Tech

Is Cryptocurrency Traceable? Or Should You Use a Privacy Coin?


Many people assume cryptocurrency’s biggest perk is anonymity. Crypto is often praised for its increased privacy and security, but does this mean that it can be used totally anonymously? Or can your activity still be traced somehow?


Is Crypto Anonymous?

anonymous hooded individual using laptop in dark room

In short, cryptocurrency as a whole is not 100% anonymous. This is a common assumption but is nonetheless untrue. Let’s get into why this is the case.

It is true that cryptocurrency can usually offer higher levels of privacy and security than traditional money. Cryptocurrencies exist on a blockchain, a ledger of both public and encrypted data. Blockchain technology uses cryptography to keep data safe, making blockchains incredibly difficult to take over or alter in cyberattacks.

However, enhanced security and privacy do not give way to total anonymity. That’s because every single transaction made with a crypto like Bitcoin or Ethereum is recorded on its native blockchain. This record is permanent and immutable, meaning it’s not going anywhere once it’s added. Given that most crypto blockchains are totally public, anyone who wants to access the ledger and look at its transactional history can. This gives crypto an element of transparency and trustworthiness but can pose risks, too.

It’s important to note that your real name is not displayed on the blockchain when your transaction is added. Your address, phone number, and other sensitive information are also not listed. But the sending and receiving addresses of the transaction are. With a bit of work, a malicious actor can uncover your true identity via your public wallet address, which puts your privacy at risk.

On top of this, the majority of crypto trading platforms out there require you to identify yourself before you can use them. Take exchanges, for example. On reputable exchanges like Binance, Kraken, and Coinbase, you must verify your identity using a passport, driving license, or similar document. So, before making your first trade on such platforms, your identity is already known. This means that you would be identified easily if you were to try and do something unethical on your account.

Many of the cryptocurrencies you may have heard of, including Bitcoin, Dogecoin, and Ethereum, are not totally anonymous. But are there exceptions to this rule?

Which Cryptos Are Most Anonymous?

monero coin held in hand
Image Credit: FXTM Thailand/Flickr

While cryptocurrency isn’t entirely anonymous, there are assets designed to prioritize privacy above all else. These are known as privacy coins; the most common example is Monero (XMR).

Monero (XMR)

Monero is a proof-of-work cryptocurrency created in 2014 via a Bytecoin hard fork. Monero obfuscates transactions using an array of technologies, namely ring signatures and stealth addresses.

Monero’s stealth addresses are essentially one-time burner addresses that a sender can use for a single transaction. This allows the recipient to display a public address that cannot be used for identification. In short, only the sender and recipient know where the transaction funds end up.

In addition, ring signatures are used to sign Monero transactions. A typical ring confidential transaction consists of a group of users, one of which provides the ring signature. All the members of the ring transaction have unique private keys and public keys, so by coming together in a ring transaction, it becomes difficult for anyone to determine who signed and conducted it.

Alongside ring signatures, Monero uses Ring Confidential Transactions, or RingCT, which hides the amount of XMR sent in transactions and has allowed the basic ring signature model to be improved. Today, Monero’s ring signatures are more officially known as Multi-layered Linkable Spontaneous Anonymous Group signatures, which allows for anonymity across the board, be it the amount sent, origin address, or destination address.

Using this technology, each Monero transaction is untraceable, maintaining user anonymity.

However, Monero has been heavily criticized in the past. Firstly, it has been speculated that Monero transactions may not be totally untraceable. In a 2018 Wired piece, it was reported that a team of researchers within the US founds flaws in Monero’s privacy model that may make it possible for wallet addresses and identities to be determined from transactions. However, these vulnerabilities have long since been resolved.

On top of this, Monero has been criticized for not complying with the Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, which are in place to keep traders and investors safe. Because of this, several major exchanges have de-listed Monero for trading, including Huobi and Kraken.

Note that Monero and other privacy-focused cryptocurrencies cannot comply with these regulations because it defeats their purpose, but that doesn’t mean that crypto exchanges will continue to support them.

Zcash (ZEC)

Next up, you’ve got Zcash. This privacy coin was created in late 2016 and stands as the second-most popular privacy coin, next to Monero. ZEC uses zero-knowledge proofs (ZKPs) to make blockchain transactions private. A ZKP is a cryptography protocol that has been around for many decades but has proven particularly useful for Zcash.

Using ZKPs, a Zcash transaction can be verified on the blockchain without needing to be publicly displayed. Instead, typically public information is encrypted. Zcash uses two kinds of wallet addresses: transparent and shielded. As the names suggest, the former kind of address can be seen by anyone on the blockchain, while the latter is encrypted and private.

Many prefer Monero over Zcash because it is decentralized. Zcash’s centralized nature makes it more susceptible to malicious attacks and new regulations, both of which crypto traders often want to steer clear of. But, like Monero, Zcash’s privacy-focused design is also a regulatory concern, so numerous exchanges have decided to de-list it, namely Huobi.

There are a number of other privacy coins out there today, including Dash, Verge, and Decred.

As we’ve seen with Monero, privacy coins are pretty controversial. But why are these particular cryptos such a point of contention? What risks do they pose?

The Dark Side of Privacy Coins

anonymous hooded figure in front of binary code map background

Privacy coins provide a perk for those looking to protect their identity when trading crypto. But there’s another element to these cryptos that is far more nefarious.

If an asset is designed to be hard to trace or isn’t linked to a personal identity, it’s more or less perfect for cybercrime. Of course, no cybercriminal wants to have their illegal activity tracked back to their identity. Staying anonymous is paramount for these malicious actors.

Enter privacy coins.

Using privacy coins, cybercriminals can more effectively stay under the radar when committing illicit acts. Monero, for example, has become hugely popular in ransomware gangs, dark web marketplaces, malware-as-a-service providers, and other criminal realms of the internet.

In the past, Bitcoin was a favorite for cybercriminals until they realized that this cryptocurrency is a little too traceable to be laundered safely. But with the rise of privacy coins, namely Monero, this isn’t as much of a problem. This is great news for anyone looking to maintain their anonymity but not so much for the authorities trying to track them down.

Crypto’s Anonymity Is a Blessing and a Curse

While crypto isn’t anonymous across the board, its increased anonymity makes it more desirable to cyber criminals. Moreover, privacy coins and their focus on concealing identities open yet another door to malicious actors who want to remain unmasked. While such assets are great for maintaining privacy, their design undoubtedly gives them a shady side.

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