Understanding Blockchain and Privacy Part I: Pseudo-anonymous Assets and What They Reveal
Much like it is with fiat funds, there are those who are honest with their income and expenses and there are those who attempt to conceal some of their incoming and outgoing transactions for one reason or another. Although we’ve reached a point in the industry where the majority of crypto users understand that digital assets don’t provide the full privacy that those in the latter category above wish for.
We could stop here, but the “why” behind how governments are able to track our transactions and tie them to us is intriguing and serves as a very important lesson as to why it’s never a smart idea to try to hide your money in cryptocurrency.
With that in mind, let’s dive into the first part of this two-part series, starting with pseudo-anonymous cryptocurrencies like Bitcoin.
A Brief Overview of Blockchain
If you’re mostly involved in the investing and trading sides of the industry, you may not necessarily know as much about why assets like Bitcoin function the way they do, which necessitates a quick overview to help you better understand the information below.
Put simply, blockchain technology is a way of managing information in a decentralized manner in order to ensure trust and transparency. For example, when a Bitcoin transaction takes place, the blockchain takes note of all of the information involved in the transaction (wallet addresses from the sender and the recipient, amount sent, time and date sent), verifies this information, stores the information in a “block”, and uploads it to the public online ledger where it is recorded and available for all users of the network.
The reason why this is so important for enthusiasts is that it gives them full control over their money while allowing them to conceal personal information that would normally be revealed in traditional financial transactions. However, it is this sense of safety that has led many to believe that they can hide away Bitcoin without ever being discovered.
Why Crypto Isn’t Anonymous (and How It Is Tracked)
While crypto transactions aren’t tied to your name, physical address, or personal contact information, the fact that they are tied to your wallet address is enough information for organizations to track down most people.
For example, let’s imagine that you have been receiving crypto as a form of side-income and have attempted to hide this extra income from the IRS. While you do have your assets stowed away in a separate wallet (theoretically), you are inevitably going to have to sell off your assets on some platform. Once you do sell, someone can then see where these assets have been transferred from, which will inevitably allow them to take note of exactly how much income has been coming in as each transaction has a traceable source.
Additionally, because of KYC/AML laws, you are going to be hard-pressed to find an exchange where you can transfer your crypto without having to register using some form of personal information that can be tied to you or tied to the original sender and traced down to you. Even Bitcoin mixers are not reliable ways to hide your crypto as they have been advertised to be in the past.
True, while there are always ways to work around these systems, those who are attempting to do so will experience severe difficulty trying to make sure that payments are untraceable, something that is considerably hard in this day and age.
Overall, no matter how simple it may seem to stow away crypto and avoid being detected, it is not the private currency that it is sometimes made out to be. In section two of this series, we will be analyzing some of the privacy coins on the market and showing how these too can be subject to tracking by larger entities.