The anonymity of cryptocurrencies is both a myth and reality. It’s a myth because, in most cases, the owners of crypto wallets can be identified. But it’s also not a myth because identification often happens indirectly, and users themselves are typically responsible for their own de-anonymization. Moreover, there’s a segment of digital assets designed for enhanced privacy.
Why Aren’t Cryptocurrencies Truly Anonymous?
Technically, cryptocurrencies are anonymous in the sense that no personal data is directly exchanged between users. However, blockchain records all transaction details, and digital asset operations occur beyond just the cryptocurrency network. Users frequently compromise their anonymity by leaving public wallet addresses on forums, social media, or other platforms, making it easier to trace their identity. Specialized software can analyze these indirect clues to trace the owner of a specific wallet, tracking the flow of digital assets back to a bank account or other points where the crypto world intersects with traditional finance.
For example, in 2017, analysts at BitFury Group reported the ability to reveal the identities of over 16% of Bitcoin address owners using open data analysis. They examined public records on 97 major platforms, including Twitter, Wallet Explorers, BitcoinTalk, and Reddit. As a result, 14 million individuals or organizations and 95 million Bitcoin addresses were identified. Earlier, in 2014, researchers from the University of Luxembourg found that more than 60% of Bitcoin addresses could be linked to real identities through de-anonymization attacks, even when using tools like Tor.
Since then, the volume of data stored on blockchain networks has grown massively, and the number of large blockchain ecosystems has increased. At the same time, analytical methods have advanced. Besides, the evolving legal framework further assists in de-anonymizing crypto users.
An example of regulatory influence is the European Union’s legislative framework. On January 10, 2020, the EU’s 5th Anti-Money Laundering Directive (5AMLD) came into effect, requiring mandatory verification of all crypto platform clients according to KYC and AML standards. Depending on various estimates, 30% to 70% of major exchanges and platforms comply with these rules, meaning their users can be identified when necessary. Moreover, in 2023, the European Council approved the Markets in Crypto-Assets (MiCA) regulation, which introduces comprehensive rules for digital assets, including stricter identification requirements for clients. This further limits the anonymity of cryptocurrency users.
Why Can Cryptocurrencies Be Anonymous?
There are several crypto projects whose main focus is on enhanced privacy. The most notable ones include:
- Monero (XMR);
- Dash (DASH);
- Zcash (ZEC).
These cryptocurrencies use advanced encryption algorithms that obscure both sender and receiver addresses, as well as hide transaction amounts. As of September 2024, over 80 cryptocurrencies prioritize anonymity.
Additionally, there are cryptocurrency mixers. These services use algorithms to blend all incoming funds, making it impossible to trace which tokens came from where and where they went. Public keys are generated separately for each transaction, making it nearly impossible to track specific funds. Mixers work with major cryptocurrencies and charge a small percentage for their services, offering increased privacy even for BTC transactions.
Pros and Cons of Anonymous Cryptocurrencies
The main advantage for regular users is financial privacy. On the downside, anonymity makes these cryptocurrencies a useful tool for illegal activities such as hacking, financial fraud, terrorism financing, and money laundering.
A prime example is the Wannacry virus outbreak. This malicious software encrypted user files and demanded ransom payments in BTC. If the ransom wasn’t paid within seven days, the virus would delete the encryption keys, locking access to the files permanently. Wannacry affected over 500,000 computers across more than 200 countries. Investigations revealed that all the collected BTC were converted into XMR, making further tracking of the funds impossible.
To sum up:
- The level of anonymity in most cryptocurrencies is often overestimated and largely depends on the users themselves.
- Certain cryptocurrencies offer a higher degree of privacy, making them popular among hackers, cybercriminals, and regular citizens who seek to avoid the watchful eyes of governments and large financial corporations.
