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Cryptocurrencies are no more anonymous

Photo by Tarik Haiga on Unsplash


There are no proper answers to few cryptocurrency-related questions. This is due to the wide variations in characteristics of each coin. With the advent of cryptocurrency in 2008, it became the safe haven for criminals with its anonymity and untraceability fitting the frame. The anonymity and traceability of cryptocurrencies are in question as they gained more knowledge on blockchain technology. To know how anonymous are cryptocurrencies, we should get to know some nuances.

Cryptocurrency — An overview

The cryptocurrency was getting mainstream, and it was established as a stable store of value compared to fiat currencies. Cryptocurrencies use encryption techniques and cryptographic algorithms to prevent double-spend and counterfeit. They do not have any physical embodiment.

Opening an account in traditional financial bodies like banks is tedious as it involves numerous steps, including recording your KYC (Know Your Customer) data. In the case of cryptocurrency exchanges, certain exchanges do not have a proper AML compliance process. In recent times, cryptocurrency has become the most preferred mode of payment for criminals or money launderers as these transactions cannot be flagged.

The paradox of cryptocurrency is that your entire financial history becomes public information stored in distributed ledgers. When you make a transaction with that particular asset, it is visible to everyone in the network. Other than the identities of people who make transactions, the further details inclusive of date, time, and value of the transaction will be the network members or anyone who knows your address. Bitcoin was the first of its kind, and now several cryptocurrencies vary widely in the functions they perform.

Cryptocurrency and anonymity

Right from the birth of the concept of cryptocurrency, usage in dark markets was one among its various use cases. You might be aware of Silk Road, the first dark market reputed for selling or buying anything. In simple terms, it is a global eBay for criminals. Initially, people were used to spending Bitcoin in the market as the Bitcoin wallet addresses are difficult to trace as almost all the wallet addresses are similar. But the fact is, wallet addresses are not anonymous and are pseudonymous as it stands for the identity of the wallet owner.

The FBI could delink the entire network by linking together the sellers and buyers through their Bitcoin wallets. Though there were several existing wallets, the authorities were able to analyze the blockchain transactions and connect the wallet address with the people associated. This process of connecting dots is called Chain analysis and is the most used way of tracing illegal transactions.

The advantage of cryptocurrencies over fiat currencies is that any nationalized banks or governments do not govern them. But recently, governments wanted cryptocurrency exchanges to be regulated and brought under the law. Now, the government can get the sale and purchase records of any crypto asset that has been sent off the exchanges. This lets the government trace which does what seamlessly. In 2008, Bitcoin was considered the most anonymous payment mode, but now it becomes the most analyzed chain.

According to the recent law, cryptocurrency exchanges are asked to address the source of funds for traders. The exchanges in Japan, the USA, and Singapore are put under such regulations. Anyone can harness the data in blockchain as they are open and permissionless. The spendings of the entities can be mapped by common-spend clustering algorithms. This is how people spending illicit funds are caught.

An end to anonymity

The cryptocurrency algorithm is structured so that everything that happens in the cryptocurrency space is transparent. With the growth in technology and new concepts like chain analysis, cryptocurrency is no more untrackable. The authorities have got the power to do so, limiting the usage of cryptocurrencies for illicit activities.




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