Cody Wilson is working on software that covers the tracks of financial transactions made with bitcoin. Steve Jones for the Wall Street Journal
AUSTIN, Texas— Cody Wilson rattled lawmakers and law-enforcement agencies with a plastic gun created from a 3-D printer, home computer and blueprints he posted online for anyone to download.
Now, the 25-year-old law-school dropout is about to launch software aimed at covering the tracks of financial transactions made with bitcoin, the virtual currency that has exploded in popularity among spenders and speculators—and raised concerns among regulators that it might be used for illegal activity.
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"We need an anonymous cash online," says Mr. Wilson, who oversees from his apartment near the University of Texas at Austin about a dozen self-described antiestablishment techies working on the software, called Dark Wallet. Some of them are paid in bitcoin.
"It's not that I want you to buy drugs," he says. "It's just that I think you should have the freedom to do it."
Mr. Wilson is one of the most prominent examples in a band of hackers, programmers and agitators trying to deploy technology in ways that disrupt what they see as limits on personal freedom. Even though they often live, work or mingle in Silicon Valley, they claim its rise has created too much technology that benefits corporate America or helps government snoop.
In the 1980s, such techies were known as cypherpunks and obsessed with using complex encryption to keep communications secret. The modern version is more consumer-oriented and often focuses on mainstream products, such as Web browsers, open-source software and iPhones, with the aim of having world-wide impact.
Mr. Wilson, who graduated from the University of Central Arkansas in 2010 and then started law school here, shuns political labels. His bedroom features a Texas flag that says "Come and take it," a bookshelf with copies of the Federalist Papers and Austrian-born economist Friedrich von Hayek's libertarian treatise "Road to Serfdom," and several random bullets.
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While bitcoin critics claim the online currency is vulnerable to use to lawbreakers because people can make online transactions without giving their real names or addresses, Mr. Wilson and other bitcoin purists says it isn't secret enough.
To prevent fraud, all transactions made with each jumble of computer code tied to the currency are automatically posted in a public ledger called the "block chain." That means it is possible for authorities to track a person's transactions if they can determine the user's unique bitcoin address.
Dark Wallet is a no-frills, low-budget push led by Mr. Wilson to make bitcoin the electronic-commerce equivalent of a Swiss bank account. Attached to a browser such as Google Inc. GOOG +1.11% 's Chrome, Dark Wallet will try to scramble the long strings of numbers and letters that form bitcoins. The scrambling will occur as bitcoins are spent, making it harder to detect who is buying what.
The first version of Dark Wallet is set for release in early 2014, though a specific date hasn't been decided. It will be free, though the developers are accepting donations.
Supporters concede it is likely impossible to make bitcoin transactions absolutely untraceable. Still, if Dark Wallet delivers as hoped and catches on with the virtual currency's users, law-enforcement officials will have more trouble tracking the flow of online commerce, some people close to U.S. government officials say.
Scott Dueweke, a virtual-currency expert at consulting firm Booz Allen Hamilton Inc.,BAH -1.99% includes a Dark Wallet video made by Mr. Wilson when he explains bitcoin to regulators and law-enforcement officials. Mr. Wilson's video features ominous music and an image of Edward Snowden, the National Security Agency contractor turned leaker.
"It spooked the hell out of them," Mr. Dueweke says.
Stephen Hudak, spokesman for the U.S. government's Financial Crimes Enforcement Network, declined to discuss Dark Wallet, but says: "We'd be concerned about anything that would increase the threat level of money laundering."
Federal officials also have said they see benefits from digital forms of money. Federal Reserve Chairman Ben Bernanke told lawmakers in November that online currencies "may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system."
Jon Matonis, executive director of the Bitcoin Foundation, a nonprofit group that serves as unofficial curator of the online currency, released on the Internet in 2009, says the Dark Wallet project is consistent with his efforts to promote and develop the digital cash a private, government-free currency.
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But some of Dark Wallet's image and marketing are hard to stomach, he says. "I have a serious problem with what they named it," he says. "The average person ... will think it's this criminal thing for buying drugs."
Mr. Wilson focused on Dark Wallet after his plastic-gun effort was blocked. In 2013, he posted online instructions for how to make a gun called "Liberator" with 3-D printing. Three-dimensional printers use plastic materials to make objects as simple as a figurine or coffee cup.
Federal officials warned that new plastic guns could fool metal detectors and compromise security, and the State Department ordered him in May 2013 to remove his online gun blueprints, citing arms-export laws. He complied.
Bitcoin captured Mr. Wilson's interest. PayPal founder Peter Thiel, a billionaire libertarian, invited Mr. Wilson to a private Wyoming retreat, where the two men discussed the future of bitcoin. Mr. Thiel sees promise in the young entrepreneur, a person close to the billionaire says.
In another sign of Mr. Wilson's growing reach, he helped find a lawyer for Ross Ulbricht, the alleged ringleader of a popular Internet black market called Silk Road that used bitcoin as its currency. In November, federal prosecutors filed criminal charges against Mr. Ulbricht that include conspiracy to traffic in narcotics and hack computers. His lawyer, Joshua Dratel, says Mr. Ulbricht is innocent.
Mr. Wilson says Mr. Ulbricht should be embraced by the libertarian community. Dark Wallet could make it harder to bust users of future Silk Roads of the future, Mr. Wilson says.
His closest partner in Dark Wallet is 25-year-old Amir Taaki, a computer coder in the U.K. who sometimes wears apparel—shirts, pins—with the online currency's symbol: a "B" sliced by two vertical bars. Mr. Wilson, who sometimes wears sunglasses at night, is the management and fundraising expert. "They're literally the only prescription glasses I have right now," he says.
An online fundraising effort for Dark Wallet has so far attracted about $100,000, Mr. Wilson says. All told, Mr. Wilson says he has raised nearly $250,000, most of it in bitcoin and through Defense Distributed, a self-described nonprofit group he began in 2012.
The Internal Revenue Service hasn't approved the group's application for tax-exempt status. The agency declined to comment on the reason or the application. Mr. Wilson says he has been asked to explain his dealings with the State Department.
Mr. Wilson dropped out of law school in May to work on plastic guns full-time. Later the same day, he got the government's edict to remove his online gun blueprints. Because of his suspicions of the government, Mr. Wilson had his home address removed from the University of Texas law school's student directory. On business matters, he communicates with encrypted email or chat systems.
Dark Wallet "captures everything we want to do," he says. "My particular brand of activism is crisis-forcing."
Write to Danny Yadron at danny.yadron@wsj.com