Bitcoin in the sight
Cryptocurrencies are still a topic that evokes a lot of emotions. They gained notoriety when the media started reporting on crimes in which they were used. Today, however, we have more knowledge of how cryptocurrencies actually work. And we also know that the overwhelming majority of transactions are unrelated to the criminal world. Bitcoin is the oldest and most popular virtual currency, but can its holders feel anonymous?
The answer is yes and no. Cryptocurrencies, including Bitcoin, are “pseudo-anonymous”. The blockchain technology itself is anonymous, but every customer who wants to use Bitcoin on the network must reveal his identity, e.g. by registering on the cryptocurrency exchange. A stock exchange wishing to act as a licensed entity is required to implement a Know Your Customer (KYC) procedure where no customer is anonymous. The stock exchange is obliged to provide information about a given user at the request of the authorities. However, not all cryptocurrency exchanges cooperate with the police.
Government agencies employ experts to track transactions and watch what happens to blockchains. Thanks to this, they de-anonymize and identify users making transactions. This leads to easier law enforcement in the field of taxes, fraud, extortion and money laundering.
Tracking transactions made with Bitcoin is available not only to the police or the tax office. By design, BTC movements are publicly available — this is allowed by blockchain technology. Their history is kept on the blockchain all the time, so just watching a transaction is not unusual. However, the key is to link these transactions with specific addresses to which they are sent or from which addresses they come from.
Specialized companies such as Chainalysis are already engaged in searching for links of address data with the criminal world. They analyze blockchains looking for patterns that will lead law enforcement agencies to users breaking the law.
The remaining cryptocurrencies also have their own data sets about transactions in their blockchain. By default, they contain information about the number of coins sent and the addresses of wallets involved in the transaction. Interestingly, no previous transactions are removed from the blockchain, so you can analyze the history of each coin from the beginning.
Although BTC transactions can be traced very easily, there are ways to make it harder to find the address where the money is actually going to go. An example here can be the so-called mixer. The method consists in mixing coins from different people from the pool and then sending them to the correct address.
Another way to make it difficult to track transactions online is to create a “smoke screen”. It consists in creating many crypto wallets and by carrying out many transactions between them, finding the right connection becomes very time-consuming.
You can also use a completely anonymous wallet — Electrum. However, if BTC is sent to this wallet from the verified client’s wallet, this anonymity disappears.
Despite the fact that legal regulations do not always keep up with reality, many countries very quickly introduced a tax on realized profits for the sale of BTC. Therefore, when investing in cryptocurrencies, you should familiarize yourself with the current regulations on the taxation of fiat currency obtained from such trade.
