Bitcoin, blockchain and cryptocurrency are words that most people have at least heard of since the industry exploded into the mainstream public consciousness in 2021.
Over the course of this series of articles, we’ll be delving into the basics of the industry, providing an introduction to crypto that will give you a solid grounding in the technology and a lexicon of its terminology — cryptographers should never be allowed to name anything the public will eventually need to know — in short, enough to understand what people are talking about and decide if you want to learn more.
See the series:
PYMNTS Crypto Basics Series: What’s a Blockchain and How Does It Work?
PYMNTS Crypto Basics Series: What’s a Consensus Mechanism and Why Is It Destroying the Planet?
PYMNTS Crypto Basics Series: What’s A Crypto Wallet And How You Can Avoid Losing A Quarter Billion Dollars?
PYMNTS Crypto Basics Series: What’s A Permissioned Blockchain and How Does Centralized Decentralization Work?
PYMNTS Crypto Basics Series: How To Lose Your Crypto Without Being Hacked
So, is Bitcoin really anonymous?
Short answer: No.
And with the help of blockchain intelligence firms, federal and other law enforcement agencies are getting better and better at tracking down criminals who thought Bitcoin could cover their tracks.
Just ask Jong Woo Son, the South Korean man convicted of running Welcome to Video, a dark web child p*rnography site that the FBI called the largest ever discovered. Son, who was convicted in 2019 in South Korea after authorities raided his home and found a server with 250,000 video files, also faces indictment in the U.S. if he ever steps foot here.
Son was tracked by following the money, in this case bitcoin, along its blockchain as the site had received funds from more than 1 million bitcoin addresses used to pay for the illicit material, the Justice Department said.
How? Well, the FBI made some buys, sending bitcoin payments to the website’s wallet. As every bitcoin transaction is visible on the Bitcoin blockchain by anyone using a website like Blockchain Explorer, authorities followed the bitcoin as it was moved to a different wallet connected to an account on the cryptocurrency exchange Coinbase — which had required Son to provide proof of identity in compliance with anti-money-laundering regulations.
That leads to the longer answer to our question about Bitcoin’s anonymity, which is a firm “sort of.”
Behind the Mask
The biggest advantage law enforcement has in tracking Bitcoin and almost every other cryptocurrency is that the coins are not anonymous but pseudonymous, which kind of sounds like something you’d hear only on a crossword puzzle.
Let’s unwrap that.
As we discussed in our earlier Blockchain Basics series article about crypto wallets, each bitcoin has two key codes, one public and the other private. The public one identifies it on the blockchain, and the private one is required to send it from one digital wallet to another.
The reason for this two-key system is at the heart of how blockchains work. Bitcoin was designed as a “peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.”
This means cutting the trusted third party out of the transaction while allowing the two parties to make and receive payment without trusting each other — a “trustless” transaction. This is done by cryptographically timestamping each transaction and writing it onto an unchangeable, or immutable, digital ledger called a blockchain. (See “What’s a Blockchain,” linked above.)
With that information publicly visible, double-spending is not possible. Which means that the transaction isn’t anonymous. Each bitcoin transaction can be tracked from the moment the token was created to its present owner.
The identity of that owner is not revealed, however. Proof of ownership comes in the form of that private key code, which is required to initiate a transaction and send the bitcoin to someone else. Once used, the code is burned, and a new one is created when it is received. So, neither party can identify the other, but the fact that it moved on the blockchain verifies that the payment was made.
The bitcoin’s owner is hidden behind a pseudonym — the public key code — with proof of possession provided by the private key code. You’ll note that possessing the private key code is not the same as legal ownership.
There are ways around this, notably privacy coins like monero that do not show transaction data publicly, and mixing services that try to break the transaction chain by putting bitcoins from a group of unconnected users and randomly trading them.
See also: PYMNTS Crypto Crime Series: When Privacy Counts, Crypto Users Turn to Mixing Services
Look for the Offramp
Getting back to the criminal, Son was able to remain hidden behind his bitcoins’ pseudonymity until he wanted to turn those bitcoins into spendable fiat cash.
