Are Cryptocurrency Transactions Actually Anonymous? – CNET

Since the original 2008 white paper that introduced blockchain technology, bitcoin and other cryptocurrency transactions have been touted as completely anonymous and private. but how anonymous are crypto transactions really?

Earlier this year, $3.6 billion in bitcoin was seized from a Manhattan couple who were arrested and charged with money laundering in connection with a 2016 hack on the Hong Kong cryptocurrency exchange Bitfinex. it was the largest financial seizure in the history of the justice department.

Reading: Bitcoin traceable than

The police went to great lengths to track down the illicit funds, including tracking the stolen bitcoin through a complicated network of transactions spanning multiple countries. it took six years, but the authorities finally caught up. More recently, researchers have demonstrated traceability through unintended patterns in bitcoin transactional data: the larger a data set, the more patterns appear. and patterns can be identified and traced.

Because cryptocurrency allows for direct peer-to-peer transactions over the internet, the idea is that only two parties participate in the activity. no banks, governments or middlemen needed. Although this seems to set the perfect framework for privacy and anonymity, this year’s raid and other examples paint a different picture of crypto transactions.

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Bitcoin has now caught on with mainstream investors, and this principle of private transactions has become much more precarious. if this financial activity can be traced, then cryptocurrencies like bitcoin are more pseudonymous than anonymous.

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To understand how anonymity and cryptocurrencies relate to each other, cnet sat down with two blockchain technology experts: dr. Steven Gordon, who teaches a course on cryptocurrencies and blockchain at Babson College; and Feng Hou, Head of Digital Transformation at the University of Maryville, who works on implementing blockchain technology.

This is what they told us.

are bitcoin transactions anonymous?

not. Bitcoin transactions can be traced, as evidenced by the recent raid in Manhattan, as well as last year’s Colonial Pipeline hack, in which authorities were able to recover part of the ransom payment from the attackers.

“While there are certain ways that cryptocurrencies provide a level of anonymity, keep in mind that no one today can claim 100% anonymity at this time,” Hou said.

how can cryptocurrencies be traced?

The federal focus on cryptocurrency-related crime, combined with the increasing sophistication of law enforcement tools for tracking illicit cryptocurrency payments, means that such dealings are not anonymous. But aside from the increase in resources devoted to stopping crypto crime, there’s a simpler reason why these types of transactions aren’t truly anonymous to ordinary Americans.

Cryptocurrency transactions are recorded on a blockchain, which is generally public. at the same time, cryptocurrency transactions are not necessarily linked to an identity, which provides a bit of anonymity to users. While there are select goods and services that you can buy directly with bitcoin, in most cases, it must be exchanged into the local currency to spend it. and converting bitcoin to US dollars, a heavily regulated currency backed by the federal government, creates a distinct paper trail.

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“If you want to use bitcoin or any other cryptocurrency to buy things,” Gordon said, “then you’ll probably need to transfer the cryptocurrency into dollars at some point.”

To convert bitcoins to dollars, you generally need to find a company that provides this service, such as a cryptocurrency exchange, money transfer service, or select banks. Companies like these generally abide by “know your customer” principles, meaning identity verification is required to use the service. As Gordon put it, “regardless of how anonymous or pseudo-anonymous bitcoin is, services that transfer bitcoin to dollars are not anonymous, and therefore the transaction would not be anonymous in any meaningful sense.”

how are suspicious crypto transactions reported?

kyc refers to a financial services industry standard that protects against money laundering and other financial crimes. For example, institutions under the Federal Deposit Insurance Corporation must have a clear relationship with their customers to develop a “customer risk profile,” which is used to identify and report suspicious transactions to authorities.

That means banks and other financial institutions are required to have customers’ personal information on file to be insured. Although the fdic does not insure cryptocurrencies, cryptocurrency exchanges operating in the united states have adopted kyc standards. both coinbase and require customers to confirm their identities. It’s also worth noting that the fdic, along with other regulatory agencies, is investigating new laws for crypto assets.

Are any cryptocurrencies truly anonymous?

There are cryptocurrencies that people claim are 100% anonymous. however, any claims of fully anonymous transactions should be treated with skepticism.

“We know that through forensic analysis, we can always get to the bottom of things,” Hou said. “so to clear this up, any cryptocurrency that claims to be 100% anonymous, we have to take it with a grain of salt.”

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