Are Cryptocurrency Transactions Anonymous? What You Should Know!
Have you ever wondered why there is a preconceived notion about bitcoin being used to facilitate fraudulent transactions? Not denying the existence of it but what is common to this notion is the belief that transactions in cryptocurrency cannot be traced.
Cryptocurrencies are generally perceived as entirely anonymous, untraceable, and interference-free forms of payment. However, on a closer look, you’ll discover that these digital transactions can expose a lot more personal details than you think.
What is Cryptocurrency?
Cryptocurrency is a type of digital currency/virtual money that operates as a means of exchange over a computer network, and is not supported or maintained by any central Organization such as a bank or government. A very good example is Bitcoin.
The fact that cryptocurrency employs encryption and has no physical representation makes it very difficult to forge, it is however equivalent to real-world currency in all other respects like being a medium of exchange.
Even if you are not a “guru” in the financial world, it is very unlikely that you’ve never heard of Bitcoin. This is because, since its creation in 2009, Bitcoin has risen to be the world’s largest and most popular digital currency; so much so that its success and value inspired the creation of other digital currencies.
How Does Bitcoin Work?
Bitcoin functions using a peer-to-peer decentralised network. What this means is that it can be transferred from a sender directly to a receiver, without the help of a third party.
Every transaction takes place within a blockchain. Think of a blockchain as transparent ledger of transactions. A blockchain is a Distributed Ledger Technology (DLT) that consists of a chain of blocks for storing records on a Decentralized Network.
It basically shows “who’s paid what to who?”.
So as long as you’re part of that blockchain, you can see all the transactions made on the explorer. This makes crypto transactions secure and easily traceable. For example, using the blockchain explorer you can see the activities carried out with a wallet address on the blockchain.
Bitcoin wallets are created using an address (scrambled letters and numbers), not a name. So this gives users some form of anonymity.
Although you may not know the names of the users making the transactions, their activities can still be traced to a private wallet or an exchange.
How is Cryptocurrency Traceable?
As earlier stated, cryptocurrency transactions occur on a blockchain. Blockchains are public, and although it may take a while, the patterns on a blockchain can be studied, identified and traced to a user.
In recent times, some cryptocurrency transactions have been traced, and fraudulent crypto transactions have been exposed. A key example of this was the arrest of Ilya Lichtenstein and his wife, Heather Morgan by the US Department of Justice for alleged money laundering through cryptocurrency. The authorities had seized the stolen bitcoin by gaining access to private keys of a digital wallet containing the cryptocurrency. This shows that cryptocurrency transactions are, albeit traceable.
One popular way cryptocurrencies can be traced is through conversion to fiat currency by cryptocurrency exchanges. Most popular cryptocurrency exchanges have a “Know Your Customer” (KYC) verification that takes customers’ personal details, and creates a customer’s risk profile. This means that suspicious transactions can be reported to the law enforcement authorities. This is in the bid to maintain regulatory compliance.
How is Cryptocurrency Anonymous (Privacy Coins)?
Sadly, because it is “pseudonymous”, some crypto proponents feel that Bitcoin lacks the required privacy measures to adequately protect its users.
As a result, the crypto market is currently flooded with coins that are privacy-focused, making it difficult to decide which ones would be best for our needs.
Privacy coins are digital currencies that enable anonymous and private blockchain transactions by hiding their source and origin. Simply put, these coins were created for two main reasons: privacy protection and anonymity. Examples of such coins are Dash, Monero, Zcash, Beam, Grin, and PIVX.
These coins employ various means such as stealth addresses, CoinJoin, ring signatures, and Zk-SNARKs to maintain anonymity.
Although some coins claim to be completely anonymous, security agencies against crime usually warn believing that cryptocurrencies can be completely anonymous, as thorough investigations can still unearth suspicious transactions made with cryptocurrencies.
