Bitcoins are one of the most popular and traded cryptocurrencies in the world. Operating on a blockchain network, the currency offers security and anonymity, making many invest in the platform. Are they really anonymous? Can the Government Track Bitcoin?
In this article, we delve into the anonymity of Bitcoin to find out to what extent the anonymity feature exists.
Table of Content
- Understanding the Bitcoin Blockchain.
- The Anonymity of Bitcoin
- Can the Government Track the Ownership of the Bitcoin?
- Why Does the Government Track Bitcoin Transactions?
- How Does the Government Track Bitcoin Transactions?
Understanding the Bitcoin Blockchain
Bitcoin is a cryptocurrency that operates on the blockchain network offering decentralization. The platform eliminates the need for a central authority to control and monitor the transactions and engages every participant in the decision-making process.
By utilizing the consensus mechanism the platform agrees all the nodes to process an authorized transaction and prevent fake transactions. The transaction data are stored in the blockchain ledger that is connected to each other. The blocks are immutable and once recorded, no changes or removal can be done.
The data entered is visible to all the participants of the node, however they can’t make changes. Making changes in a single block requires changes in the other attached blocks, which means the entire blocks must be changed, which is impossible.
The Anonymity of Bitcoin
First of all, Bitcoin is not anonymous, they are pseudo-anonymous. Every data entered in a Bitcoin blockchain is recorded on a distributed ledger and is completely transparent. These ledgers are publicly visible and everyone can trace the transaction details.
However, the data includes wallet addresses and not the personal information of the person who made the transaction. Thus the personal information is protected and the wallet address is visible, making Bitcoin pseudo-anonymous.
To identify the personal information a person must grant the user’s pseudo-anonymity, which is not easy. It requires accessing the public key.
Can the Government Track the Ownership of the Bitcoin?
Due to the transparency of Bitcoin platforms, the data of transactions can be viewed publicly. Thus watching the happenings and transactions of the Bitcoin blockchain is not a cumbersome process for the government. Now we talked only about viewing the blockchain, which means only the wallet address is visible. But how ownership is tracked?
The traceability of a Bitcoin transaction depends on whether the wallet address on the blockchain can be linked to personal identity. As we already mentioned anyone can view the transactions of the wallet address, and can find out from where and to where the currencies are transacted. This helps authorities to analyze the happenings of the platform.
Though many users don’t show interest in disclosing their identities, at some point in time, especially during centralized exchanges and known wallet transactions, personal information gets revealed. And then the government can track the ownership of the Bitcoin transactions.
Why Does the Government Track Bitcoin Transactions?
The government may not directly identify the people involved in a Bitcoin transaction, rather they analyze the happenings of the platform and evaluate the corresponding patterns.
Government, including the police, FBI, and IRS don’t track the identity of transactions every time, as it is not a crime. However, there are transactions done for illicit purposes like money laundering and fraud. In such cases tracking the identity becomes mandatory.
The government also tracks Bitcoin transactions to calculate the taxes on capital gains and income. Bitcoin is subject to tax when it is considered an income, which means someone receives a salary in the form of Bitcoin. The coin is not considered under tax when it is transferred as a gift or kept as a holding.
How Does the Government Track Bitcoin Transactions?
To become licensed in a country centralized exchanges incorporate with regulations of the country. These exchange platforms conduct Bitcoin exchanges. Most of the centralized exchange platforms have incorporated the Know Your Customer (KYC) process to verify the account, these contain the personal information of the users.
The government requests exchanges to provide information about users included in KYC, allowing authorities to analyze the activities on the blockchain. Since the exchanges are obliged to follow the rules of the government, they are forced to share the information even if they are not willing to. By utilizing the gained information, the FBI and IRS can identify unknown Bitcoin wallet addresses and their personal information.
However, not all exchanges use KYC. Decentralized exchanges are not controlled by any central authority, so making them obey government compliances is difficult.
The government also tracks Bitcoin transactions with the help of private companies like Chainalysis which provides assistance with blockchain monitoring and analytics. When the company analyzes criminal activity during the transactions of Bitcoin, it collaborates with the Federal Bureau of Investigation (FBI) to track cryptocurrency funds.
Final Thoughts
Bitcoin exchanges are not anonymous they are pseudo-anonymous. The government can track the ownership of Bitcoins by utilizing the KYC documents provided to the centralized exchanges. Though the government views the Bitcoin transaction as knowing what is happening within the platform, it only tracks the information when needed. When any criminal activities are recorded in the platform or for the collection of tax information the Bitcoin ownerships are tracked.