How private is the blockchain?

How easily can your cryptocurrency be tracked?

Many people assume that cryptocurrency transactions on the blockchain are completely anonymous, but it’s not the case. Different blockchains offer different levels of privacy and anonymity.

Bitcoin, for instance, offers little privacy, and transactions on the chain are not anonymous, they’re merely ‘pseudonymous’.  This means a Bitcoin address has no name or identity directly attached to it, yet if someone has knowledge of the connection between you and an address then every transaction you’ve made to and from it is there to be seen on the blockchain. Anyone looking will know how many bitcoins you’re holding and, if they can find information on the addresses you’re sending it to, could quickly know a lot about your business.

In addition, once bitcoins are sent to a crypto exchange, a paper trail is created that can be linked to an individual. This is because every wallet on an exchange should – theoretically at least – be subject to KYC (Know Your Customer), and therefore have the ability to be tracked to a particular person. Even without sending cryptocurrencies to an exchange, so-called Blockchain forensics has become big business both in the law enforcement and private sectors in recent years, and techniques such as IP address tracking can be used to trace movements.

To counter Bitcoin’s shortcomings in terms of privacy and anonymity, privacy coins such as Monero and ZCash have been created which add levels of privacy to their blockchains. Dash, another privacy coin, offers a ‘PrivateSend’ feature that utilizes ‘mixing’ operations which take multiple transactions and combine them in such a way that it is difficult to work out which sender relates to which receiver. There’s more information about mixing techniques in our previous blog – https://blog.parsiq.io/2019/06/18/how-to-launder-money-on-the-blockchain/.

Bitcoin and fungibility

The cash in our pockets provides two things: anonymity and fungibility. The first means it’s our business where and on what we spend it. The second is more subtle, but it means that any cash we hold is of equal value. Whether it is fresh off the press, or has been used in multiple dodgy dealings, that cash is worth what it is worth and there is little chance it will be refused.

In contrast, should you be paid in Bitcoin that was previously stolen, there is a much higher chance you will eventually be unable to spend it as the coins are easily traceable. But on the positive side, it means that as soon as stolen funds are flagged, it becomes difficult for criminals to exchange them into fungible assets (such as fiat currency).

The fact that all transactions are permanently recorded on a public ledger should be a constant reminder that most blockchains are less anonymous and private than cash. Even the privacy coins are generally only private to a certain extent. After all, the reason for a public ledger is to provide immutable proof of each transaction.

However, for most people this won’t matter. The benefits and convenience of blockchain technology far outweigh the negatives. It’s a transformative technology, and we’re still only just working out its true potential.

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