When you make a credit card purchase, you share your identity with a network of establishments: the retailer, the credit card register, the issuing bank, and ultimately, law enforcement. Bitcoin was invented to provide a safeguard against this vicious centralized matrix, but unfortunately, its decentralized nature was immediately misused as a getaway to the dark market.
Indeed, the general public didn’t seem interested in “invisible money” when Bitcoin appeared on the scene in 2009. However, apart from the closed group of tech-savvy geeks and overzealous entrepreneurs, some law-abiding individuals saw cryptocurrency as a perfect place to develop a crime network without being traced.
From today’s perspective, we can say that the crypto landscape has drastically changed, especially after governments worldwide started tracking down crypto-gangsters and forced crypto providers to implement a regulatory framework for their growing user base. The demographic of Bitcoin users has also changed in the meantime — the population that invests in Bitcoin nowadays is looking for nothing less than a fully regulated system which they can trust.
If you’re wondering how this course of action affects the real nature of Bitcoin and other cryptocurrencies, check out this article. We’ll go through the main misconceptions that stem from the so-called anonymous nature of Bitcoin.
Are Blockchain Transactions Really Anonymous?
By definition, if the transaction is anonymous, then nobody knows who you are. It’s true, your name and place of birth won’t be recorded on the blockchain, but this doesn’t mean that you won’t have any form of identification as a user.
To explain, Bitcoin is a digital currency that never leaves the blockchain. If you want to become a Bitcoin owner (regardless of whether you buy, mine, or receive it as a gift), you’ll first need to get a Bitcoin wallet, a software program that generates a unique set of keys — a public and private key. The public key serves as a Bitcoin address so that the sender knows to whom they’re sending the digital assets, while the private key is your secret code to access those assets and hence, the only way to prove they’re yours.
That is to say, your public and private keys are your identity card on the blockchain. They’re cryptography codes (something like fe9e4e4a626a2e9bd31736c8, just much longer), but they do represent you in the transaction. This means that Bitcoin is pseudonymous rather than anonymous.
Are Bitcoin Transactions Private?
As for privacy, the Bitcoin blockchain is everything but private. It’s a public ledger that allows access to everyone with an internet connection. This means that everyone can read that, for example, the Bitcoin address fe9e4e4a626a2e9bd31736c8 has upgraded a Microsoft app on a certain date for a certain amount of Bitcoin. They won’t know that it was you, but with a little detective work, a government investigation team, and IT security support, it isn’t impossible for you to get traced based on your previous blockchain activities.
Back in the early days of Bitcoin, regulators weren’t aware of just how powerful the blockchain hidden identity can be and failed to predict the rise of the dark crypto market. In one of the following sections, we’ll present you with a few examples of how criminals tried to trick the system with Bitcoin payments.
Is Bitcoin Trading Anonymous?
When it comes to anonymous Bitcoin purchases on the real market, you should get your expectations in check — it’s almost impossible to leave no evidence when buying, selling, and paying with cryptocurrency.
To some extent, the blame for the unrealistic expectations is on Satoshi Nakamoto, who introduced Bitcoin in 2009 as a peer-to-peer electronic cash system. Certainly, we don’t dare to question the credibility of Bitcoin’s creator, but his definition doesn’t truly mirror the real crypto atmosphere today. As implied at the beginning, the Bitcoin network was envisioned as a financial system liberated from centralized regulators, but over time, it has evolved into a mainstream market that has given up its original principles.
For starters, let’s clarify that the term peer-to-peer (P2P) refers to a marketplace where Bitcoin is transacted between two participants without the interference of a third-party intermediary to control the process. Under this definition, you can expect anonymity due to the lack of a centralized institution to collect your credentials.
However, you should know that such peer-to-peer (P2P) marketplaces occupy a very small portion of the $2 trillion crypto business. The backbone of the entire crypto industry is represented by centralized crypto exchanges (CEXs), behaving like regular e-commerce websites that require verification of your real-world identity and bank solvency before allowing you to use their services.
On a consumer level, the mainstream approach of Bitcoin trading helped the general public to faster digest the far-fetched notion of blockchain. However, law enforcement was the main reason why Bitcoin deviated from the decentralized route in its development.
Can You Hide Behind Bitcoin?
Several years ago, it felt that anyone could transact Bitcoin without a trace. There is a legendary forum post from 2013 that says: the FBI does not have a prayer of a chance of finding out who is who, but it turned out quite the opposite.
FBI and other agencies devoted much focus to developing law enforcement instruments to track illegal crypto payments and in less than five years, showed that it’d be difficult for hackers and criminals to go away with any form of blockchain-powered crime.
The Silk Road
The Silk Road was the first platform on the darknet established at the beginning of 2011 by Ross Ulbricht, known under the alias name Dread Pirate Roberts. The platform used the Tor anonymity system and offered illegal drugs, weapons, and other deals for criminal activities in exchange for BTC. A couple of years after its release, the FBI narrowed down the creative mind behind this infamous store, which managed to openly sell illicit stuff in the 21st century.
The authorities found out that Ulbricht’s online marketplace had made a turnover of more than 1.2 billion USD in its years of operation and seized 144,000 BTC in possession of the website owner. The money seizure was a result of an exhaustive investigation by the joint forces of the criminal investigations unit of the Internal Revenue Service, the Justice Department, and two private companies specializing in crypto-analytics software, Excygent and Chainalysis.
After the initial shutting down of the site in 2013, there was another attempt of reviving the Silk Road 2.0 but it didn’t last for long. Ulbricht was sentenced to life in prison without the possibility of parole.
