How anonymous is cryptocurrency? The answer to that question will surprise some who assume that decentralized finance, the blockchain, and crypto itself operate with the potential for 100% privacy.
Why Cryptocurrency Works The Way It Does Today
The short lesson on how crypto works includes this; a cryptocurrency is essentially a digital unit of value that is commonly accepted as currency but not necessarily legal tender. When you use real-world dollars to open a bank account, the institution requires a variety of Know Your Customer type identification and identity verification.
Crypto requires none of these things, though some platforms have learned the hard way that Know Your Customer measures can be beneficial for reducing money laundering and other illegal activities.
The transactions using crypto are logged in the blockchain, and as long as those details are kept private and the buyers, sellers, and/or traders keep their actual identities out of the transaction there is a degree of privacy one can realistically expect. But there are no guarantees.
How Anonymous Is Cryptocurrency?
As others have pointed out when writing about this issue, cryptocurrency isn’t so much anonymous as pseudonymous.
Private keys and blockchain ledgers give a degree of privacy closer to using a pen name to write a controversial novel. If someone is able to associate your on-paper identity with your real-world identity, your privacy is compromised. In the earliest days of blockchain, it was assumed that what was then considered “untraceable” would forever remain so.
That’s one of the fatal flaws of some segments of the cryptocurrency multiverse–the assumption that today’s technology and the privacy associated with it won’t be compromised thanks to future innovations.
And indeed, that points to an additional lack of critical thinking among some operating in the space; the notion that things in crypto will continue as they are without future regard for tech innovation, federal regulation, and investor confidence.
One problem seems to feed the other. The key is to remember that nothing is truly anonymous, your private data is private only as long as it remains unavailable to hackers and scammers.
And there is research and development in all areas of tech, are we really foolish enough to believe that blockchain privacy will continue unimpeded on an indefinite basis? As other crypto writers point out time and time again, if every single Bitcoin or Ethereum transaction is recorded on the blockchain, how long before an innovation to expose those transactions becomes as common in the grey market as trojans, worms, and other malicious scripts for sale?
That is the question informing some going forward.
Does Trackable Mean Traceable?
Having every transaction being recorded in the blockchain does mean there is an inherent ability to track them. Tracking, or reviewing the “paper trail” so to speak of the transaction is not the same thing as tracing those transactions back to a specific person or entity.
That is, of course, unless the person or entity has included personal data in the information stored on the blockchain.
Getting the identity of the payer or payee could be as simple as picking up the clues left behind by someone who either doesn’t realize they’ve included private data somehow, or by someone who includes but does not understand the full implications.
And there is a third alternative. Some personal data may be required as Know Your Customer measures are adopted within the crypto world in larger numbers. Know Your Customer and anti-money laundering measures are creating spaces where it’s not as easy to stay hidden when running pump-and-dump crypto schemes or other shady operations. Trackable does not always equate with traceability, but that could change as the technology evolves.
If you have concerns about privacy and anonymity when investing or trading in crypto, it’s a good idea to read up on best practices, know your customer requirements for your favorite exchanges and platforms, and also to keep an eye on crypto headlines for developments in federal regulation.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.
