Anonymity and privacy were two of the main ideas behind the original crypto, Bitcoin, when it was developed in 2009.
Satoshi Nakamoto wanted to give people the ability to do monetary transactions while hiding them from central institutions such as banks.
And to say the least, this was achieved to a large extent. For example, you can use Bitcoin to make private online casino transactions in the UK, and this won’t reflect in your bank statement. You can click here to learn more about it.
So how does crypto achieve this anonymity, and how can you benefit from it? Then, what are the various privacy concerns? Today, we look at all these issues.
How Cryptocurrencies Provide Anonymity
Cryptocurrencies offer anonymity in various ways.
Pseudonymous Transactions
Although cryptocurrency doesn’t provide full anonymity, it can allow you to make payments with enhanced privacy and anonymity.
When using crypto, you do away with central financial institutions such as banks, which can monitor all your transactions using your real-world identity.
To make payments, you can send cryptocurrency to another individual or business directly. These will then be verified by users on the blockchain instead of a central authority.
Besides this, your crypto transactions do not display your name. Instead, it is replaced by a string of letters, which is your crypto wallet.
This offers you anonymity in that people aren’t seeing your real identity. However, it’s important to note that this is pseudonymity, and it’s not entirely foolproof.
When you use a crypto exchange such as Binance, you will still have to give them your real identity, which will then be associated with your crypto wallet. But unless the government comes knocking on Binance when interested in certain criminal activities, that is as far as it goes.
Privacy-Enhancing Techniques
Cryptocurrencies are always under development, and the space is full of innovation. As such, there are various techniques that have been developed with the aim of maximizing the anonymity a user can get.
And by using them, you can make it hard for various parties to track transactions and link them back to you.
One of these is the use of mixing services. These services allow you to add confusion to funds by pooling them with other uses. The mixing service will then send different coins to every user, making it hard to trace particular transactions.
To make it even harder for people to create patterns about you, you can also have multiple wallets. If a person is tracking your activities using information they have about you (such as services you pay for), having multiple addresses will add confusion and potentially throw them off.
Privacy-Focused Cryptocurrencies
Besides the inherent privacy provided by cryptos, there are some that have been developed specifically to provide users with much more privacy and anonymity. Some of these are:
- Monero (XMR): Monero uses ring signatures and stealth addresses. Ring signatures increase anonymity by combining a user’s transaction with those of several other people, making it difficult to identify the actual sender. The use of stealth addresses also helps ensure that the recipient’s address is not revealed.
- Zcash (ZEC): Zcash is another crypto that focuses on privacy by using zero-knowledge proofs called zk-SNARKs. These proofs let network users prove the validity of a transaction without needing any sensitive information. This way, it allows users to shield their transactions from people trying to track them.
- Dash (DASH): Dash, initially known as Darkcoin, boosts a user’s privacy and security through a feature known as PrivateSend. The feature mixes transactions, providing users with increased anonymity.
Generally, these cryptos take the privacy provided by the likes of Bitcoin further, using innovative techniques such as ring signatures, zero-knowledge proofs, and coin mixing. This makes tracing transactions much more difficult.
Crypto Privacy Concerns and Challenges
To be able to use crypto for maximum anonymity, you also need to understand how this anonymity can be compromised.
Pseudonymity
As mentioned before, crypto only offers users pseudo-anonymity, usually referred to as pseudonymity. This means that although they operate without revealing names or forwarding everything to a central institution, the transactions can still be traced to some extent. After all, that’s how the governments manage to recover ransom payments.
Blockchain Analysis
The fact that the blockchain records all transactions publicly opens the door for blockchain analysis, which can be used to trace transactions.
This basically involves identifying patterns and tracking funds, with the aim of linking them to real-world identities.
If the party doing the analysis has the right tools and expertise, they can potentially de-anonymize crypto transactions.
That said, this can be countered with the various privacy-enhancing techniques we discussed, such as Bitcoin mixing.
You can also use privacy-focused cryptos like Monero (XMR) and Zcash (ZEC) to make blockchain analysis on your transactions more challenging.
Centralized Exchanges and KYC
Although crypto is stored in wallets that offer good anonymity, chances are that you’ll need to use a crypto exchange at some point.
The exchange is the intermediary which will allow you to convert your cryptocurrency to another digital asset or traditional fiat currency.
The problem comes in that these centralized exchanges typically require users to undergo know-your-customer (KYC) procedures, which involve providing personal information and verifying identity.
This immediately does away with a huge layer of crypto anonymity as the exchange will have both your crypto wallet address and your real-world personal information.
It therefore introduces concerns such as data breaches and sharing information with governments. However, it shouldn’t be a major concern if you are not involved in any criminal activities.
Regulatory Challenges
Governments like it when they can see and control what you do. As such, they have started implementing laws and regulations that regulate the use to some extent.
These have been done in the name of curbing illegal activities, and so parties like exchanges have to find a balance between privacy and regulatory compliance.
These regulations are still in the early stages, so you can expect them to grow over the years. However, they’ll mostly operate at the crypto exchange level.
Wrap Up
Although the anonymity provided by cryptocurrencies has several challenges, developers and innovators are actively exploring ways to enhance it and provide users with more ways of hiding their personal information.
And today, you can already enjoy a satisfactory level of anonymity provided by crypto and various anonymization techniques, allowing you to make discreet financial transactions and protect your payment information.
