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Isn’t Bitcoin supposed to be anonymous?

January 15, 2018 10:00 am Published by

One of the most commonly touted benefits of Bitcoin is anonymity. Many people prefer their transactions to not be linked to their names for political or philosophical reasons. Others do so for the sake of their privacy, such as when making an anonymous donation to a charity. Yet law enforcement around the world is steadily getting better at tracing Bitcoin transactions and finding the names behind the wallets.

So, is Bitcoin anonymous?

The answer is both yes and no.

While the media often describes cryptocurrencies as anonymous, Bitcoin is considered to be pseudonymous.

Think of it this way. Imagine an author writes a series of books under a fake name. Anyone who looks at the books cannot tell they wrote them because they contain no identifying information. But if the author is linked to that pseudonym, it will become apparent that the entire series is their work.

Bitcoin is much the same. When someone sends or receives Bitcoin, their personal information is not linked to the transaction. However, if a particular address is linked to a particular person, it will be clear that they made all of the associated transactions.

How can a Bitcoin transaction get traced back to you?

Much like an author using a pseudonym, a person using Bitcoin can take steps to protect their identity. With a great deal of work, they can make it hard for anyone to trace them. But, as it stands, they cannot guarantee no one will be able to link their identity to their transactions. An author could use a different name for each book and a Bitcoin user could use a different address for each transaction, yet anonymity is never assured.

Cryptocurrency transactions leave behind a trail which can be followed. Every Bitcoin transaction is recorded on the Blockchain (which is public). Anyone can access this and look at the activity to and from an address. Transactions are public while the owners of wallets are anonymous.

For example, some people post their Bitcoin addresses online, such as on a forum. If they later use the same address for something illegal and have also posted identifying information to the forum, it is simple to link the two.

There are numerous other methods of tracing Bitcoin users and new ones are constantly emerging. We also have to take into account Know Your Customer (KYC) verification, wherein businesses verify the identities of their clients to avoid legal repercussions.

Conclusion: Bitcoin is not strictly anonymous

At the time of writing, the EU is introducing new measures to undermine the anonymity of Bitcoin. The laws, which should come into effect in 2019, will require exchange platforms and wallets to collect identifying information about their clients. The stated intention is to reduce the number of people using cryptocurrencies to avoid paying taxes, or for other illegal purposes. It’s undeniable that many people use Bitcoin as a tool for breaking the law, which gives cryptocurrencies a bad name. Some believe that legislation will help legitimise Bitcoin and prevent scams, while others believe this defeats the objective of decentralization.

A member of the Bitcoin development team, Jeff Garzik, stated early on that it was a stupid to “attempt major illicit transactions with Bitcoin, given existing statistical analysis techniques deployed in the field by law enforcement.” If a wish for anonymity is your primary attraction to Bitcoin, be aware that it may be unwise to use it for large transactions you want to remain private. However, the demand for anonymous payment methods has led to the development of other cryptocurrencies, such as Monero. The answer to the question of whether Bitcoin is anonymous or not changes over time as both technology and legislation develop.

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