The most recent example of blockchain forensics leading to an arrest was the Feb. 8 indictment of Ilya Lichtenstein and his wife, Heather Morgan, who allegedly stole cryptocurrency now worth $4.5 billion from the Bitfinex exchange in 2016. The Justice Department said they were tracked through the purchase of a $500 Walmart card with crypto.
Read more: PYMNTS Crypto Crime Series: Bitfinex Using $3.6B Seized in Hacking Arrests to Cover Shadow Banking Losses
And that’s another advantage for law enforcement: While crypto grows in popularity, there are still relatively few ways to actually spend it in the real world without going through a trusted third party with a money transmission services license that requires the collection of know-your-customer (KYC) identity information from all customers.
There are, of course, unscrupulous service providers, but then you would be trusting a criminal with your ill-gotten gains.
It’s not always that simple, of course. In another case, an identity was traced when the alleged criminal used an email address linked to a digital wallet when posting a coding help request on a developers’ forum.
Additionally, blockchain forensics experts in law enforcement and private firms spend a lot of time looking for patterns in blockchain transfers — a lot of small transactions coming into a wallet, for example — that can get quite complex. They often spot hacks before the exchange or project developers do.
How Consumers Pay Online With Stored Credentials
Convenience drives some consumers to store their payment credentials with merchants, while security concerns give other customers pause. For “How We Pay Digitally: Stored Credentials Edition,” a collaboration with Amazon Web Services, PYMNTS surveyed 2,102 U.S. consumers to analyze consumers’ dilemma and reveal how merchants can win over holdouts.
FAQs
Bitcoin's blockchain technology is, in principle, anonymous but also traceable due to the transparency element. Bitcoin can thus be called “pseudo-anonymous.” Government agencies are hiring cryptocurrency experts to help them with BTCtracking and identity verification.
Can the FBI track crypto? ›
Federal agencies like the IRS, the FBI, and the State Department have spent millions of dollars on contracts with private crypto intelligence firms. These companies often have access to powerful machine learning software that can sift through huge numbers of transactions and look for leads.
Can the US government track Bitcoin? ›
Yes, the government (and anyone else) can track Bitcoin and Bitcoin transactions. All transactions are stored permanently on a public ledger, available to anyone. All the government needs to do is link you to your wallet or transaction.
How anonymous is Bitcoin really? ›
Although it is possible to create a certain form of anonymity with cryptocurrencies, it is difficult to send transactions completely anonymously via the Bitcoin blockchain. Blockchains remain fully open and accessible to everyone. Thanks to the transparency of the blockchain, it is possible to easily track money flows.
How do police trace Bitcoins? ›
As a digital currency, there is no way to track or identify who is sending or receiving Bitcoin. This is a perfect way for a scammer to receive a lot of money with no way of tracing it back to them.
Who investigates crypto crimes? ›
The FBI is the lead federal agency for investigating cyber attacks and intrusions. We collect and share intelligence and engage with victims while working to unmask those committing malicious cyber activities, wherever they are.
Can you trace crypto scammer? ›
In crypto, scammers like that there is no central bank to stop fraudulent transactions. However, after the victims report the scheme to law enforcement, it is easy to trace all of the scammer's activity and work to recover the funds.
Can the police do anything about stolen crypto? ›
Investigators can trace transactions to cryptocurrency exchange locations or other “choke points” that require the user to sign up using their true identification. From this point, the law enforcement officer can get a warrant to force the exchange to divulge the real identity of the account owner.
How does the IRS know if you have Bitcoin? ›
One way the IRS can track cryptocurrency is through crypto exchanges or trading platforms. The transactions done on the exchanges/platforms are directly reported to the IRS. If your trading platform provides you with a Form 1099-B or 1099-K, the IRS knows about your crypto transactions.
Does Bitcoin report to IRS? ›
You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.
When can the government seize bitcoin? The government can seek to obtain a warrant to seize any property it has probable cause to believe is evidence of a crime or was used in the commission of a crime.
