Anonymity in Crypto: a Myth or a Fact
When Satoshi Nakamoto released bitcoin in 2008, the technology was revolutionary. It provided a seamless channel to conduct financial transactions, and the best part— it was anonymous. As a result, most users could transfer bitcoin without having to identify themselves. As more cryptocurrencies flooded the market, the situation was the same, and users revelled in the anonymity feature. However, this feature of anonymity might have changed in recent years.
This article will discuss the extent of crypto’s anonymity and whether users can completely hide their identity while using crypto in today’s world.
Is Crypto Really Anonymous?
Crypto transactions are anonymous, in a way. One of the primary features of the traditional financial system is that regulators can easily trace most transactions. This traceability is due to the Know Your Customer (KYC) checks implemented by traditional financial companies. However, the crypto space tells a different story.
Today, many cryptocurrency exchanges do not require KYC procedures from users. KYC procedures are identity checks, like requiring the user’s actual name and documents to verify identity. While most governments are trying to clamp down on crypto by enforcing these KYC checks, only a few standardized exchanges use them. As a result, users can transact under fake names on smaller and decentralized exchanges. In this case, the transaction history will be visible to every user on the blockchain, but the user’s actual identity will still be inaccessible.
This supposed anonymity makes crypto transactions a top choice for many bad actors. It allows users to create multiple accounts and send money across the web with minimal traces. Realizing these dangers, many governments have started to initiate measures to undermine the anonymity of crypto transactions.
Crypto’s Reducing Anonymity
The world has evolved to become globalized and interconnected, and it is almost impossible to conduct web transactions without any form of traceability. Recent events have proven that while crypto has been globally recognized for its anonymity, the situation is rapidly changing.
Earlier this year, the United States Justice Department caught hackers who compromised Bitfinex, a crypto exchange. The hackers reportedly carted bitcoin worth about $3.6 billion. While it took the Justice Department over six years to identify the hackers due to the anonymity of crypto, the bad actors were still identified.
A similar incident occurred more recently. A couple of hackers launched a cyberattack on Colonial Pipeline and demanded a ransom of $2.3 million to be paid in crypto. While the company paid the ransom, US law enforcement successfully traced the transactions and discovered the hackers’ identities. These events are some of many instances in which crypto transactions have proven to be not so anonymous.
The Rise of Privacy Coins
In light of crypto’s reducing anonymity, many users are turning to privacy coins as an alternative. Privacy coins are cryptocurrencies that offer a higher level of anonymity than conventional altcoins. Examples of privacy coins are Zcash and Monero. However, the problem with these coins is that, while they are anonymous, many crypto exchanges do not list them. Thus, they can hardly become mainstream.
Globalization has made it increasingly challenging to maintain completely anonymous systems. Thus, it is likely that the secrecy attached to crypto transactions might reduce further in the coming years.