Anonymous Cryptocurrency Assets

You may think your dealings become anonymous when you decide to buy a cryptocurrency and use it, but just how true is that, and can you ever really be safe?

When bitcoin first appeared, many people assumed that they could use it anonymously, that isn’t quite the case. Bitcoin is transparent, and with blockchain forensics tracking it’s easy to discover how it’s been used and by whom. But there are still a number of things that users can do to hide their activities a little better and stay fairly close to anonymous.

Why You Might Want to Stay Anonymous

Just because you want to stay anonymous doesn’t mean to say you’ve done anything wrong. Anonymity helps security, and privacy helps maintain sanity. Why should the world know your business? It certainly doesn’t need to know about your cryptocurrency holdings. But of course, some people want to hide financial information to avoid taking a hit in divorce or bankruptcy cases, or to hide criminal activity. Whether your reasons for hiding your cryptocurrency transactions are benign or not, what you really want to know is how easy is it to do?

Anonymity as a Spectrum

The question of whether or not a system is decentralized isn’t completely binary. There are many different shades of centralization and decentralization, and you will always find aspects of both in any crypto. You can think about being anonymous in the same way. There’s no way to remain completely anonymous, but there are moves you can make to increase your anonymity. Some actions will greatly improve it a lot while others won’t make much of a dent.

Factors Affecting Anonymity

Privacy Coins, like Monero (XMR) and ZCash (ZEC) were designed with privacy and anonymity in mind. They may be better than the average but that doesn’t mean to say that they are perfect. The rise of these sorts of tokens has attracted a great deal of attention from forensic tracking companies and intelligence services, and they have significant resources that they can bring to bear on cracking these tough nuts. At the same time, the teams behind Monero and Zcash are equally committed to maintaining the anonymity of their users, so there’s a kind of arms race going on, with each team trying to stay ahead of the other in a never-ending battle of wits.

But there’s only so much that anyone can do to maintain complete privacy. Even the most anonymous coin needs to be bought from someone, and usually, that means going to an exchange. If that happens, the exchange knows who is doing the buying and when they’re presented with a subpoena that’s the information that they will be forced to offer up.

A technique called coin mixing can be used to sow seeds of confusion around ownership though, and some cryptos like DASH do it automatically. Even though this can help, the consensus is that genuine privacy coins like XMR are still the better option.

On the flipside, using the same bitcoin address more than a couple of times makes it easier for others to see who has control over a wallet, so this reduces anonymity and is best avoided.

Something else to use to increase anonymity is Reusable Payment Codes or PayNyms. People can share their PayNym codes without giving away their account balance or transaction history because a unique new and unused bitcoin address is securely generated for each payment received.

Another approach is to use a VPN or Tor because this hides the IP that broadcasts the transaction.

Moving funds from one address to another reduces their anonymity because it makes it easy for investigators to see the links between wallets.

The “know your customer” procedures that exchanges use can also really put a dent in privacy because they let the exchanges see which addresses a person has control over. And if they need to look deeper, they can find out where the money is going from and to. It’s pretty hard to get hold of cryptocurrency without going through an exchange, and when you do, most of them are required by law to have KYC policies, so there is seemingly no escape from agencies knowing who you are.

If you exchange currency with someone who knows your identity then they represent one more potential threat to your anonymity. Recipients usually will be easily able to see your wallet address, and with some detective work they may even be able to find other addresses that are linked to it. They don’t even have to be detectives themselves since there are a growing number of experts in this field using an ever-expanding array of forensic detection software.

Blockchain Forensics

Two big players in this burgeoning field are Chainalysis and BIG Blockchain Intelligence Group. They have developed their own software, but many companies don’t author their own wares. They perform forensic software investigations manually or using the likes of Qlue produced by BIG. Some assist law enforcement agencies, while others help tax authorities. Some investigators mainly work with lawyers in the divorce sector to locate cryptocurrency assets and also do the same thing for bankruptcy fraud.

Discussion

There’s no single ‘anonymous’ button that a person can press to render themselves invisible online. The extent to which their activities can be made opaque is on a sliding scale, so they will need to use numerous strategies to attain a respectable level of anonymity.

Anybody seeking anonymity needs to ask themselves how important it is to them. If an agency is likely to pour huge amounts of money into finding out what they’ve been up to with their cryptocurrencies, then it may indeed be worth investing time and energy in becoming as invisible as possible, but for most people, the effort of maintaining a high level of anonymity is simply not necessary.

And in any case, if someone decides today that they will become as anonymous as possible from this point forward, that still does not hide transactions that they completed and past. Those can still be discovered, and their old wallet addresses may be linked by transaction data to new wallet addresses, effectively tainting them, so, the only real way to be safe now is to always have been safe, from the moment they began using cryptocurrency— which is impossible! When most people first purchase cryptocurrencies they don’t even know how to create their own wallet address, which means no matter how sophisticated they are now, the naïveté of their old self creates a breadcrumb trail that forensic tracking firms can easily follow.

Summary

It’s not difficult to use the technologies that help anonymity, but what is difficult is to combine them for maximum effectiveness—right from the beginning—and maintain them. If somebody wants to find out about cryptocurrency transactions that you were involved in then they probably can.