Anonymous transactions are one of the aspects many people associate with bitcoin, and this is said to enable various criminal activity. However, with thorough knowledge about how the blockchain works, one soon realizes that this is not the case. The bitcoin blockchain works like a public database that eternally stores every transaction performed, and where transparency is a key aspect. This aspect, obviously, is far from desirable for someone with criminal intentions.
Pseudonymity is a more correct term
A more accurate term in this context is pseudonymity. The addresses stored in the transaction history of the blockchain should consequently be considered as pseudonyms. These pseudonyms can then, through various methods, be linked to a specific person, who can be held responsible for any criminal actions. Information regarding a specific person can, for example, be collected from internet service providers, crypto exchanges, wallets, or spyware (malicious software with the purpose of acquiring disclosed information).
The people and companies involved obviously try to keep such information confidential, but companies might be obliged to disclose information to for example police, tax agencies, or other authorities if urged to.
Nowadays, so-called “multiple address wallets” are being used. This means that several addresses are used for the same wallet in order to increase the difficulty of tracking the users. If one address is used only for a single transaction, the possibilities for tracking the user considerably decrease since there only is one counterparty from where information could leak. Generally speaking, it always gets more difficult to track the more addresses and transactions are involved, and a “multiple address wallet” creates considerably more addresses to keep track of.
Human error – the weakest link
In many cases, the human error is the number one reason enabling tracking of users. Even though one party has indeed taken all necessary precautions to assure anonymity, it is possible to identify this user by gathering information from the other party (or someone this person, in turn, has interacted with), who might not be as thorough.
Let’s take an example. Charlie has taken all available measures to assure anonymity. Bobby, who knows Charlie and his bitcoin address, now makes a transaction to Charlie’s address as remuneration for a good or service. This transaction is, like always, stored on the blockchain, which means that the connection between these two can be confirmed through this. In case Bobby is not as thorough as Charlie when it comes to security, chances are that he has left traces, maybe by having disclosed his address to someone in an un-encrypted chat.
Should the police be able to get hold of that chat history, they could pressure Bobby to disclose the identity of the person connected to the address in question. Alternatively, they could urge a crypto exchange, used by Charlie, to give all information available to them, so that they can confirm the connection between the address and Charlie. In this way, they could then charge Charlie for transactions made related to illegal activity.
Researchers are also working on methods to track, in this context, ancient transactions used to pay for criminal goods and services on Silk Road, the now-closed web portal focusing on criminal activity. Also, it seems that it now even is possible to, through bitcoin transactions, identify users of the (alleged) anonymous web browser Tor, CCN reports.
The advantages of anonymity
For someone with good intentions, the lack of anonymity may not seem like a major problem, but the truth is that the economic freedom, that many are dreaming to accomplish with cryptocurrencies, by this is being threatened. This is by many considered as negative. On the contrary, many people embrace regulations and control in order to counter money laundering and other criminal activity.
Despite the good intentions behind this, also this is problematic since cryptocurrencies are meant to work in all situations, regardless of where you are in the world, and it is easy to imagine situations where anonymous transactions can prove useful, especially in case of an oppressive totalitarian state.
Better alternatives around
Despite the never-ending attempts to curb the anonymity on the Internet in general, even more methods to counter this arise. This is also true for cryptocurrencies. This takes place in the form of the so-called “privacy coins”, such as dash, zcash and monero, which all claim to offer totally anonymous transactions. In other words, bitcoin most definitely does not seem to be the best solution for someone striving for anonymity.
Consequently, claims about bitcoin being anonymous cannot be considered true, even though anonymity in principle can be achieved. Better alternatives are however available, which makes statements about bitcoin being a tool for criminal activity rather hollow.
