Cryptocurrency, and Bitcoin especially, has a reputation for being a completely anonymous form of payment, free from tracking and interference. However, if you look a little closer, you’ll see that these digital currencies reveal more information about you than you might think.
Anonymous vs. Pseudonymous
The main issue with Bitcoin is with its wallet, where your Bitcoin is stored. Cryptocurrency wallets are generally pseudonymous rather than anonymous. Anonymity is about being “nameless”—it comes from the Greek word for “without a name”—but instead, your wallet gives you a fake name, a pseudonym. Instead of “Mark Twain,” you get some scrambled numbers and letters, but the same idea.
Despite the Bitcoin Project itself disclosing this information on its website, many people have taken the scrambled nature of their wallet addresses to mean that their cryptocurrency payments can’t track payments. That’s the point behind using a fake name, after all. But your Bitcoin wallet address can be tracked, and instead simply, too: It’s right there in the way that the system is designed.
Blockchain and Anonymity
Bitcoin works on a blockchain, which for our purposes is a list of when Bitcoin came into being, where it was used, and by whom. (It’s a little more complicated than that. Please read our article on how blockchain works for all the details.)
This list also called a ledger, is public. Anybody can see which wallet spent which Bitcoin where. However, the person who paid the money is hidden behind many scrambled numbers and letters (One example is “vBMSEYstWetqTFn5Au4m4GFg7xJaN,” although that one’s fake.), their activity isn’t.
For example, knowing that your buddy John spent money on a specific service—a VPN, let’s say—on a particular day, you could go to the ledger and see which Bitcoin address spent money on that VPN. Even if that search spits out more than one or two addresses, you can check where else money was spent. If one of the addresses you found made a Wikipedia donation like John regularly does, you have a second data point.
Like with browser fingerprinting, it isn’t one specific data point that gives you away; it’s the whole picture. With today’s technology, it’s easy to piece all of these little bits together, too, making pseudonymous accounts next to useless when protecting your identity.
Exchanges and Proof of Identity
There’s another issue: Spending is one thing, but buying Bitcoin isn’t anonymous, either. Exchanges, where you exchange your government-backed currency for cryptocurrency, all require proof of identity, be it a passport, a driver’s license, or a government-issued ID. Like regular banks, exchanges need to implement know-your-customer (KYC) protocols to operate.
This means asking you for your ID (like here, on the site for popular exchange Coinbase) and maybe even for proof of income and the like. Like with banks, they do this because they have to: Governments worldwide are cracking down on money laundering, no matter the method.
Since the ledger is public, authorities can see who bought how much and when by simply asking the exchange for your information. If you think that a fake ID might help, you’re in for a nasty surprise: You can also be identified through the bank account you used. This piece in Science goes into more detail about how authorities make sure that criminals can’t hide behind Bitcoin.
Anonymous Cryptocurrency
There are ways to get around such safeguards, of course. Still, these are often pretty technical or simply expensive—like setting up a unique protocol to hide the origin of your transfer or getting a middleman who (for a fee) will buy the Bitcoin for you. With the purchase sources covered, you’ll need to cycle through different wallets regularly, and that should be enough to cover your tracks, at least partially.
Another option to get Bitcoin anonymously is to mine for it yourself, but that might not be profitable, depending on the price of electricity in your country: In Venezuela, it’s a great idea, while in Australia, it very much isn’t.
One last option is to buy Bitcoin with cash using a Bitcoin ATM: Much like we discussed in our article about signing up to VPNs anonymously, cash is still king when related to keeping your identity safe. However, according to one source, these ATMs aren’t free: They charge some hefty commissions, 7.5% on average. These ATMs also require you to visit them with a large wad of cash in your pocket—a mugger’s dream—so that’s something to keep in mind.
Anonymous Alternatives to Bitcoin
There are options besides Bitcoin that you can use if you want to make anonymous online payments. Monero seems to be the most popular (other examples include Zcash and Dash), but all of them use technology to obfuscate the wallet’s address somehow, making the coins much harder to trace.
Much like Bitcoin, though, we doubt that they will remain untraceable. Money is too important to run around unregulated, it seems, so we predict that eventually, these as-yet-anonymous coins will become trackable, and people seeking privacy—for whatever reason—will have to move elsewhere.
RELATED: What Is a “Blockchain”?
RELATED: Know Your Customer (KYC)
