The pseudonymous nature of bitcoin is an oft-debated characteristic of the technology and it brings up a host of opinions, some of which are valid and others, not so much. Although I believe that bitcoin is a better payment system than current conventional systems, its futile to argue that pseudonymous (or anonymous) financial transactions over the network are a problem or a benefit of bitcoin itself.

The real question that needs to be asked is: should those that participate in the bitcoin network adhere to the same personal identification standards (commonly referred to as KYC or Know Your Customer) as those that are set for conventional payment systems? And if so, why?

There are many who strongly support the idea that, as citizens of free and democratic countries, we have basic personal rights to financial privacy, including financial transactions. This is a nice idea and there are several valid business reasons that support this concept. That said, we have to take into consideration the reality of how our government agencies operate.

But before I turn to that, its important to note that in order to setup a conventional bank account regardless of whether its a personal or business account we must all provide detailed personal information to our bankers. What most of us do not correlate is that a bank account also enables us to participate in and transact using fiat currencies and conventional payment systems such as Visa, MasterCard, Interac, etc. I dont think anyone would argue with me over this.

So back to our government agencies: across the developed world, governments have chosen to track financial transactions as a primary method of combatting illicit business activity. This mandate gained momentum with the U.S. war on drugs and has been bolstered considerably by the perceived war on terror. The reality is that this is a directive that our elected governments have chosen to enforce so we all must be aware of it and take it into consideration.

As a result of this strategy, government-based banking and financial services regulators have put stringent rules in place that require banks, financial service providers and similar to track and report, if necessary, on our financial transactions. Because our personal information is provided to the banks at the time of opening a bank account, our personal information is also passed on to government agencies, if required.

Regardless of their reasoning or the validity of their directives, governments use conventional banking and payment networks to monitor commerce across the globe for perceived illicit activity. The information they collect holds a tremendous amount of value and they have built significant infrastructure around it.

Now along comes bitcoin, which operates independent of conventional banking networks and it is a decentralized global network. No central authority has control over the bitcoin network. This is a major benefit of the bitcoin network, but its innovative structure is a cause for concern for government agencies. They do not and cannot control the bitcoin network so they cannot track financial transactions and therefore cannot use their conventional methods to track perceived illicit activity.

Banking regulators have sent messages to banks suggesting that they avoid doing business with individuals or companies involved in bitcoin. They have often used the rational that bitcoin is too risky as a speculative investment as the reasoning for their warning. This is a fair warning, but I suspect that the explanation above is the primary reason they have asked the banks to step back from bitcoin.

Banks can still choose to work with those associated with bitcoin, and were seeing some forward-thinking banks doing just that. Its my view that bitcoin has already passed the point of critical mass and Id be very surprised if it does not continue to proliferate. However, its quite uncommon for a bank to go against the suggestion of their regulator. The government regulators hold a lot of power over the banks and getting on the wrong side of them can make for a miserable time. Its therefore understandable that banks are cautious and most of them have done exactly what the regulators have recommended in regards to bitcoin.

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Bitcoin isnt risky when you know your customers