There are hundreds of misconceptions and myths surrounding crypto.
As a newbie in the cryptocurrency world, it is important to understand that your activity on the blockchain is recorded and traceable.
How the Myth Started
Bitcoin, has long given its users a sense that their transactions are “anonymous” through elimination of a centralized bank or any trusted third party. In the Bitcoin network, instead of having a general overseer who holds all the information, people can check a “public ledger” that records every exchange made and is available for all to see. With this lack of monitoring and regulation, traditionally performed by banks, people have assumed that their activity is untraceable to them. This isn’t a great stretch of the imagination, as although every transaction is recorded in the “public ledger,” the only immediately identifiable characteristic of the exchange is the pseudonym attached to the wallets transacting. No personal information is attached to these wallets and, apart from an email address, none is needed to set one up. Unfortunately, Bitcoins are easier to trace than many users suppose.
Image credit Coinbundle
Breaking the Myth
Anyone who has had to buy Bitcoin would know that doing so requires an online exchange, such as Coinbase. When creating an account on this site, a user must enter all government standard KYC and AML information including name, social security number, government issued identification, address, and phone number. Coinbase “complies with the Bank Secrecy Act, which the company says ‘requires Coinbase to verify customer identities, maintain records of currency transactions for up to 5 years, and report certain transactions,’ and the Patriot Act.” It should immediately call into question the “anonymity” of a currency that this kind of data must be provided to buy it. Despite more complex strategies through which a user could buy Bitcoin (providing all the above information) and place it into a wallet (which does not contain any personal information), then transfer those funds to a second wallet (adding a buffer between the online exchange transaction and the second wallet), the work needed to discover the true owner is slight. If one wished to trace a single bitcoin back to the online exchange, it would be easy to do so by looking through the public ledger. Every transaction in the history of Bitcoin is logged in and searchable. The second wallet’s Bitcoin would be traced back to the initial wallet and then to the online exchange. This sounds eerily like the trusted third party system that Bitcoin, and other cryptocurrencies today, sought to avoid and banish in the past. It is now up to the online exchange to securely protect its users’ personal data.
Is Anonymity Even Possible?
Through third party sites, Bitcoin users may be able to “launder” their coins using various methods including Bitcoin ATMs. This should make it much harder to trace the origin of a particular Bitcoin but, most likely, not impossible. What of other currencies? Is anonymity in the digital realm even attainable? Two digital currencies, Dash (by creating a feature called “PrivateSend”) and Monero (which uses a system called “ring signature”), seem to be some of the leaders of the pack in achieving anonymity on a blockchain currency. ZCash, which uses “zero knowledge proofs,” separates the transactions from the people who make them, so no one can reverse engineer the source of the funds by reviewing the blockchain. This process allows for information verification without revealing any identifiable information of the transactors, no longer disclosing which wallet sends or receives what. All that is shown is whether or not the funds were transferred in a positive or negative fashion. Even the amount transferred is kept private.
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