Today it’s very hard for Bitcoin to retain its status as an anonymous cash system. That’s partly because people often misinterpret the “anonymous nature of Bitcoin” and partly because the current landscape for crypto trading doesn’t match the basic principles of blockchain technology.
In fact, everything depends on the reason why you’d insist on remaining anonymous when trading cryptocurrencies. Is it to hide your identity from law enforcement or is it a strategy to protect yourself from the pitfalls lurking in the virtual world?
But let’s take one thing at a time. In this article, we’ll discuss whether and to what extent you can exchange bitcoins without leaving digital footprints. Hopefully, you’ll understand all the reasons for this common misconception, and more importantly, learn that easy and safe withdrawals are possible only in a highly regulated marketplace.
How Does Bitcoin Work?
Bitcoin resides on the blockchain, which is a totally different environment from any other financial model familiar to the modern investors’ world. It appeared in 2009 as a reaction to the centralized burdens that people face in their day-to-day financial interaction. The creator of Bitcoin, Satoshi Nakamoto, was the first to present an achievable peer-to-peer system to run in a decentralized manner. He replaced human-powered intermediaries with automated blockchain protocols and miners, making BTC transactions trustless, immutable, and secure.
To achieve full transparency in the transaction process, the blockchain always stays open to the public. Anyone, at any time, can see all transactions that occurred on the blockchain, together with the amount transacted, transaction time and details about the sender and the recipient.
The thing is that those details don’t tell anything personal about the participants — no first and last name, address, email, phone number, etc. All you can see is a long string of random characters or the wallet address of the participant. The Bitcoin address is deliberately designed to be “un-memorizable” so that users can’t relate it to other users’ Bitcoin wallets at a glance.
Is Bitcoin Anonymous?
Under this description, we can say that Bitcoin is pseudonymous rather than anonymous, but it surely isn’t private.
Certainly, this word game doesn’t mean anything to you as long as the blockchain allows you to send and receive bitcoins without exposing personal information. The thing is that the blockchain rules don’t apply to the main markets for buying, selling and trading Bitcoin. At least, not anymore.
In the early Bitcoin era, nobody took this digital currency for granted and indeed, users were able to execute transactions just as described in the previous section. Even Bitcoin-to-cash conversions went untracked and untaxed since no government knew how to classify these decentralized assets.
This resulted in the dominance of crypto on the dark market, especially after Bitcoin’s monetary value grew and other altcoins popped up on the scene. There was a series of Ponzi Schemes, hacker attacks, and ultimately, the Silk Road scandal of unprecedented proportions that made law enforcement set regulated grounds for the development of crypto.
Moreover, the industry of cybersecurity got government support to find advanced methods for tracing crypto scammers through IP addresses and other digital footmarks even if they use VPN, Tor browser, Tor-Onion Router, or a mixing service. And finally, crypto-providing services got the same status as all other money service businesses.
The regulatory norms in crypto didn’t happen overnight, and we can’t say that their implementation is fully completed. However, from today’s perspective, we can be sure that:
- There is no technology to help you skulk into illegal activities and stay uncaught.
- There is almost no unregulated marketplace for trading Bitcoin, especially if cash is involved in the process.
Can I Sell Bitcoin Anonymously?
Cashing out Bitcoin has been simplified to a retailer level thanks to user-friendly platforms or what we call centralized crypto exchanges (CEXs). There are over 500 active companies out there that allow you to buy and sell Bitcoin in exchange for USD, CAD, EUR, or GBP in a few clicks. Understandably, CEXs differ in many respects — design, fees, number of supported crypto and fiat currencies, payment methods, etc.
The catch is that despite all this overwhelming diversity, all entry-level exchanges that support cash operate as FINTRAC-registered MSB in Canada. This means that crypto exchanges are fully compliant with locally-established AML/CFT policies and hence, require all new users to complete KYC verification to qualify for using the platform’s services. Identity verification is the point where the narrative of the anonymous/pseudonymous Bitcoin transaction breaks — KYC includes detailed personal information, residence and bank solvency proof. In some way, that’s the price you pay for being sure that your cash arrives at your bank account safely.
