Is Bitcoin Anonymous and Untraceable? Privacy Discussions Loom, but Most Transactions Can be Linked to People

Last Updated on July 12, 2021

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Is Bitcoin anonymous? It depends on who you ask.

The anonymity of Bitcoin took a hit in March when the U.S. Internal Revenue Service created what it called “Operation Hidden Treasure,” a search for unreported income within the cryptocurrencies. Many people don’t report their crypto income precisely because they are under the impression that crypto transactions can’t be traced, as if they are within a technological cloak of invisibility. But the IRS launched this operation recently, proving once and for all they are taking this issue seriously.

The new operation, part of a broader “emerging threats mitigation team,” is a cooperative effort by  the IRS’ civil office of fraud enforcement and its criminal investigation unit. It trains agents to understand the blockchains and the root out tax evasion.

At a conference hosted by the Federal Bar Association, the IRS’ Carolyn Schenck, the National Fraud Counsel & Assistance Division Counsel for the Office of Chief Counsel, IRS, delivered a message to crypto users: “We see you.”

Bitcoin May Not Be So Anonymous

Schenck’s statement may come as an unpleasant surprise to some of the admirers and critics of Bitcoin and the other cryptos that have developed in its wake.  Part of the appeal of crypto? People believe it limits the reach of the government. The central bank issues greenbacks, which detractors call “fiat currency.”

According to one line of thought, the very issuance of such money is a mechanism of surveillance and control. This philosophical notion is perhaps part of the reason it continues to circulate even where it is expressly prohibited by governments. Does Bitcoin enable the laundering of dirty money? Does it preserve anonymity and privacy in a valuable way? Those two questions are the negative and positive sides of the same coin.

Bitcoin Anonymity Myth
Ben Weiss of CoinFlip, the largest network of Bitcoin ATMs in the United States, says that the anonymity of Bitcoin is a myth. Photo credit: Shutterstock.com

Andrew M. Bailey, a Singaporean philosopher (with a Ph.D. from Notre Dame University) has written about this. Bailey points out that Bitcoin is something more specific than “digital money.” A paper ledger attached to an old-style checkbook can “go astray,” as Dr. Bailey says. The paper ledger can “differ from official bank records, [but] Bitcoin’s ledger — known as its blockchain … — cannot go astray, because for an address to have some Bitcoin just is for the ledger to say it does.”

Where does this leave us as to the desired or feared cloak of invisibility? Bailey observes that the ledger “does not associate addresses with real-world identities like legal names, phone numbers, birth dates. and so on.” This suggests its appeal to would-be freedom fighters or money launderers.  But such associations, Bailey continues, “are not difficult for state and corporate entities to establish, especially since regulated exchanges require customers to provide identifying information.” In the end, the cloak may not be very magical.

Playing with Fire

Ben Weiss of CoinFlip, the largest network of Bitcoin ATMs in the United States, says that the anonymity of Bitcoin is a myth. “You’re really playing with fire” if you try to rely on the supposed anonymity today, he told a recent webinar on digital assets.  When prosecutors have enough information to get warrants for the search and seizure of the necessary records, all can be laid bare.

Reuters recently ran a story by Tom Wilson discussing an analysis of “crime that originates on the blockchain ledger … including scams, cyberheists, ransomware and darknet marketplaces used to buy contraband.” Wilson writes, referencing the study by Chainanalysis, that  “270 cryptocurrency addresses received $1.3 billion in illicit digital transfers last year.”

One of Wilson’s points is that crypto-criminality seems quite concentrated. Those 270 addresses constitute more than half (55%) of the criminal crypto flows Chainalysis identified.

This may well be. But that concentration doesn’t establish that the anonymity is real or fake. Only that, if it is a myth, the 270 people or groups using those addresses believe in it. They may well be playing with fire, as Weiss suggests.