Can you be traced on Bitcoin? ›
Many people believe that Bitcoin is anonymous. However, this is not the case. Bitcoin, contrary to popular belief, is traceable. While your identity is not directly linked to your Bitcoin address, all transactions are public and recorded on the blockchain.
Who is the secret person behind Bitcoin? ›
Satoshi Nakamoto is a pseudonym for the person or people who helped develop the first bitcoin software and introduced the concept of cryptocurrency to the world in a 2008 paper. Nakamoto remained active in the creation of bitcoin and the blockchain until about 2010 but has not been heard from since.
Can you trace the owner of a Bitcoin address? ›
A Bitcoin address by itself is not traceable, as there is no identifying information stored directly on the blockchain. But there are ways that the identity of an individual can be linked to specific wallets they own and transactions they have made. This is why Bitcoin is not anonymous — it's pseudonymous.
Can the government see your crypto wallet? ›
The IRS can and has requested these records from exchanges. In the past, the IRS has issued John Doe Summons to exchanges like Coinbase and Kraken. In addition, exchanges like Coinbase, Gemini, and Kraken issue 1099 forms to customers and to the IRS reporting on your crypto transaction activity.
How do I get my money back from a scammer Bitcoin? ›
Once you pay with cryptocurrency, you can only get your money back if the person you paid sends it back. But contact the company you used to send the money and tell them it was a fraudulent transaction. Ask them to reverse the transaction, if possible.
Can I recover money from a crypto scammer? ›
Some scammers offer so-called recovery services to people who have lost money to fraud. If you've lost money in crypto, scammers might try to convince you they can get your money back. (Spoiler alert: they can't.)
Can crypto theft be traced? ›
In theory, it's possible to track your stolen bitcoin by monitoring the blockchain – in practice, however, this is made difficult by both the anonymous nature of the currency and the fact that the thief will most likely use a bitcoin exchange to trade the currency for normal cash straight away.
Does crypto report to US government? ›
Does Crypto.com report to the IRS? Crypto.com provides American customers with a 1099-K form when they have more than $20,000 in trade volume and more than 200 trades for the year. A copy of this form will also be filed with the IRS.
How to investigate Bitcoin theft? ›
Using a combination of Open-Source Intelligence (OSINT) and Know Your Customer (KYC) data collected by the exchanges, an investigator can work to identify the owner of a cryptocurrency address. From there, law enforcement can issue subpoenas and try to recover the funds.
So, how to spot a crypto scam? Warning signs to look out for include: Promises of guaranteed returns: No financial investment can guarantee future returns because investments can go down as well as up. Any crypto offering that promises you will definitely make money is a red flag.
What happens when cops seize crypto and bitcoin? ›
Once seized, it can take years for authorities to secure a forfeiture order letting them sell crypto and return the proceeds to crime victims or governments. In the U.S., seized property is subject to claims by people who say they have a right to it.
How much does IRS take from Bitcoin? ›
Short-term crypto gains on purchases held for less than a year are subject to the same tax rates you pay on all other income: 10% to 37% for the 2022-2023 tax filing season, depending on your federal income tax bracket.
What happens if you don't claim Bitcoin on taxes? ›
If you don't report a crypto-taxable event, you could incur interest, penalties, or even criminal charges if the IRS audits you. You may also even receive a letter from the IRS if you failed to report income and pay taxes on crypto, or do not report your transactions properly.
Why does the IRS ask if I bought cryptocurrency? ›
The IRS considers cryptocurrency holdings to be “property” for tax purposes, which means your virtual currency is taxed in the same way as any other assets you own, like stocks or gold.
What happens if you don't file taxes for Bitcoin? ›
If you don't report taxable crypto activity and face an IRS audit, you may incur interest, penalties, or even criminal charges. It may be considered tax evasion or fraud, said David Canedo, a Milwaukee-based CPA and tax specialist product manager at Accointing, a crypto tracking and tax reporting tool.
