Are Cryptocurrencies Really Private (2023)?

For many, the attraction of Bitcoin and other early cryptocurrencies was the assumed anonymity of the platforms used to trade them. For those obsessed with individual privacy, it seemed the ideal solution to decouple currency from the grip of governments and traditional financial institutions (FIs). With regulation over crypto fast approaching a level comparable to what is used to regulate fiat (cash), many mourn the “death of anonymity.” But was crypto ever really anonymous? 

Bitcoin could be considered “private,” but is not – nor was it ever – fully anonymous. Instead, Bitcoin is pseudonymous, requiring a public address, or key, to accomplish transactions. While the keys aren’t currently tied to any identifiable real-world identities, transactions over time make information patterns that can be extrapolated to identify transacting parties.    

Pseudonymity means that crypto provides more anonymity than typical Electronic Payment Systems (EPS) run by third-parties, but less anonymity than cash transactions. This is due to the Distributed Public Ledger (DPL) that makes every exchange and transaction in Bitcoin visible to the entire network through the blockchain. Blockchain requires linking of every transaction the one before and the one after it in an immutable record.

The blockchain provides detailed information about every transaction ever made; including timestamps, crypto values, recipient and sender public keys. It also links the history of individual pieces of currency to its former and future owners. Over time, real-world identities can be revealed because of the sheer amount of data preserved in the public ledger.  

Why is Pseudonymity Ok?

The pseudonymity of blockchain increasingly crucial as the cryptocurrency sector prepares for anti-money-laundering (AML) and know-your-customer (KYC) compliance. Many voice concern that burgeoning AML and KYC requirements could diminish blockchain’s perceived strengths while hampering its ability to assist non-traditional investors or the unbanked.

Due to the capabilities of analysis to deanonymize crypto, however, the implementation of regulation has more benefits than drawbacks – chiefly when it comes to the legitimization of crypto as a viable currency, making it more accessible, not less. 

Will FATF and FinCen Guidance Spell the End of Crypto Anonymity?

The G-20 Summit focused on encouraging global adoption and enforcement of guidance provided by the Financial Action Task Force (FATF) to curtail illegal activities such as money laundering, terrorist financing, and tax evasion. 

Even though less than 1% of Bitcoin has been used for illicit purposes, most of the currency is tainted from even indirect contact with unsavory practices, contributing to crypto’s poor public perception. 

With regulation in line with Financial Crimes Enforcement Network (FinCEN) guidance, crypto may officially split into two worlds. One would find KYC and AML regulations followed, legitimizing crypto and allowing for clean transactions and identities. The other world would see identities, as well as the currency itself, are suspect.   

Those who choose to embrace the legitimate side will have to relinquish concepts of “privacy above all” and trust that a real-world identity will be linked to their digital one. All is not lost, however; many innovators are seeking ways to comply with KYC and AML without storing identifying information or compromising user privacy.  

Advantages of Regulating the Crypto Markets

Cryptocurrency regulation won’t kill the market but will shift it from shaky ground onto more solid footing. 

Reduced crypto scams

Instead of a cryptocurrency reality in which new coins come and go, and many altcoins within a single currency can have varying value based on “taint,” the new world of crypto will reduce scams and stabilize currencies. The practice of Initial Coin Offerings (ICOs) will become less fraught for investors, who are often left empty-handed when exchanges delist a short-lived coin. 

Increased institutional investment interest

Regulation will help ensure new coins coming to the market meet specific criteria, paving the way for confident investing. Crypto can join more traditional investment avenues as a respected option for investors of all types, including institutions. The considerable price differentials will also fade away as confidence in crypto is established, and alt currencies become less volatile. 

Legitimized cryptocurrencies

Cryptocurrency will finally become “morally” acceptable, shaking off the false public perception that it is only useful as a way for the criminal element to fund illicit activities. Individuals drawn to crypto because of its decentralized nature can come out of the dark, and transact comfortably and confidently in a newly regulated world.

Continued innovation

Regulation will drive innovation, as investors demand more access and security. Developers and technologists will be able to build out support networks for crypto that contain both architectures for regulatory compliance and fail-safes for user privacy.

The Future of Blockchain and Cryptocurrency

Cryptocurrency’s future is rapidly being cemented, but the real player in the global stage is blockchain. 

Governments will adopt blockchain technology

It is widely held that global acceptance of crypto is fast approaching, and governments will utilize blockchain technology for multiple uses. Blockchains can be virtually unhackable, making them an attractive choice for safeguarding date through distributed networks.

Cryptocurrencies and the Internet of Things (IoT) will intersect

The IoT and smart devices market is exploding; an anticipated 500 billion devices are expected to be connected by the year 2030, with the average person owning no less than 15 smart devices. Crypto has the capability and stability to make micro-investments for smart devices in a productive way.

FIs will undergo disruption.

Banks can be expected to accept cryptocurrencies and find ways to profit off of crypto-based services, by providing crypto bank accounts, crypto debit cars, access to cryptocurrencies via ATMs, and cryptocurrency loans. P2P immediate transfers will be facilitated and supported worldwide. 

Blockchain will facilitate AML/KYC compliance

The comprehensive transaction trail provided by distributed public ledgers powered by blockchain technology offers much more transparency than cash transactions or traditional FI transfers. 

With cryptocurrency, an end-to-end history of all currency movement delivers an ongoing digitized and immutable audit of fund flows. Blockchain monitoring can make it easier than ever to differentiate innocent transactions from illicit ones, cutting down on false positives while making crypto more comfortable to use. When every verified transaction can be trusted, crypto is automatically legitimized. 

Blockchain for Fraud Prevention

Privacy can still be maintained, while minimizing risks.

Identity fraud

The biggest fear of the average financial consumer is identity fraud. Blockchain can remove that fear, securely encrypting and safeguarding not just identities, but all transactions enacted by each identity. Permissions enabled blockchain means that only permitted parties will be able to verify transactions, but authorized parties gain limited access to verify identities..

Supply chain fraud

Blockchain also cuts down on the rising problems of supply chain fraud, improving both the traceability and transparency of supply chain products via a shared and distributed ledger, making each one subject to consensus protocols (requiring the approval of the majority of participants of the network — millions of computers). 

With monitoring tools and compliance with AML/KYC regulations, crypto is inevitably going to go legit. It’s won’t be anonymous, but that’s OK. The positives that come with bringing crypto up to the surface of global finance waters far outweigh the cons. 

Cryptocurrency + Privacy: Closing Thoughts

In conclusion, while cryptocurrencies may not offer the complete anonymity some had hoped for, they still provide benefits and opportunities that traditional financial systems cannot match. With regulation becoming more prevalent, the legitimacy of cryptocurrencies is on the rise. As blockchain technology continues to evolve and grow in importance, its applications will only become more widespread and influential.

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