Home News Cryptocurrency How does cryptocurrency protect your anonymity?

How does cryptocurrency protect your anonymity?

With the rise of digital transactions and increasing e-commerce, consumers lost a great deal of privacy. Every transaction is logged by your bank, payment processor, and to whomever they sell your data. Different companies will have specific guidelines and policies when it comes to your data. Some promise a great deal of privacy, but the fact remains that your transactions are directly tied to your name, and you do not have full autonomy over your wealth. 

The rise of Bitcoin 

Cryptocurrency started with Bitcoin, which promised a decentralized digital currency. A transparent ‘ledger’ called the blockchain ensures that transactions are legitimate, by frequently cross reversing all transactions on the blockchain. This constant cross reversing is done by anyone who wants to participate. In return, they generate a small amount of Bitcoin, creating an incentive to ‘mine.’ 

The decentralized nature of Bitcoin made it an attractive option for those who are looking for privacy. It is easy to set up a Bitcoin wallet, which requires no personal information to start sending and receiving currency. For long term storage and increased safety, it is possible to use a cold wallet taking your Bitcoin offline, until you want to start transacting again. 

For whom?

Financial censorship is an increasingly common phenomenon. There are but a few significant players in the payment processing world. We have seen these companies put payments on hold and ban users altogether. Mostly because of pressure by governments, but increasingly because of there own cultural and political goals and ideals. 

The problem is not just with payment processors. Banks and service providers – such as Patreon – have terminated accounts for similar reasons. These banishments commonly target political and cultural dissidents. 

Therefore, it is no surprise that these groups and individuals adopted Bitcoin and other cryptocurrencies. Even though it is not nearly as easy to donate and subscribe, cryptocurrency can be their life support. They also provided potential donors of controversial projects anonymity. 

Privacy and Bitcoin 

However, the open “ledger” in the Bitcoin blockchain has a substantial disadvantage: all wallets and transactions are public. Anyone can look up a wallet and see what is inside, monitor where the currency came from and went to from the moment it was mined. Open Source Intelligence (OSINT) tools such as Maltego can monitor and visualize this information, as shown below. 

Hypothetically, ill-intentioned entities could link you to a specific Bitcoin address when you purchase the coins on a marketplace and when you declare an address publicly. Furthermore, one can follow these coins to their destination. Most marketplaces promise not to share your information with third parties, but there is no guarantee. In the case of a hack or a government raid, your transaction history could be reconstructed and used against you.  

There are numerous methods of obfuscating your transactions on the blockchain, such as never reusing an address and coin controlling. However, these methods could still leave a trace. By using services such as tumblers, mixers, and coinjoins, you can gain more anonymization. However, these come with the risks of theft, seizures, and possible illegality due to anti-money laundering regulations. 

Without going into more technical details, we can conclude that Bitcoin is an excellent option for those who want to avoid using banks and payment processors, although it has its flaws. Guaranteeing anonymization with Bitcoin requires quite a bit of technical knowledge and developed privacy practices, both online and offline. 

Monero (XMR) 

That is where Monero comes into the picture: the most popular cryptocurrency design for optimal privacy and information security. With features such as enforced privacy, ring confidential transaction, ‘bulletproofs,’ stealth addresses, and ring signatures. 

These features combined make it that both the sending and receiving wallet in a transaction remain anonymous. Also, the transaction and wallet values are unknown to the public. Therefore, a hypothetical observer of a public address cannot reconstruct an incoming or outgoing transaction. That makes Monero the preferred option for those who want their transactions to be anonymous. 

Now it should be noted that there are theoretical problems with Monero’s anonymization. Research shows that deanonymization is possible under the right conditions. However, these methods have not been recreated on a significant scale and are unlikely to be utilized by law enforcement. There is also a significant concern with the mining pool size, which could become a problem if an entity gains a majority share. Even though the Monero pool diversity has been improving, it is still far from optimal. 


Illicit marketplaces and malicious software

With the relative anonymity of cryptocurrency and user-friendly programs – such as Tor – making it easy to browse darknets we have seen an entirely new market surge. It is a large underground network benefiting from the decentralized nature of these tools. Marketplaces selling drugs and illicit services are commonplace, with the preferred currency being Bitcoin or Monero. 

Law enforcement throughout the Western world has seen a sharp increase in online drug purchases in the last decade. In some countries, up to thirty percent of all drug purchases are online. On the Clearnet, vendors of grey market goods and services have taken a liking to cryptocurrency as well, because of oversight and no involuntary refund in the case of a dispute with a customer. 

Malicious software that encrypts your data – and then offers a decryption key in exchange for cryptocurrency (ransomware) – has also become more prevalent. The anonymous nature of these transactions and the relative ease of purchasing cryptocurrencies made it profitable. 

Towards widespread adoption

The rise of cryptocurrencies and their relative ease of use, decentralized nature, and anonymization have created many new possibilities. That includes individuals who want to store and trade wealth outside of centralized banking and for organizations that continue to receive funds after they are financially blacklisted. It also safeguards the anonymity of members of such organizations.

But with anonymity comes crime, and alongside the crypto speculators and visionaries, criminals have adopted crypto as their preferred currency. That has created entirely new markets and forms of exploitation.

Also, complex technology is rarely perfect: flaws and weaknesses are repeatedly theorized and patched. Concerning speculation, hype, and forks, cryptos are seldom stable and cannot provide the relative stability of gold or cash.

However, cryptocurrencies are exciting technologies that must be watched closely, as they have and will continue to provide new financial possibilities. Nevertheless, we are quite far away from widespread adoption.



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