Can the feds shut down Bitcoin? ›
As Bitcoin is decentralised, the network as such cannot be shut down by one government. However, governments have attempted to ban cryptocurrencies before, or at least to restrict their use in their respective jurisdiction. Governments could still try to jointly ban Bitcoin.
Can banks trace Bitcoins? ›
Is bitcoin traceable? Yes. Bitcoin is traceable. While bitcoin can be minted, moved around, and stored without the oversight of any central authority like the government, each bitcoin transaction is recorded on a permanent publicly available ledger known as the blockchain.
What is the dark truth behind Bitcoin? ›
Lack of market regulations
There are currently no legitimate market regulations for cryptocurrency trading. Even governments are doubtful of bitcoin's long-term viability. As a result, no government-regulated financial institutions support cryptocurrency transactions (e.g. encashing).
Is Bitcoin owned by the CIA? ›
The owners of Crypto AG were unknown, supposedly even to the managers of the firm, and they held their ownership through bearer shares.
...
Crypto AG.
| Industry | Cryptography |
|---|
| Defunct | 2018 |
| Headquarters | Steinhausen, Zug , Switzerland |
| Owner | Central Intelligence Agency (1970–2018) Federal Intelligence Service (1970–1993) |
4 more rowsBitcoin.com is a bitcoin exchange and cryptocurrency wallet developer.
...
Bitcoin.com.
| Type of site | Private |
|---|
| CEO | Dennis Jarvis |
| Industry | Cryptocurrency |
| Products | Cryptocurrency/web3 wallet, news, exchange, games |
| Services | Cryptocurrency sales, trading |
8 more rowsBased on information stored on the blockchain alone, it is not possible to identify a relationship between Bitcoin addresses and IPs.
Can Bitcoin sent be traced? ›
Are Bitcoin transactions traceable? Since Bitcoin uses blockchain technology, there is complete transparency, and all the transactions are recorded on a distributed ledger. These ledgers are open to the public, and anyone can access them. This makes Bitcoin transactions traceable.
Can Bitcoin transactions be traced? ›
Many people believe that Bitcoin is anonymous. However, this is not the case. Bitcoin, contrary to popular belief, is traceable. While your identity is not directly linked to your Bitcoin address, all transactions are public and recorded on the blockchain.
Can Bitcoin theft be traced? ›
In theory, it's possible to track your stolen bitcoin by monitoring the blockchain – in practice, however, this is made difficult by both the anonymous nature of the currency and the fact that the thief will most likely use a bitcoin exchange to trade the currency for normal cash straight away.
Can someone track me with my Bitcoin address? ›
Since users usually have to reveal their identity in order to receive services or goods, Bitcoin addresses cannot remain fully anonymous. As the block chain is permanent, it's important to note that something not traceable currently may become trivial to trace in the future.
Can a crypto wallet address be traced? ›
Are Bitcoin Addresses Traceable? A Bitcoin address by itself is not traceable, as there is no identifying information stored directly on the blockchain.
Who keeps track of Bitcoin transactions? ›
In a blockchain, each node has a full record of the data that has been stored on the blockchain since its inception. For Bitcoin, this data includes the entire history of all Bitcoin transactions. If one node has an error in its data, it can use the thousands of other nodes as a reference point to correct itself.
What crypto is not traceable? ›
Most likely, if someone asked you which cryptocurrency is anonymous, you'd respond with Dash, Zcash, and Monero. There are more than 70 anonymous cryptocurrency tokens, yet these three are at the top of the list of the greatest privacy cryptocurrencies.
Who investigates crypto theft? ›
The FBI leads this task force of more than 30 co-located agencies from the Intelligence Community and law enforcement.
The Secret Service is responsible for detecting, investigating, and arresting any person who violates certain laws related to financial systems. In recent years digital assets have increasingly been used to facilitate a growing range of crimes, including various fraud schemes and the use of ransomware.
Can a crypto scammer be traced? ›
If your cryptocurrency has been stolen or scammed, a powerful technique known as crypto tracing can be used to identify target transactions and locate assets. Whether to inform a financial crime investigation or assist an asset search, IFW offers exceptional crypto tracing services across the globe.
