Bitcoin is sometimes described as an untraceable payment mechanism that encourages illegal activity by allowing criminals to send and receive money without being monitored. This representation indicates that bitcoin users can operate completely anonymously, with their identities hidden. However, this is not always the case. While bitcoin provides more privacy than typical payment methods that require a third-party intermediary such as a credit card company, it is still not as private as cash. There are actually several ways a person’s identity can be revealed through bitcoin transactions.
Anonymity versus pseudonymity
The bitcoin blockchain is not anonymous, as it is a continuous public record of all transactions that can be accessed by anyone at any time. Instead, public key cryptography is used to encrypt activities on the blockchain, masking the true identities of the people behind them. As a result, bitcoin is pseudonymous. Each user receives two digital keys in every bitcoin transaction: a public key or address, which is visible to everyone and is transmitted on the bitcoin network, and a private key, which is known only to the user and serves as the user’s signature.
Others can use the private key to verify that the transaction was indeed signed by that person. Only one transfer between two public keys on the bitcoin blockchain will be displayed, along with the time and value of the transfer.
Bitcoins can be traced back to individuals
Encryption can give the impression that these activities are visible but not traceable to specific people. Bitcoin, on the other hand, is not as undetectable as encryption may seem. It is feasible to link an encrypted transaction to a specific person; this is not an insignificant risk. This can happen in many different ways.
Users who use a bitcoin trading exchange to exchange cash for bitcoin must provide personal information to open an account with the exchange. All those thoughts and assumptions that anonymity cannot be guaranteed in case of transactions, could affect the entire entertainment industry. Anonymity is one of the main reasons many players started using Bitcoin for online gambling; however, if there are valid possibilities to trace the transactions, then it might appear that there are some changes. The information collected by the exchange varies, but generally contains a user’s first and last name, as well as a phone number, at a minimum. The exchange may also collect a user’s IP address. A user’s personal information could be disclosed if these transactions were vulnerable to a data security breach. Additionally, some centralized exchanges provide customers with the option to have their bitcoin assets and private keys managed on their behalf.
There are other services that maintain users’ wallets on your behalf, such as online wallet service providers. We can say that a wallet is more like a software that stores the public and private key pairs of a user. Because these centralized exchanges and online wallet service providers store private keys, they are excellent targets for thieves because, as noted above, anyone with access to a user’s private key can generate a legal bitcoin transaction. A hacker who gains access to a registered person’s private digital key can transmit all of the user’s bitcoins to himself or to any intermediary he chooses.
Exchanges are also becoming more regulated, which could lead to government organizations gaining access to a registrant’s personal information. Earlier this year, South Korea imposed stricter bitcoin regulations. Users will only be able to transact on their exchange wallets if the identity number or letters on the exchange correlate with the identity of the bank account that person is using at that particular time, according to new South Korean legislation. South.
Exchanges are already subject to some legal obligations, including responding to the solicitation, which may require them to disclose personal data with government agencies if required by law. For example, a judge recently ordered Coinbase Exchange to turn over information about some 14,000 of its users to the Internal Revenue Service. Based on a quick assessment of the online privacy rules of various exchanges, an exchange will share a user’s information as necessary to meet its legal and regulatory responsibilities.
It is also feasible to know the users simply by examining the Blockchain transactions. Elliptic and chain analysis, have created companies in blockchain research. These companies use bitcoin blockchain analytics to correlate bitcoin addresses with online organizations and help their clients determine the danger of illicit activity.
Clients include exchanges and government agencies. In fact, the IRS has been using Chainanalysis software to identify potential tax evaders since last year. From there, the researchers were able to learn about the structure of the bitcoin network, where the transaction money is sent, and whose companies are involved. Another investigation of bitcoin transactions in a small university sample revealed that employing behavior-based clustering algorithms can reveal the profiles of up to 40% of users in a typical academic setting.
Despite these privacy concerns, bitcoin users should not be discouraged; There are techniques to improve privacy on the bitcoin block chain. For starters, a crypto user can create a branded innovative bitcoin address for each upcoming transaction, resulting in a new public key for each transaction, making it more complicated to link the transactions of a single person. to the same address.
Second, a bitcoin user could take additional steps to reduce the danger of third-party exchange tracking. The user can visit the exchange and establish an account without providing any real unique information by using the anonymous Tor browser; The registered person’s IP address and sensitive information would not be revealed. Third, the user can avoid holding bitcoins in third-party online wallets and instead use only offline PC wallets, which reduces the risk of exchange hacking. Fourth, bitcoin mixing algorithms like CoinJoin connect users and allow them to pay with mixed bitcoins. Because only a subset of transactions are recorded on the blockchain, it is more difficult to identify a specific user.
Monero as an alternative
Alternative cryptocurrencies with an increased focus on privacy have emerged as a result of these privacy concerns. The most famous of these replacements is Monero. Unlike the bitcoin blockchain, which, as noted above, uses two-key encryption, the Monero blockchain uses one-time keys and ring signatures.
This results in a unique signature that can be used to accept or confirm a transaction. When a person engages in the Monero transaction, the approved person can verify that the transaction came from a pool, but not the address of the initiator whose private key was used to generate the signature. As a consequence, the Monero blockchain does not identify a specific donor and recipient addresses and transaction amounts are hidden. Monero has become the currency of choice for people who value their isolation. The open structure of the blockchain, coupled with the increasing danger of government regulation, can allow users to be identified when trading the currency.