Bitcoin users are generally motivated by the low fees and privacy of digital currency. Most of them use the platform for legal transactions. However, many try to benefit from the anonymity feature to carry out fraudulent transactions. “Cryptocurrency is thought to keep transactions secret. But not many know that it creates a forensic trail that can make the identity of the buyers,” said Scott Jason Cooper, cryptocurrency consulting boutique.
The Anonymity of Bitcoin: Is It Real Or Just a Myth?
Bitcoins is known for its transparency. Every cryptocurrency transaction is stored in a blockchain. The public ledger containing the transaction amount is open to the public. The identity of the Bitcoin owner is hidden and codes are used as the digital signature.
The paradox of cryptocurrency is that its associated data create a forensic trail that can suddenly make your entire financial history public information.
According to the CEO of CoinFlip, Ben Weiss, the anonymity of Bitcoin is a big myth. He said that the cryptocurrency transactions are traceable. The identities of the users can be traced with some effort.
According to Weis, people who think that Bitcoin transactions are completely anonymous don’t understand the process. The reality is that cryptocurrency transactions are not anonymous. Know Your Customer (KYC) rules require that the sellers ask about the identity of the customers before the transaction.
Cryptocurrency transactions according to Weis are more transparent than the traditional financial system. The identity of users who use Bitcoin is not shielded.
Traceability of Bitcoin Transactions
Bitcoin addresses don’t have identities registered in the public ledger. But the real-life identities can be traced through the KYC rules and IP address of the computer through which the transactions are paid.
Every Bitcoin investor has to provide personal information to the cryptocurrency platform. Personal information can be obtained by law enforcement agencies by contacting the digital currency exchange.
The address of the Bitcoin transaction can be linked to the real identities of the individuals through the crypto platform. According to Weiss, law enforcement personnel can easily trace down digital currency transactions if they make an effort. That’s why it is a big mistake to launder money using Bitcoin thinking that the transactions are anonymous.
Weiss says that you are playing with fire when you try Bitcoin for money laundering. People cannot launder money using cryptocurrency to avoid taxation thinking that the identity will remain hidden.
US taxpayers must realize that they will face consequences if they don’t report their digital assets to the IRS. Their identities are not anonymous and they could face significant fines if the law enforcement personnel discover the real identity.
The IRS has launched a cryptocurrency criminal investigation program known as ‘Operation Hidden Treasure”. A dedicated team of IRS professionals consisting of blockchain experts seeks out taxpayers who don’t list their cryptocurrency assets. The consequences for not reporting digital assets can be severe.
Understanding the Bitcoin Process
“Bitcoin addresses hide the identity of users. But the addressees can be used to trace the real identity of users,” according to Scott Jason Cooper, “Digital transactions are transparent and anyone can the transactions since they are stored in the public ledger. People can know about the date and time as well as the amount of transaction. Only the identities of the buyer and seller are not known.”
But the real-world identities of Bitcoin users can be traceable by law enforcement personnel due to the KYC rules, crypto exchange registration policies, and analysis by blockchain experts.
Every transaction creates a digital trail. If the real-world identity is traced, the entire financial transactions of the individual will become transparent.
Users can preserve their identities by using Bitcoin addresses to keep the transactions secret. Security experts refer to the process as pseudonymous privacy. It is similar to writing books under a pen name. The pseudonym is the digital address that receives the currency.
The anonymity of Bitcoin users is preserved only until no one can find out the link between the address and the identity. If the link between the user and the address becomes know, the financial history will become known. The personal details linked to the cryptocurrency assets such as physical address and name will be revealed.
According to Steven Goldfeder associated with Princeton University, the process of linking individuals to digital currency transactions is rather straightforward. The identities can be revealed even when the platforms such as CoinJoin are used for cryptocurrency transactions that claim to provide additional privacy. The cookies and web trackers of a computer can reveal the real-world identity of cryptocurrency users. These are pieces of website codes that collect the personal information of the users that are provided to third parties for advertising purposes.
Web trackers collect information about the purchase amount, page usage, and browsing habits. These trackers can collect emails, names, and addresses of individuals. Law enforcement agencies and malicious users can track the Bitcoin identity using cookies and web trackers.
Final Remarks about Bitcoin Anonymity
Bitcoin transactions are not completely anonymous. Governments and rogue users can track the identity of the parties involved in the Bitcoin transactions. The information can be traced through KYC rules, IP addresses, website trackers, and cookies.
Some cryptocurrency platforms have unintentional leaks allowing hackers to know about the identities of cryptocurrency users.
Buyers of digital currencies can use privacy tools such as AdBlock Plus, uBlock, Ghostery, or VPN software to protect their privacy. But even then the transactions don’t always remain anonymous. Law enforcement personnel can force crypto exchanges to tell about the IP address and other information of the users who carry out the transaction.
Bitcoin analysts are helping law enforcement agencies to nab criminals who are using Bitcoin for hiding their fraudulent transactions. The Silk Road bust in February 2015 that led to the arrest of Ross Ulbright for selling illegal drugs and the seizure of Check resident Tomas Jirikovsky in September of the same year shows that the assumption that Bitcoin is safe for criminals is wrong.