Due to the peer-to-peer nature of cryptocurrency transactions without names, email addresses, and other sensitive information, many people have ascribed anonymity to cryptocurrency transactions. There is a saying, “if you don’t want it public, keep it away from the internet.” Indeed, cryptocurrency transactions are conducted on a decentralized “blockchain” network, where data isn’t privately managed by a single firm; hence, integrity is preserved. However, the transparent nature of the blockchain makes transactions pseudonymous and not anonymous.
How Do Blockchain Transactions Work?
The blockchain is a public ledger that keeps public data of transactions, which can be accessed by anyone with an internet service. Hence, anyone can easily view your transaction history on the blockchain. However, this is where it gets tricky.
Blockchain transactions are carried out with only public addresses, which is a string of hexadecimal characters that look like “a1b2c3d4…xyz.” Hence, unlike usernames or email addresses, these are difficult to identify; without someone sharing their public address, it may be difficult to know who has what public address. Hence, only someone who knows your address can identify your transaction in the blockchain. As a result, we can say cryptocurrency was built for anonymity.
However, due to the need for liquidity and the ease of converting fiat to crypto and vice-versa, Centralized Exchanges (CEXs) have become commonplace. Against the tide of anonymity, Centralized Exchanges require users to sign up with details such as email addresses and government-recognized names (KYC). As a result, crypto transactions could be tracked and identified. This is mainly done to deter criminals from using crypto exchanges to launder money or deal in illicit transactions. For example, if Mr. A sends 1 BTC (from an illicit source) to Mr. B, who sends 0.8 BTC to Mr. C, who eventually sells it for some fiat via an exchange. Mr. A and Mr. B may remain unknown; however, Mr. C can easily be apprehended by the authorities, and it only becomes a matter of time before others in the network are caught.
Are Cryptocurrency Transactions anonymous?
Considering the example above, we can conclude that cryptocurrency transactions are not absolutely anonymous. However, if you can find a way to complete transactions without funneling any of your funds through a Centralized Exchange, then your transaction will likely remain anonymous.
Hence, crypto transactions are regarded as “pseudonymous” – defined as bogus anonymity.
What About Privacy Coins?
Privacy coins like Zcash, Monero, and Dash have algorithms that work with zero-knowledge proofs, enabling them to compute blockchain data by publishing hardly any transaction data on the blockchain. Hence, transactions done with privacy coins can offer an extra layer of anonymity. However, when linked with a Centralized Exchange, there is still a chance of exposure.
Crypto tumbler services also exist but are increasingly being blacklisted by Centralized Exchanges due to governments’ frowning against them. Crypto tumblers help to mix several transactions in order to help people lose a trail and complete their transactions anonymously. However, due to its activity and heavy links with crime, crypto tumblers are getting blacklisted and hardly available to use.
How Can I Ensure Anonymity With My Crypto Transactions?
The only absolute way to ensure anonymity when transacting on the blockchain is to ensure that your identity isn’t linked to any public address; hence, more than just avoiding Centralized Exchanges, you would need to complete transactions with people who don’t know your real identity, because if your trade partner is identified, then you can be identified too.
Hence, the chances of remaining anonymous are slim because you cannot control the actions of others; whether or not they connect with a Centralized Exchange is not your decision to make.
Indeed, Satoshi Nakamoto created Bitcoin to be a standalone currency that needn’t depend on fiat currency. However, the volatile nature of cryptocurrency makes it necessary for people to have instant access in and out of cryptocurrency; hence, centralized exchanges thrive.
Perhaps, in the nearer future, when Bitcoin becomes less volatile and is better seen as a means of exchange rather than a store of value, there will be fewer interactions with centralized exchanges, and anonymity can be attained. However, for now, the only way to maintain absolutely anonymous transactions is with cash payments; all other digital options could lead back to you.