Bitcoin does not make payments anonymous — just really hard to trace

Bitcoin does not make payments anonymous — just really hard to trace
Payments using Bitcoin will always leave some kind of trail to followCanva
  • Using Bitcoin to make payments does not mean that your transactions are hidden from the world.
  • Since Bitcoin is built on blockchain, which is a public ledger, the address of your crypto wallet is visible to everyone.
  • The amount of effort required to link a wallet address to a person or an IP address is reducing, with law enforcement hiring crypto experts and crypto exchanges requiring identity verification.
Cryptocurrencies have seen their fair share of suspicion from governments all over the world including India, China, the US, and Europe. Until a few years ago, Bitcoin was touted as the underground currency that even the world’s leading intelligence agencies won’t be able to track — but that may not really be the case.

Examples from as far back as 2015, when the creator of the Bitcoin market called the ‘Silk Road’ was sentenced to life in prison for facilitating the sale of $1 billion in illegal drugs, show otherwise. Investigators can still follow the money.

Even the most private of cryptocurrencies like Monero, DASH, and Verge are traceable to a certain degree. This is because of the very nature of blockchain. Every single transaction is recorded and kept on a ledger — and that ledger is accessible to everyone.

A lot of people still think that digital currencies, or Bitcoin, is a good use for illicit activities. In actuality, it’s probably the worst mechanism that you could use for illicit activity.

Michael Sonnenschein, CEO of Grayscale Investments, told Business Insider during a webinar earlier this month

Why do people think Bitcoin is more anonymous than a normal currency?

Simply put, the Reserve Bank of India (RBI) can track where every rupee is spent. Even if it is cash being exchanged in a foreign country, the apex bank knows how many rupees are outside the country’s borders. But when in India, only the Indian Rupee can be used to pay taxes or buy groceries — the US Dollar or Euros can’t be used without exchanging the currency first.


Cryptocurrencies, on the other hand, don’t have a central authority — there’s no one person, one company, or one government that can influence the supply of Bitcoin.

Having said that, most countries do not mind ‘barter’ of goods. One might be able to exchange a golden lamp for three silver plates. In the same way, one bitcoin could be exchanged for six laptops from a friend.

The issue is that tracking barter transactions and evaluating their value is hard, making it difficult to levy sales tax or income tax. That pushes such transactions into the informal economy — also called the black money market in India.

The problem with untraceable transactions, in addition to circumventing tax, is that they could be used for illegal activities.

Why can’t criminals hide behind Bitcoin?

Because Bitcoin is a digital currency, all transactions are made online and visible to all.

Transactions are recorded on the blockchain, a ledger of all Bitcoin transactions from the beginning. This ledger is not centralised, a complete blockchain copy is stored by all Bitcoin participants (miners) and crypto exchanges.

Transactions stored on this ledger include details such as the amount, time, the wallet money were sent from, and the wallet that received the money.
Anybody can analyse other transactions made by the same wallets that sent and received the money.

American Bitcoin ATM operator CoinFlip’s CEO commented in June 2021, “Bitcoin transactions are more traceable than cash” and that it would be “stupid to launder dirty money using Bitcoin.”

Examining the myth of anonymity

While Bitcoin wallet records are open for public view, there is no inbuilt system identifying who the owner is. Bitcoin does not intrinsically need a ‘know your customer’ (KYC) identity proof for you to have a wallet. This is the origin of the myth of Bitcoin anonymity.

However, crypto exchanges are solving this issue by requiring a KYC ID before they let you conduct transactions, then sharing the data with law enforcement authorities.

In other words, if your Bitcoin wallet is sitting empty and idle, you are anonymous. But if you have ever sent or received anything, law enforcement can use the KYC documents uploaded to an exchange to identify both the sender and receiver.

Investigating agencies can trace the wallet owner using ‘crumbs’ of information along the money trail, but it is not easy. They capture information from ‘darknet’ markets, ‘sniff’ data by mining Bitcoin themselves, utilise past internet history of criminals, then cross-reference it all with KYC information from crypto exchanges to identify a Bitcoin wallet owner.

In sum, the flow of funds on Bitcoin is more traceable and open than any bank today. As a recent example, US FBI agents helped recover Bitcoin worth $2.3 million from the ransom paid to a criminal group online in May 2021.

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