The Chief Operating Officer of Cake Wallet warned that a single transaction could expose years of careful Bitcoin activity.
On this week’s Bitcoin Rails podcast, activist Seth for Privacy discussed different ways to protect privacy when using Bitcoin, stating that in the West, valuing privacy is essential.
Since the developer of the privacy coin mixer Samourai Wallet was tried and subsequently imprisoned last year, Bitcoin privacy has once again become a hot topic.
However, this week, the U.S. Treasury withdrew two long-stalled cryptocurrency regulatory proposals, delivering a major victory to privacy advocates and the digital assets industry.
Seth said: “If you spend your non-KYC tokens together with your KYC tokens—if your wallet automatically handles this, as it might, since it can’t distinguish between the two—you’ll immediately link all the non-KYC bitcoins you spent in that transaction to your identity.” He is referring to UTXO management, also known as “coin control” by some wallets.
A Bitcoin wallet does not hold a single balance; instead, it holds a set of independent unspent transaction outputs (UTXOs)—each being a separate "coin" from a specific historical transaction.
When you send a payment larger than any single UTXO, the wallet selects multiple UTXOs and combines them as inputs in the same transaction—Seth points out that this is prone to errors.
Seth added that citizens in Western countries need to "feel the pain" before they realize how important privacy is, compared to people in the Global South, who have experienced more oppressive state systems.
However, he also noted that attitudes are shifting, and people are becoming more serious about protecting their privacy.
He said, "Over the past five or six years, many people—even in the West—have begun to realize that privacy is truly important, and we really need to take this issue seriously now."
Cake Wallet is a privacy-focused, self-custodial, open-source wallet. Earlier this year, the wallet integrated the Bitcoin Lightning Network into its platform.
Using this Layer 2 solution is not only faster and cheaper, but also offers greater privacy than the Bitcoin mainchain.
Although Cake Wallet supports other cryptocurrencies, including the privacy coin Monero, Seth for Privacy adds that he actually wishes this cryptocurrency didn't exist.
He said, "If Bitcoin's privacy is good enough that you can use it, and its privacy is at least close to Monero's without going through a lot of cumbersome steps, then Monero wouldn't matter even if it didn't exist."
I’d prefer something that more people use to have better privacy, rather than a niche tool with perfect privacy but fewer users and lower visibility.