The First Bitcoin Ponzi Scheme
In 2011, the young Bitcoin enthusiast Trendon Shavers had come up with a “genius” plan to encourage Bitcoin investments online, promising a weekly interest rate of an unbelievable 7% to investors who lent bitcoin to Bitcoin Savings and Trust. Don’t let the “savings and trust” name mislead you to the conclusion that Shavers ran a huge Wall Street corporation. On the contrary, this Texan guy worked from his personal computer between 2011 and 2012 under the nickname pirateat40 and managed to collect 764,000 bitcoins, which comprised 7% of the total amount of circulating bitcoins at that time.
As a typical Ponzi scheme, Shaver’s hedge fund was short-lived since he settled the early investors with the income from new ones, and it soon became difficult to handle. The interesting thing about Shavers’ story is that he used to live an extravagant life by cashing out BTC while his business was blooming. Ultimately, he was arrested for a year and a half in prison and charged $40.7 million in a separate civil court proceeding.
KYC Verification in Cryptocurrency Trading
Apart from the growing number of resources focused on controlling Bitcoin-related crime, there is a simpler reason why crypto transactions can’t be anonymous for casual investors — the Know Your Customer (KYC) verification check.
KYC is a requirement imposed on financial institutions (crypto exchanges are considered money transmitters in almost all legislations worldwide) to check out the background of their potential users before allowing them to use the institution’s services. The KYC verification is part of a wider regulatory framework called AML (Anti-Money Laundering) and CFT (Combating the Financing of Terrorism) standards, whose purpose is to prevent cross-border channels of money laundering and other illicit activities.
Canada, for example, has turned out to be fairly initiative in regulating digital assets and crypto-providing services. From June 2020, all cryptocurrency exchanges that operate in the territory of Canada have to be registered with FinTRAC (Financial Transactions and Reports Analysis Centre of Canada), which will ensure their compliance with all applicable verification, reporting, and record-keeping policies as MSB (money service business) companies.
Can I Buy Bitcoin Without KYC?
For most users, a KYC-compliant crypto exchange strengthens the level of trust as it ensures centralized protection of their accounts and funds. However, anonymity in crypto trading is still a high-valued trait since there is a considerable number of traders who have personal reasons for hiding their credentials from authorities or just refuse to share sensitive data online.
Unfortunately, it’s almost impossible to find a fully anonymous crypto marketplace today, but there are a few legit shortcuts for a KYC-free Bitcoin purchase without including a VPN or a hidden IP address.
You can still find KYC incompliant crypto exchanges on the overall crypto market, but these platform solutions don’t support fiat currencies. This means that you can’t rely on them if you buy Bitcoin for the first time.
The best example is the world-renowned crypto exchange KuCoin, where you can freely trade BTC and other cryptocurrencies like Ethereum (ETH), Monero (XMR), Dash (DASH), and Cardano (ADA) as an unverified user. However, the exchange doesn’t facilitate fiat transactions through your bank account but it cooperates with third-party payment providers like Simplex and MoonPay to enable entry-level crypto purchases for new users. The thing is that these external services come with their own set of rules and verification policies.
Tier-Based Verification Model
Some crypto exchanges, on the other hand, do allow you to start without a KYC, but in such case, you can use a very limited scope of available trading services. This includes forbidden access to more advanced platform options (futures market or margin trading), a limited number of payment methods, restricted withdrawals or no withdrawals at all.
These types of exchanges usually feature a tier-based verification system where the threshold of supported services grows together with the level of verification. A few trending exchanges like Binance and Kraken follow this model, but the majority of regulated crypto marketplaces, such as Coinbase or the Canadian-based favourites Bitbuy and Coinberry, require ID verification during the registration process.
P2P Bitcoin Exchanges
P2P marketplaces like Paxful and Bisq used to be the anonymous shelter for Bitcoin traders as they allowed users to register on their websites without specific requirements for detailed verification. Unlike centralized exchanges, P2P services enable users to pair themselves based on certain parameters (type of crypto and payment method) without facilitating the transaction process. However, the non-facilitators feature didn’t save P2P exchanges from being classified as money transmitters and hence, subject to AML/CFT standards.
Finally, Bitcoiners have found another, a bit obscure way to stay anonymous by utilizing so-called Bitcoin mixing services or tumblers. These are private pools where users put together their BTC holdings before dividing them out among the recipients.
The point is that when you mix bitcoins in such a way, it’ll be difficult for anyone to track down the real transaction participants. For instance, if John sends 5 BTC to a mixer instead of the crypto wallet of his fellow Peter, and then Peter receives those bitcoins from the mixer, nobody can gather the relationship between these two wallet addresses.
This method sounds like a perfect ground for the development of illegal transactions, but it hasn’t been banned as a means of financial interaction yet. The most popular Bitcoin mixers include CoinJoin and Wasabi.
Bitcoin ATMs or BATMs are standalone kiosks where you can buy Bitcoin and other popular altcoins with cash. They’re a very convenient purchasing method and a step forward to the broader acceptance of crypto. You can find a BATM in all busy locations across Canada and acquire new coins within a few clicks. All you have to do is scan the (QR) code of your Bitcoin wallet address and follow the on-screen instructions to complete the purchase. If you don’t have a wallet, the machine can generate a new one for you on the spot.
However, BATMs aren’t anonymous, even though they can process only cash payments. The thing is that each user needs to go through a verification process before initiating a transaction. Depending on the BATM model, it can be a print-finger or face recognition, email or SMS verification.
A Few Words Before You Go…
As you can see, Bitcoin’s anonymity is a fight that can’t be won even though its core lies on an identity-free architecture run by algorithms, not people. We hope that our article helped you understand why it’s nearly impossible to transact with Bitcoin without sharing your identity on such a mainstream market. More importantly, now that we’ve gone through all possible risks that pseudo-anonymous trading caused, it’s high time we admitted that anonymity is overrated and not that harmless.