As regulators push for Know-You-Customer (KYC) and Anti-Money Laundering (AML) compliances, it is increasingly debatable if Cryptocurrency and Anonymity could still work alongside one another.
The rapid growth of Bitcoin (BTC) has opened new investment opportunities to the financial world. Within a decade since its inception in 2009, Bitcoin is becoming a more mature asset class as is evident from the growing number of transactions and onboarded online merchants who offered users the option to pay using Bitcoin. Unsurprisingly, it has become the de facto standard for cryptocurrencies, ushering in a wave of spin-off cryptocurrencies built on a decentralized peer-to-peer network, known as blockchain. Thus, as mass adoption is underway, the risks associated with using cryptocurrencies are also becoming more blatant. For example, more than $1.5 billion worth of cryptocurrencies were pilfered in the market where more than 75% of cryptocurrency holders are at risk of being defrauded. Therefore, it has gained unwanted attention from regulators worldwide amidst the growing risks for both institutional and retail investors.
As cryptocurrencies are gaining a foothold in the financial market and adopted by investors due to its great investment volatility, there is a strong call from governments and financial institutions to implement know-your-customer (KYC) and anti-money laundering (AML) compliances on cryptocurrency investments. While these bureaucratic measures are implemented in the best interest of protecting users of cryptocurrency platforms, they could further infringe the user’s privacy by preventing anonymity in cryptocurrency-related transactions. Contrary to popular belief, many cryptocurrencies are pseudonymous even before the stringent measures were implemented.
Privacy is a Right, not a Privilege
In recent years, more people are focusing on securing the individual’s privacy rights , owing to the slew of privacy leaks by the Big Tech companies such as Facebook, Google and Uber. One of the major appeals of cryptocurrency is the prospect of replacing the traditional fiat money system, could potentially usher a decentralised financial era where the rights are transferred back to the people. Privacy is a fundamental human right recognized in the UN Declaration of Human Rights, the International Covenant on Civil and Political Rights (ICCPR) and in many other international and regional treaties. Fortunately, unlike fiat currencies, the level of anonymity one could achieve with cryptocurrencies could be flexible depending on how we use them.
Anonymity may seem to be of great importance to hackers or individuals who want to conduct illegal transactions, it is equally crucial for any avid cryptocurrency users. With increased anonymity, users will not be limited to regulations hindering the use of cryptocurrency, and they will also be able to enhance and maintain their privacy in the hyperconnected world today.
Trade Cryptocurrency Anonymously
Properly setting up your anonymity involving cryptocurrencies are akin to managing your digital footprint. In order for you to maximise the level of financial privacy, appropriate measures can be taken right from the initial process of acquiring cryptocurrencies. There are a number of ways to reduce your “financial trails” since most of the transactions occur online, unlike fiat currencies where it is mandatory for certain procedures (e.g. account opening or transferring of a significant amount of fiat dollars) to be made offline, or fulfill a stringent set of legal compliances.
In the early days of Bitcoin, people that acquired BTC through trading instead of mining were directly dealing with those that owned the cryptocurrency through cryptocurrency meetups or in person. A consensus was made between the buyer and seller before the purchase was made, most often through cash settlements. Fast forward to today, there are convenient online means such as a Peer-to-Peer (P2P) marketplace and social media groups to acquire directly from BTC sellers. For instance, Localcryptos offer a straightforward escrow option to search for buyers or sellers with an account that does not require KYC/AML, removing the regulatory aspect which hinders a user’s privacy. The platform allows the user to access it directly by connecting with Ledger, WalletConnect or any Web3 Crypto Wallet.
Due to the demands for more privacy-focused solutions in the cryptocurrency market, there is an emergence of innovative solutions that could serve the purpose of anonymity. For instance, there is a free and user-friendly product known as Incognito Wallet, where it converts all cryptocurrencies stored in the wallet into ‘privacy coins’. Not to be mistaken with privacy coins, users of the Incognito wallet could convert their bitcoins into private bitcoins, and vice versa through their algorithms. This unique process allows transactions with Bitcoin to maintain its anonymity, providing novice users an opportunity to conveniently anonymize their pseudonymous cryptocurrency assets at a single click of the application.
Measures to Improve on Anonymity
In our earlier article on “The Anonymity of Cryptocurrencies” , we have also suggested adding an additional layer of privacy protection such as a Virtual Private Network (VPN), Tor and burner profiles to increase one’s anonymity when searching for, and signing up to these platforms. Alternatively, there is also an anonymous offline method of purchasing cryptocurrencies like BTC, that is through a cryptocurrency ATM (commonly known as Bitcoin Teller Machine, or BTM). Do note, however, that some crypto ATMs require the user to create a KYC-compliant account which reveals one’s identity when purchasing from these ATMs. Therefore, it will be wise to research the available crypto ATMs near you that do not require any verification or account creation. If chosen correctly, users will be able to purchase BTC via the ATM into a paper wallet, or wallets that do not compromise one’s identity. After which, users can top it off by utilising good bitcoin mixing services like MyCryptoMixer to further obscure its origin, keeping your identity safe and anonymous.
There is a specific group of cryptocurrencies such as Monero (XMR) and ZCash (ZEC) that are designed with privacy in mind. Known as privacy coins, these cryptocurrencies could encrypt all potentially sensitive transaction data from prying eyes. However, not all cryptocurrencies are created equal. Such coins were known to be complex in terms of their wallet creation and management. Therefore, most cryptocurrency investors are still inclined to be involved with more popular and liquid cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH) and Litecoin (LTC). As such, appropriate measures will still have to be taken to ensure anonymity and security to users transacting in these cryptocurrencies.
The above methods are meant to assist privacy-oriented persons without revealing one’s identity through the entire cryptocurrency transaction process, enhancing the overall anonymous cryptocurrency experience. However, it is worth noting that while ample privacy measures have been recommended in this article, there are still risks involved that could implicate your identity obfuscation efforts. It is advisable not to reveal your cryptocurrency holdings to anyone around you as there were cases of kidnap, like the most recent case involving a cryptocurrency consultant from Singapore. Have sufficient due respect to your financial assets by keeping your holdings/wealth discrete at all times, as sometimes people could still easily sabotage your identity and safety, if such private matters were shared verbally to others.
Anonymity as a Necessity
When Satoshi Nakamoto first invented Bitcoin and the distributed ledger known as a blockchain, the purpose is to offer a transparent and traceable public blockchain which allows immutable transactions for everyone. This creation aimed to deliver a trustless and free system to the financial world. However, problems have arisen over the past decade involving privacy concerns for cryptocurrency users, as such transparency could open its door to unwanted criminal activity and the safety of their users. Thus, there is a growing voice within the community to improve on its anonymity in the transaction process, accelerating the demand for privacy for regular cryptocurrency users.
It is now known that Bitcoin does not offer anonymous transactions as it is possible to trace the origin of any transactions on the blockchain, as shown by the sophisticated analytic service offered by companies like Chainalysis and Ciphertrace. Nevertheless, Bitcoin users are still given various options such as using Bitcoin mixers and hiding IP addresses using VPNs to ensure their anonymity. By remaining anonymous, Bitcoin users will be able to protect their cryptocurrency assets from prying eyes. It may be an inconvenient and complex process implementing the privacy measures for cryptocurrency transactions, and it certainly does not come for free. However, privacy is the right for everyone, and ensuring sufficient anonymity will enhance the overall cryptocurrency experience.