OMFG, Bitcoin is so anonymous!
The physical Bitcoins (like those by Casascius) work exactly like this: physical coins containing a private key hidden behind a seal.
Lets say I give you a "physical" BTC worth 1 million BTC. Is there any way for me to prove to you that I have erased the private key to this BTC address?
No, there isn't. Anyone who is caught using physical BTC coins is a sucker who doesn't understand the system. They can be very easily scammed by the very man who created the "physical BTC coin". After all, all I need to do is keep a copy of the private address, and transfer the money sometime after I've "sold" you the BTC.
Lets say the IRS are watching this (and why wouldn't they be?). They now know a multi-million dollar transfer has happened, and are beginning to track it down.
Unless you have some anonymous way of depositing BTCs into random addresses, all transfers into and out of that address will be stored into the BTC Blockchain _for life_.
No, seriously. Forever, for the rest of Bitcoin's history, there will be a record that two addresses transferred BTC between each other.
This will be timestamped, cryptographically signed, and archived by the BTC Network. That is... what Bitcoin is after all. It is the ultimate ledger.
Alternatively, could I use a web wallet to bounce coins around to obfuscate ownership?
Researchers can easily track such trivial ways of "attempted anonymization".
>>> We found out that there is a huge number of tiny transactions which move only a small fraction of a single bit- coin, but there are also hundreds of transactions which move more than 50,000 bitcoins. We analyzed all these large transactions by following in detail the way these sums were accumulated and the way they were dispersed, and realized that almost all these large transactions were descendants of a single transaction which was carried out in November 2010. Finally, we noted that the subgraph which contains these large transactions along with their neighborhood has many strange looking structures which could be an attempt to conceal the existence and relationship between these transactions, but such an attempt can be foiled by following the money trail in a suciently persistent way
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ALL BTC transactions are FOREVER archived in the bitcoin ledger. Its how it works.
That is also a pretty cool paper as well. Thanks for the link.
The recommend use of Bitcoin is that every payment you receive should be to a new address. This maximizes privacy and its necessary when you may have multiple concurrent payment in order to sort out which one you've received. Common wallet software (including the reference client) also always pays change to a new address.
... so it's a bummer that the authors of the paper went on to describe every coin assigned to an address which has never spent as in savings (roughly 60% of them), if not for a couple things engaging in the bad practice of address reuse they would have found 100% in "savings".
This joining means that even if you've been super careful to never link address A to you because you've done sketchy things with A, if at some point in the future (even distant future) you join A with another address that the someone CAN track, they now know you own A.