moving through the payment channel have enhanced authentication, end-to-end encryption and secure storage.

"These Bitcoin developments are a reminder that businesses in the financial services ecosystem should assess their existing data privacy and security practices and other terms and conditions of service to ensure that they are consistent with evolving legal developments," Brennan said.

Adding to the potential privacy woes are the data-mining tools that are sure to be developed to leverage the information stored in the Bitcoin public network, particularly if the data has value for marketing purposes, lead generation or some other profitable endeavor, said Murray Jennex, an associate professor in information systems at San Diego State University.

"The research community is going to find some way to utilize this big chunk of data," he said.

This could be seen as the cost of using Bitcoin as an inexpensive payment service. "There is no such thing as free; there's always a cost," Jennex said.

Read more about network security in CSOonline's Network Security section.


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