Bitcoin and other cryptocurrencies have been accused of being used in criminal activity and of stimulating illicit activity, which is one of the major concerns surrounding their use. Many government authorities, such as US Treasury Secretary Janet Yellen and European Central Bank President Christine Lagarde, have expressed concern about criminals and terrorists using cryptocurrencies.
With the rapid development of the crypto space, this notion has become a significant exaggeration. Less than one percent of all bitcoin usage is associated with unlawful and criminal activity, according to a report published nearly two years ago by a cryptocurrency business called Elliptic.
Since it is so difficult to trace the origins of laundered funds, it has long been a preferred method of funding criminal enterprises. Because cash is physically transferred, there is almost no way to determine where it came from or where it went because of the lack of a paper trail.
When contrast to Bitcoin, tracking down a transaction’s origin and destination is a breeze.
Now that we’ve gotten that out of the way, this article will go into the level of traceability that surrounds Bitcoin and other cryptocurrencies functioning around the world.
Determining the History of Bitcoin Transactions
Like I indicated earlier, Bitcoin transactions can be traced with relative ease. Information about every Bitcoin transaction is kept and saved on what is termed a ledger, often popularly known as a blockchain, which is accessible to the public. This is so even though Bitcoin can be created, transferred, and stored independently of any central authority.
In practice, it is possible to trace every single Bitcoin back to its original owner and the person who currently has it. However, it’s important to remember that the blockchain only stores the public address of digital cryptocurrency wallets, which may or may not correspond to the actual proprietor of the wallet.
This effectively transforms Bitcoin into something closer to pseudonymous than true anonymity. For the purposes of exchanging Bitcoins on a particular Bitcoin network, a “Bitcoin wallet address” is essentially a special form of coded address. It’s equivalent to a username or account number in email or banking contexts.
Moreover, with the advent of Bitcoin explorers, it is now very difficult to conduct Bitcoin transactions under a completely anonymous identity, as was noted above in the section on blockchain.
Bitcoin explorers are tools that assist bring to light the transactions taking place on the Bitcoin blockchain, making it possible for anybody to see the full path of a Bitcoin’s journey from its initial wallet to its final recipient. With such a public ledger, keeping tabs on Bitcoin transactions is a breeze. The blockchain can be thought of as a transparent database.
When we compare Ethereum and Solana, two other prominent cryptocurrencies, we see that they, too, have explorers that make their blockchains public. Etherscan is the name of the Ethereum explorer, while SolScan is the name of its Solana counterpart.
These explorers make it simple to trace blockchain transactions, revealing details like the sending and receiving addresses and the total value of cryptocurrency exchanged. Despite this, many people persist in the myth that cryptocurrencies like Bitcoin can be used to perform totally anonymous transactions.
One thing to consider is that Bitcoin was originally conceived as a mechanism to protect users’ anonymity. Bitcoin’s supposed anonymity stems from the fact that its users can generate a wallet address online without disclosing their true identities.
Satoshi Nakamoto, the man behind Bitcoin, pointed out in the original whitepaper that wallet addresses could be used to track down individual profiles that lead to a common identity, and he himself recommended that Bitcoin users should use a fresh address to perform each transaction, helping them in maintain a good level of privacy, but it is important to remember that the transaction itself cannot be hidden in the blockchain.
Aspects that Allow for the Tracking of Bitcoin Transactions
As has been made abundantly evident, it is possible to trace Bitcoin transactions with ease since the Blockchain that underpins the cryptocurrency keeps a transparent record that can be viewed by everyone.
Over the past decade, numerous studies have been conducted on this topic. However, the capacity to conduct a transaction with complete anonymity does not exist, particularly when it comes to the fundamental notions of a blockchain ledger, which will continue to be completely open and accessible to anybody interested in looking.
Since verifying the identities of those associated with Bitcoin addresses is an essential step in any Bitcoin transaction, it is possible for anybody to trace the transaction back to its origin, determine when it occurred, and identify the wallets that participated in the exchange.
The good news is that as additional nations have begun to regulate cryptocurrencies, the majority of them have taken into account the Know Your Customer judgement (KYC). According to these regulations, identifying information must be provided before one is allowed access to centrally managed trading systems.
With users’ identities on these sites in hand, governments may follow down everything from past purchases to the value of any assets kept in a digital wallet.
When using a centralized exchange to buy and sell Bitcoin, you’ll need to verify your identity with the exchange so that your Bitcoin wallet address can be linked to your account. The impressive thing to remember is that the record surrounding Bitcoin transactions cannot be removed, therefore authorities always have the right to see any transaction history if requested.
If there were ever to be any illegal behavior with Bitcoin transactions, investigative authorities would be able to inspect the blockchain and identify the persons involved far more quickly and simply than they could with physical cash. Several well-known criminals have testified to the fact that cash is, and always will be, the preferred method of transacting illegal business.
Bitcoin itself supposedly doesn’t need a central authority to run, but cryptocurrency exchanges are regulated by governments, so they must apply know-your-customer (KYC) rules to verify their customers’ identities before they can trade with them. Therefore, if a person accepts the agreements and uses the services of a cryptocurrency exchange, they have also accepted the KYC regulations.
How Can Bitcoin Transactions Be Tracked?
Governments may now easily trace any potentially illicit Bitcoin transaction in order to determine the true identity of the person or people behind the curtain, thanks to the proliferation of legislation and regulatory oversight of cryptocurrencies. Over the years, many governments have confiscated cryptocurrency worth millions of dollars.
