A single transaction can be enough to undo years of careful Bitcoin privacy practices, according to Cake Wallet's chief operating officer.

Speaking on the Bitcoin Rails podcast this week, privacy activist Seth for Privacy outlined strategies for protecting privacy when using Bitcoin and argued that prioritizing privacy is essential for the West.

The topic has regained prominence since the developers of the private coin mixer Samourai Wallet went on trial last year and were subsequently imprisoned — a case that put the makers of privacy tools at the center of a legal debate in the United States. Just this week, however, the U.S. Department of the Treasury scrapped two long-stalled crypto surveillance proposals, handing a major win to privacy advocates and the digital asset industry. How U.S. regulators will treat self-custody wallets and privacy tooling going forward remains an open question after the rollback.

According to Seth, the most common pitfall involves combining coins acquired through different channels. KYC — short for know your customer — refers to the checks that regulated exchanges and other financial services typically require, meaning coins bought through them carry a link to a user's identity, while no-KYC coins are acquired without leaving that link. “If you ever spend your no-KYC coins with one of your KYC coins — which if you just let the wallet do its thing, it could do because it doesn't know the difference — you immediately connect all of the non-KYC Bitcoin that you spend in that with your identity,” he said, referring to UTXO management, a practice some wallets label “coin control.”

Bitcoin wallets do not hold a single balance. Instead, they hold a collection of separate unspent transaction outputs — UTXOs — each one a discrete “coin” from a specific past transaction. When a payment is larger than any single UTXO, the wallet picks several and combines them as inputs to the same transaction — an easy mistake to make, Seth highlighted. Because Bitcoin's ledger is public and permanent, such a merge writes the linkage between coins of different origins into the shared record, where it can be traced by anyone.

Seth also drew a contrast with the global South, where people have experienced more oppressive states, noting that citizens in the West will need to “feel pain” in order to realize how important privacy is.

Still, he added that attitudes were changing and people were getting more serious about protecting their privacy. “It has been shifting, in the last five or six years a lot of people — even in the West — are starting to think [privacy] really matters, we really need to think about this seriously now,” he said.

Cake Wallet is a privacy-oriented, self-custody, open-source wallet. Earlier this year, the wallet integrated Bitcoin's Lightning Network into its platform. Using the second-layer solution is not only faster and cheaper — it also offers more privacy than Bitcoin's main chain, because payments there are settled off-chain rather than recorded individually on the public ledger.

While Cake Wallet supports other cryptocurrencies, including privacy coin Monero, Seth for Privacy added that he would love it if the digital coin didn't exist. “If Bitcoin's privacy got good enough that you could use it and have at least almost as good privacy as Monero without massive hoops to jump through, and Monero ceased to exist, that's fine,” he said. “I would much rather the thing that more people use has better privacy than a more niche tool that has perfect privacy, and that's something that less people are using because it's less well known.”

This article first appeared on Bitcoin Magazine and was written by Mathew Di Salvo.