Verification policies are not black and white for all KYC-compliant crypto exchanges. Some exchanges adjust the verification level depending on the amount you plan to cash out. Let’s see an example with an exchange that acts as a third-party broker in the selling process.
How to Cash Out on Coinbase?
Coinbase is a US-based crypto exchange registered with the New York State Department of Financial Services and one of the few crypto services out there that offer FDIC Insurance for up to $250,000. It’s been active since 2012, contributing a great deal to bringing cryptocurrencies closer to the general public.
Cashing out on Coinbase is pretty straightforward — you need to have bitcoins on your Coinbase account, link your bank account or PayPal account to Coinbase and activate a withdrawal. Unfortunately, PayPal withdrawals aren’t supported for Canadian users. Regardless of your current residency and limitations, you can’t initiate a cash withdrawal without being registered on the platform. Consequently, all Coinbase registered users must undergo KYC verification.
Bitbuy, Kraken, and Gemini also follow strict rules for registration. Interestingly enough, until recently, Binance users were able to start trading on the platform without KYC up to a certain withdrawal threshold. However, in 2021, Binance changed the rules imposing an intermediate level of verification for all newly-registered users.
This is to say, regulated crypto exchanges will allow you to convert Bitcoin into cash smoothly and securely, but not anonymously.
Where Can I Cash Out Bitcoin Anonymously?
With CEXs aside, there are a few alternatives to consider if you want to convert BTC into cash in a less exposing manner.
LocalBitcoins and Other P2P Exchanges
LocalBitcoins, together with Paxful and Bisq, provide a rather different trading approach from traditional centralized exchanges. P2P (peer-to-peer) exchanges help buyers and sellers “detect” each other on their platforms, but P2P platforms don’t facilitate the payment, nor do they offer storage space. Instead, once you find a proper buyer for your bitcoins on the exchange list, you yourselves set the payment terms in mutual agreement.
The P2P can only provide escrow service for extra protection of both parties. Many seasoned traders appreciate this method as more liberating than CEXs custodial packages and closer to the blockchain core principles. In addition, P2P exchanges don’t restrict you on payment options — apart from the common ones, the buyer can purchase Bitcoin with Amazon gift cards, send cash through Western Union, or even make an in-person transaction as long as the seller agrees.
As such, P2P exchanges used to be an optimal business venture for anonymous trades until AML/KYC regulations classified them as regular money transmitters. For instance, in 2018, LocalBitcoins was forced to stop accepting in-person offers on its platform and implement the first batch of KYC requirements. A year later, the exchange extended the level of KYC verification, and that was the time when P2P exchanges seized the opportunity for anonymous trades.
Bitcoin ATMs
The primary role of Bitcoin ATMs or BATMs is to provide fast and hassle-free Bitcoin purchases with cash. A considerable number of the operating BTC machines also allow you to sell Bitcoin in exchange for cash. The cash component in such BTC transactions usually misleads us to believe that we can cash out BTC without leaving digital footprints. For most parts, this is far from the truth.
First, BATMs do require identity verification, but the method differs from one brand model to another (e.g. SMS verification, face or fingerprint recognition, etc.) and the level of verification. However, you can find some machines where the identity checkup isn’t obligatory up to a certain amount limit.
Fortunately, Canada is the home of Bitcoin ATMs, and currently, there are over 2,500 available machines across the country. You can filter their buy-and-sell options and restrictions directly on Coinatmradar. There you can also see that some models support other market-dominant altcoins such as Litecoin (LTC), Ethereum (ETH), and Dogecoin (DOGE).
Finally, this convenience comes at a handsome price. BATMs are perhaps the most expensive providers for buying and selling BTC. The commission for the instant service combined with blockchain transaction fees can exceed 10% of the total transaction.
A Few Words Before You Go…
As you can see, the options for anonymous Bitcoin conversions are drastically reduced compared to the early Bitcoin days, when anti-money laundering norms were outside the blockchain picture. Given the fact that $4 billion worth of Bitcoin is transacted daily, those days will never come back. However, the regulated landscape will place crypto investments on a higher level — making Bitcoin and other crypto-assets an equal part of our future financial culture.