Can Cryptocurrency Be Traced?

It took the US Justice Department a full six years to investigate money laundering fraud involving cryptocurrencies, which ended up seizing 94,000 bitcoins worth $3.6 billion from a Manhattan couple, Ilya Lichtenstein and Heather Morgan in February, 2022. The most important conclusion that can be drawn from this is that no matter how hard the criminals try to obfuscate the cryptocurrency footprint, law enforcement agencies will eventually trace it through the blockchain.

When Bitcoin was first introduced to the world in 2008, its White Paper stated that the first cryptocurrency was completely anonymous and private. However, is this really so? Is bitcoin an anonymous cryptocurrency? Do all cryptocurrencies, in general, have the ability to be completely anonymous?

Why is crypto considered being more anonymous than fiat currency?

Noone controls cryptocurrencies, since they usually do not have any central authority. No company or government, no matter how powerful it is, can influence the supply of Bitcoin and most altcoins. It seems to smack of anarchy here, and indeed, the philosophy of crypto-anarchists was originally behind the first cryptocurrency. From the lack of power, the idea arose that cryptocurrencies cannot be tracked in any way, unlike state money, each unit of which is subject to strict accounting.

Why can't criminals count on bitcoin's help?

Since at the beginning of the journey, it was believed that BTC transactions were untraceable, the first crypto was often used in illegal activities and scams. However, sooner or later, the criminals got what they deserved. Thus, the first high-profile investigation into the illegal circulation of cryptocurrencies was the case of the Silk Road darknet marketplace whose founder Ross Ulbricht was sentenced to life imprisonment in February 2015. In the same year, Czech citizen Tomáš Jiříkovský was arrested on suspicion of laundering $40 million in bitcoins, American Trendon Shavers pleaded guilty to running a $150 million Ponzi scheme, and Frenchman Mark Karpeles was arrested and charged with embezzling $390 million from the exchange named Mt. Gox. 

Regulators and supervisors now have tools for tracking crypto transactions, such as Chainalysis, Crystal and Elliptic. They cooperate with the FBI, CIA and other law enforcement agencies, and are famous for investigating many criminal activities on the darknet.

Bitcoin and most cryptocurrencies are pseudonymous

Cryptocurrency transactions are recorded on the blockchain, which is a public and transparent online ledger, where anyone can check anything. In this ledger, you can see such data as the transaction amount and time, the wallet it was sent from, and the wallet to which the money came.

What does pseudonymity mean in relation to crypto? When you send or receive crypto, you are kind of using a pseudonym. Your alias is your wallet's address. If this address is ever linked to your identity, each and every transaction from this wallet will be linked to you. The Bitcoin`s initial White Paper recommended using a new address for each new transaction to avoid linking transactions to some particular owner.

What do addresses look like on the Bitcoin network?

Bitcoin addresses are a series of letters and numbers and do not contain any information about the names of their owners, thus creating a false sense of complete anonymity for users. However, transactions on the Bitcoin network are recorded without encryption, which means that they are traceable.

How quickly you can unravel the trail of digital money depends on how the address is used and what traces of activities with its use remain on the network. For example, transactions for a bitcoin address posted in the signature of its owner in email or forums are fairly easy to trace. If you created an address in the anonymous TOR network and credited BTC from a mining pool that does not require registration, the tracking becomes much more complicated. However, by using serious analytical tools and spending some time and resources, the specialists can get close to the BTC owner's person.

What cryptocurrency trace any user can track

Various block explorers of the Bitcoin blockchain provide the simplest solutions for tracking transactions. Every crypto network has such explorers. With their help, users can make sure that their transactions were successfully confirmed. At the same time, everyone can become a kind of detective and in a few clicks get information about a specific crypto address, its current balance, amounts passed through it or lists of addresses for incoming (input) and outgoing (output) operations related to it. It is easy to see how many digital coins are stored in a particular wallet. Just specify the transaction ID data (TXID, TxHash), address, hash or block height in the search bar of the block explorer and you will instantly know their status.

Is it possible to hide from cryptocurrency tracking?

Given most crypto's pseudo-anonymous nature, it is worth remembering that anti-tracking measures do not work at long distances. Even such a popular bitcoin transaction anonymization technology as CoinJoin, which combines several transfers of different users into one transaction with many outputs and does not require transferring bitcoins to a third-party service, does not guarantee complete anonymity. After all, inputs and outputs will still be reflected in the network, and this will put an end to any anonymity.

How are suspicious transactions with cryptocurrencies detected?

The KYC, or Know Your Customer, procedure is the modern financial services standard, which crypto market participants must comply with. All cryptocurrency exchanges operating in the US have adopted KYC standards. Their users won't be able to buy or sell crypto unless they provide the exchange with their documents. Exchanges report to the supervisory authorities about all suspicious transactions that pass through them. In particular, transactions involving special mixing services that confuse the digital trail of cryptocurrencies are considered suspicious.

Is any cryptocurrency truly anonymous?

Yes, there are cryptocurrencies designed to be 100% anonymous. These cryptos are peer-to-peer payment systems with their own internal accounting unit, focused on ensuring complete privacy of financial transactions. Their cryptographic protocols significantly complicate or make it impossible to audit network data. These cryptocurrencies are called privacy coins. The most famous of them are Monero, Dash, and ZCash.

Are privacy coins legal?

On August 8, 2022, the US Treasury Department banned US customers from using Tornado Cash, a cryptocurrency mixing service on the Ethereum blockchain. However, Monero, Dash, and ZCash are not banned in the US, unlike Japan, where the Financial Services Agency (FSA) has ordered bitcoin exchanges to remove Monero, ZCash, and Dash from trading. Trading in anonymous coins is also legally restricted on crypto exchanges in Australia and South Korea.

Author name: Albert Galeev
Crypto Investor 
author's website
Quickex.io partner writes