Due to the high degree of secrecy provided by cryptocurrencies, criminals have attempted to use them for various unlawful transactions, however they have ultimately failed. Legislation has tightened as a result, since the incentive to detect fraudulent criminal activity has grown.
It’s easy to keep tabs on Bitcoin transactions even if the wallet’s owner remains a mystery, but it might be difficult to pin down who exactly is using a given address. The person using the wallet may be easily identified, and the trail of the transaction can be traced, if the person wants to exchange cryptocurrency for fiat currency.
Criminals might go to considerable pains to conceal their identities by using different wallet addresses whenever they transact in Bitcoin, rendering the usage of Bitcoin explorers largely, but not entirely, useless. In these cases, authorities can keep up in a far more effective manner by using blockchain data platforms like Chainalysis.
While this may initially result in little scams, when more and more actions are monitored, such as transaction history and KYC information, the larger picture begins to become clear.
As of August of this year, according to Chainalysis, the number of scams has decreased, but this trend has been offset by an uptick in illicit hacking events.
According to data compiled by Chainalysis, in the first half of 2022, hackers stole $1.9 billion worth of cryptocurrencies from cryptocurrency exchanges, decentralized finance (DeFi) protocols, and other types of internet wallet services, marking a 50% increase from the amount stolen in the same period in 2021.
The Justice Department’s track record of recovering digital assets valued at millions of dollars is impressive. The US Department of Justice reported in June that they had successfully recovered 63 Bitcoin that had been taken in a ransomware attack.
Two years ago, the DOJ said that they had used Chainalysis to identify over $28 million worth of cryptocurrency stolen by a North Korean hacker team, preventing the thieves from accessing exchanges to launder their illicit gains.
To name just a few examples, these are the kinds of situations in which law enforcement agencies have used the transparency of blockchain technology to recover stolen cash.
Trying to find Bitcoin wallet addresses
Using a Bitcoin explorer, one can obtain the address of a Bitcoin wallet, albeit this does not always reveal the owner of the wallet. Locating the true owner of a wallet can be challenging at best, and impossible if the information provided is imprecise. Finding the original identity behind a wallet can take a long time, despite the fact that the blockchain explorer can quickly locate the relevant transactions and addresses.
Although a Bitcoin wallet address is pseudonymous in that it uses a string of alphanumeric characters instead of a real name, it is still possible to discover the true identity of the owner if all the pieces of information are available and linked together.
In their pursuit of anonymity, criminals have gone to incredible lengths. Criminals utilize Bitcoin mixers in addition to several wallets. Bitcoin mixers essentially take Bitcoin transactions from multiple sources inside a pool, combine them, and then send them out to different addresses, making it much more difficult to trace the origin of any one or group of transactions.
Using a variety of wallets simultaneously is a hassle to manage and monitor. In order to conceal their Bitcoin transactions from authorities and prevent them from being tracked, users might set up a complex web of wallets. Keeping track of and mapping all all the transactions and wallet addresses can become a very onerous problem for law enforcement to monitor and obtain any results out of.
Both methods present their own challenges, but when combined, they can constitute a major headache for authorities and trackers, who already have to spend considerable time and energy keeping tabs on individual transactions and individual wallets.
The Potential for a Completely Hidden Bitcoin Wallet
It is possible to keep one’s Bitcoins secret by using a wallet, but the method of doing so is what ultimately matters. Since your identity may be easily traced back to you if you make even the smallest error, there’s no point in even trying to use it. Although it is theoretically feasible to maintain some level of privacy when using Bitcoin, it’s important to remember that the wallet itself isn’t the only factor that can determine how anonymous you ultimately are.
Repeated use of the same wallet for multiple transactions might be used to link the user to a common identity. It is already difficult to conduct transactions anonymously without the Know Your Customer (KYC) regulations that come with exchanges.
Hardware wallets offer complete privacy. The Electrum wallet, for instance, can be used in conjunction with a hardware wallet to safeguard digital assets. A major sticking point, though, is how Bitcoin will be moved onto it. Transferring Bitcoin through an exchange that abides by the KYC guidelines would render the anonymity of the transaction null and void.
Sharing Your Bitcoin Address
In contrast to the public key, which can safely be shared without worry, the private key should be kept secret under any and all circumstances. The private key is not needed to conduct a transaction when utilizing the public key.
It would be pointless to take the public key because it is already available to the public. The wallet’s public key serves much the same purpose as an email address or account number. Anyone can make a transfer using the public key, but only the owner can use it to access the object being transferred. It is perfectly safe to give out your public key for a cryptocurrency as no funds can be stolen in this way, but maintaining your anonymity is next to impossible because every transaction can be traced back to your unique address.
Stolen private keys mean all the money in your digital wallets is at risk, and it may never come back. While it is possible to retrieve crypto assets by moving them from one wallet to another, this is impossible if the public key has been compromised, as the corresponding position in the blockchain will then be open for anybody to remove the assets from. One’s private key serves as the wallet’s primary login. In order to maintain safety, you should duplicate this key in a number of offline, physical locations.
The assumption that Bitcoin and other cryptocurrencies are constantly used for criminal and terrorist purposes lacks credibility. Unfortunately, the cryptocurrency industry’s reputation has taken a hit as a result of the widespread distribution of misinformation by those who lack a thorough understanding of the technology underpinning digital currencies.
When the public is able to put aside the terrible misinformation propagated by local media and gain a clear understanding of the true meaning behind the use of Bitcoin and other forms of cryptocurrencies, they will be in a much better position to appreciate the potential benefits of this technology and the ways in which entities are employing it to revolutionize the financial sector.