Bitcoin is not anonymous
In the middle of the 90’s it was commonly understood that everything you did on the internet was anonymous. Today we know better.
In the same way, during the first years of Bitcoin, it has been commonly understood that Bitcoin is a completely anonymous money system. This excited anti-authoritarian groups while it made banks and financial authorities skeptical. But the fact is that Bitcoin is actually far from anonymous and every day companies are working to extract more information from the open system of Bitcoin.
Here are six reasons why Bitcoin is not anonymous:
1. All transactions are public
As an open decentralized payment network it is inherent to Bitcoin that all transactions are publicly broadcasted to all participants in the network. As everyone is free to participate it also means that everyone can see exactly which transactions are made. There are even easily accessible websites showing all transactions in real time.
2. All transactions are stored forever
The underlying technology of Bitcoin is a public journal of all transactions ever made. This journal is called the blockchain. It is by reading the journal that every participant in the network can verify that the person making a transaction has enough money in his account to perform the transaction. To this date almost 70 million transactions has been sent on the Bitcoin network since the beginning of Bitcoin in 2009, and every single one of them has been recorded and stored in the journal.
Everyone can download a copy of the journal, and it has also been made easily accessible through various websites.
Many have probably heard about companies getting hacked and bitcoins getting stolen. But interestingly, often the thieves are never spending the stolen bitcoins afterwards. Because in the public journal it can be accurately monitored which Bitcoin account the stolen coins have been moved to, and thus the thieves can very easily risk revealing their identity when they try to move them any further. Because as soon as they do, everyone else will be able to see the stolen coins moving.
3. Exchanges and brokers can link a physical identity to specific Bitcoin accounts
When a person exchanges his euros or dollars into bitcoin, or his bitcoin into euros or dollars, he does so through a counterparty or a broker who can identify the person.
For instance: In our company Coinify we interface the traditional banking system with Bitcoin. Every time we perform an exchange for a customer, one part of the transaction is always between our banking partner and the customer’s bank. For instance, when we receive a payment from a customer wanting to purchase bitcoin, the name and address of the customer is available directly on the bank transfer information. Then we deliver bitcoins to the Bitcoin account number of the customer and can now link the customer’s physical identity to a specific Bitcoin account number. And as per sections 1 and 2 in this post we can afterwards see how the customer sends his bitcoin to other Bitcoin accounts.
4. Webshops can link the physical delivery address to a specific Bitcoin account
When an online store makes a sale to a customer paying in Bitcoin, the store can link the physical delivery address to the customer’s Bitcoin account.
For instance, Hungry.dk, which sells take away food from 900 restaurants for Bitcoin payments, can see exactly the name and postal address that is expecting a delivery of pizza or sushi. And as Hungry.dk accepts Bitcoin payments through a payment gateway solution provided by our company Coinify it is possible, if necessary, through a collaboration between Hungry and Coinify to link the physical delivery address with the specific Bitcoin account number from which the payment originated.
5. Physical stores can link faces with Bitcoin accounts
If a customer pays in a physical store with Bitcoin the staff and surveillance cameras can link the customer’s face with a specific Bitcoin account number. Because when the store or the payment solution provider of the store receives the Bitcoin payment they can see which Bitcoin account number the payment originates from.
6. Full compliance with blockchain analysis tools
The public journal, the blockchain, which makes up the technological base upon which Bitcoin is built, stores all Bitcoin transactions forever. This means that everyone can attempt to analyze the data stored in the blockchain to obtain useful information about every transaction ever performed.
And this is now developing into an entire industry. Today several companies are operating with the sole purpose of extracting information from the blockchain. One of them is Chainalysis.
Chainalysis sells its tool to exchanges, banks, payment providers, and authorities handling Bitcoin transactions who want to know, for instance, where they receive their bitcoins from and where their customers are sending their bitcoins. The tool can identify, for instance, whether a company is receiving bitcoins from a country which is subject to trade embargos such as North Korea. The tool can also see whether a company receives bitcoins from people who sold goods on one of the online anonymous marketplaces where people can trade in illegal products – or if the company is selling bitcoins to people who are using them to shop on similar sites.
Tools like this can provide the ability to extract all the information about a specific Bitcoin transaction that it is normally required by financial regulation for companies to collect about financial transactions.
Can my neighbor also see everything I’m buying?
With all of the above, is there any privacy left when paying with Bitcoin?
If every store accepted Bitcoin payments on their own to their own Bitcoin account without using a payment service provider AND if your neighbor knew one of your Bitcoin account numbers, then tools like Chainalysis could, with a sufficiently large data set (a lot of transactions), potentially reveal to your neighbor in which stores you are shopping.
BUT as almost all stores today accept Bitcoin payments through providers like our own at Coinify, blockchain analysis tools fall short of this. Your neighbor will in theory be able to see that your are shopping in ONE of the stores using Coinify as a payment provider. But your neighbor will not be able to see WHICH store. To reveal this a government authority would have to contact the payment provider and demand to know which store a specific transaction was intended for. So in this way Bitcoin still protects your personal privacy.
But the conclusion remains that Bitcoin is far from anonymous. And this is probably an instrumental reason as to why large established players such as NASDAQ as well as NYSE and Spain’s second largest bank has incorporated Bitcoin into their strategies.
Chief Product Officer
Coinify – Integrating Bitcoin technology seamlessly with established financial institutions
Image credits (from top down): Jason Benjamin, Rayi Christian Wicaksono, Flickr
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