Bitcoin Is Not Anonymous, but Rather Pseudonymous

Bitcoin has an image problem. A portion of the public perceives Bitcoin as the preferred form of currency for criminals because they use the anonymity of cryptocurrencies for illegal money transfers. We all know prejudices are difficult to overcome, but one thing is clear: Bitcoin is more transparent than anything we’ve seen thus far when it comes to the various ways of transferring monetary value. The notion of using Bitcoin as a perfect form of concealment is an urban legend. Here’s more about why that is.

The Anonymity of Bitcoin Is a Misconception

One of the most persistent misconceptions about Bitcoin is the issue of anonymity. To the public, the fact that Bitcoin can be used to disguise the origin and ownership of large, perhaps illegally acquired assets, comes off as potentially dangerous. Blackmailers who spy on companies online, cripple them through hacking, and demand ransoms in Bitcoin are a popular enemy. Sealed-off online marketplaces, where illegal goods are traded because of hidden payment channels, are another horrific scenario. The fact that Bitcoin technology allows the transfer of assets without involvement from payment-controlling institutions, such as banks, causes it to be seen as a gateway for criminal activity. Although this does indeed happen and partially justifies such perceptions, it’s based on a misunderstanding. In reality, Bitcoin, as well as all transactions with it, are extremely transparent. This is part of the blockchain technology upon which Bitcoin is based.

The Bitcoin Blockchain Is a Public and Transparent Database

What many users don’t realize is that Bitcoin is, essentially, a single database. A Bitcoin is neither a coin, nor a voucher, nor a company share. A Bitcoin is an entry in the Bitcoin blockchain, a database that documents who currently owns how much Bitcoin.

This database is currently about 250 GB in size and is constantly updated locally on thousands of computers. Every transaction carried out in Bitcoin is recorded, stored, and perpetually accessible to the public. This makes it easy to find out the balance of Bitcoins in any Bitcoin wallet address. A Bitcoin wallet can be thought of as a secure envelope containing all the “private keys”. These “private keys” consist of a long series of numbers and letters. With these keys, you can access your Bitcoin –– but not without them. A wallet can thus, for all intents and purposes, be considered a digital, virtual wallet or bank account.

The Transparency of the Bitcoin Blockchain Enables Law Enforcement

The inputs and outputs of all existing wallets can be transparently retrieved from the Bitcoin database at any time. This has led to special, Bitcoin-typical phenomena on various occasions. For example, when a transfer of thousands of Bitcoin, stolen through criminal activity on poorly managed trading platforms, was practically followed live by the Bitcoin community. It was possible to document the exact accounts the stolen funds were transferred to, as well as the route they then took via the Internet. All of these transactions can be read clearly in the Bitcoin database. This information must be stored there, otherwise, the transactions and the ultimate ownership of the funds cannot be accounted for.

Only recently have FBI investigators been able to use this information as the basis for a successful prosecution. They managed to blow up an international ring of criminals whose payments were processed in Bitcoin. The perpetrators apparently felt sufficiently protected by using the blockchain for their transactions. However, as always, all transactions were recorded in the public Bitcoin blockchain. The investigators were able to decrypt one of the addresses, meaning they were able to assign it to a specific person. Dozens of criminals who had used Bitcoin to pay for illegal business dealings were now exposed and information from the Bitcoin blockchain was used as evidence for their crimes. The suspects had relied on the Bitcoin blockchain’s alleged anonymity. The fact that it isn’t anonymous but rather pseudonymous, and on top of that extremely transparent, was their downfall.

Bitcoin Is not Anonymous, but Pseudonymous

Bitcoin wallet addresses consist of a cryptographically encrypted code that doesn’t allow any indication of the person behind it. However, cryptocurrencies have to be exchanged for real money at some point. This is the only way someone in possession of Bitcoin can really make use of the value that their digital currency represents. For this reason, Bitcoin is not anonymous, but actually pseudonymous.

You can hide both yourself and your identity well behind a wallet address, but what good is that if you can neither exchange the value the Bitcoin represents into real currency, nor use that value? It’s not great. Until now, most users couldn’t pay their rent, buy a car, or pay for a steak in a restaurant with Bitcoin or any other cryptocurrency. A significant amount of the laws and regulations that state institutions implement to try to contain illegal activities with cryptocurrencies contributes to this central point. Keyword KYC = Know Your Customer. BISON is therefore legally obligated to only allow users whose identity has been clearly established to trade with coins. The state and its prosecuting authorities demand information about the actual person assigned to a pseudonymous address if they have reasonable suspicion of illegal activity.

The belief that cryptocurrencies carry the advantage of guaranteeing complete anonymous ownership and transactions is, therefore, misleading. It doesn’t correspond to the current technological conditions at play here.