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December 17, 2019
How Anonymous is Cryptocurrency?

Cryptocurrency is a digital currency that is not issued by any centralized authority. There are no physical bills, and the money is secured by cryptography. The virtual currency is based on blockchain technology, which ensures the integrity of transactions. Blockchain helps in verifying the transactions to prevent double spending, as there are no third-party entities such as financial institutions. Digital currency is relatively new – just a decade old. Bitcoin, the first cryptocurrency, was created in 2008 by an unknown person/group of people who used the pseudonym Satoshi Nakamoto. Due to their decentralization nature, cryptocurrencies are not subject to government interference. One can send and/or receive funds without providing personally identifiable information. Hence, cryptocurrencies offer a high degree of privacy; however, absolute anonymity may not be possible.

Cryptocurrency offers more privacy than traditional currencies. Bitcoin, for instance, uses encrypted addresses to hide the identities of the users. Each user is assigned public and private keys, which are hashed using cryptography. A public key is used to receive payment while a private key is used as the user’s signature.  The private key verifies that a transaction was authorized by a particular user. Since blockchain technology uses a distributed ledger, transactions are recorded in multiple computers. Hence, they are permanent public records. With a public database of transactions, analytical tools can be used to identify the source and destination of cryptocurrencies.

Moreover, exchanging traditional currency for cryptocurrency may require one to divulge personal information to the exchange firm. In case of a security breach involving the exchange firm, personally identifiable information of cryptocurrency users could be exposed. Although organizations mostly implement advanced cyber defense systems, hackers could use more sophisticated tools to compromise a system. For example, in 2014, Mt. Gox, a leading bitcoin exchange, was infiltrated by cybercriminals who stole 850,000 bitcoins.  Government agencies, such as regulatory authorities, could also force an exchange to reveal information regarding its customers. Therefore, cryptocurrencies can be traced to specific individuals through the analysis of the currency exchange records.

One way of increasing anonymity is by maintaining separate identities by using multiple wallets. With several wallets, once can also use multi-input. Multi-input is the use of several addresses for payment. However, as countries develop legal frameworks to regulate the use of cryptocurrencies, it might not be possible to have multiple identities in the near future. For instance, South Korea is enforcing stricter regulation of cryptocurrency; users will only be able to deposit if the name on the wallet matches the name on their bank accounts.  This requirement will lower the degree of anonymity. Therefore, even with multiple inputs, transactions can be traced to the actual sender/receiver.

The high degree of anonymity provided by cryptocurrencies favors illicit activities such as money laundering, tax evasion, transfer of money to terror organizations, and demands for ransom by criminals. For instance, the WannaCry malware, which infected so many computers in 2017, required victims to pay a ransom in bitcoins. Preventing these crimes necessitates increased regulatory measures. The ability to transact anonymously is a crucial attribute of digital currencies. Nevertheless, the need to combat crime supersedes people’s desire to maintain anonymity in their online transactions. Therefore, cryptocurrency may face stringent regulations in the future.

The number of blockchain technology users has grown tremendously within the last decade. As of September 2019, there were more than 42 million users of blockchain wallet. This figure is a significant number, considering that the technology is barely ten years old. After bitcoin pioneered the market, several other cryptocurrencies have been developed; they include Ethereum, Litecoin, Monero, Dash, and Ripple. In the near future, the number of users of cryptocurrency is expected to increase as people become more familiar with the technology.

The complexity and volatility of cryptocurrencies is a major challenge that is likely to hinder people’s acceptance of virtual currency in the future. Unlike the conventional currencies that are controlled by a central bank, digital currencies are highly susceptible to market price changes. This means that an investor could lose a considerable amount of his/her investment if the value of a digital asset plunges. The other concern is the difficulty of use. Since cryptocurrency is based on a distributed ledger, the user should have knowledge of information technology. Thus, enhancing the ease of use would be needed in the future to increase the adoption of virtual currency.

Cryptocurrency has attracted a significant number of users over the few years of its existence. Digital currency provides increased privacy than conventional currency. However, perfect anonymity may not be possible to guarantee. As criminals leverage the privacy provided by virtual currency, governments are beginning to establish regulations that may reduce the level of anonymity. The difficulty of use and the volatility also hinder the acceptance of the digital currency. Regardless of these challenges, more people are likely to adopt cryptocurrency in the future.

 

References

Antonopoulos, A. M. (2015). Mastering Bitcoin: Unlocking digital cryptocurrencies. Sebastopol, CA: O’Reilly Media, Inc.

Newby, T. G., & Razmazma, A. (2019, April 7). An untraceable currency? Bitcoin privacy concerns. Retrieved from https://www.fintechweekly.com/magazine/articles/an-untraceable-currency-bitcoin-privacy-concerns

Smith-Spark, L. (2017, May 13). Global ransomware attack: 5 things to know. CNN. Retrieved from https://edition.cnn.com/2017/05/13/world/ransomware-attack-things-to-know/index.html

Szmigiera, M. (2019, October 7). Number of blockchain wallet users worldwide from 3rd quarter 2016 to 3rd quarter 2019. Statista. Retrieved from https://www.statista.com/statistics/647374/worldwide-blockchain-wallet-users

About the Author
David Mamikonyan | CBI
David Mamikonyan
VP | Architecture, Implementation & Managed Security Services
David Mamikonyan leads CBI's highly skilled engineering practice and is responsible for our complete integration team. He brings advanced technical expertise in cyber security analysis, design, and implementation. David works with global senior leadership teams to assess and recommend security technologies, architectures, network and IT controls.
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