Anonymity is one of the fundamental characteristics that drew people’s attention to cryptocurrencies in the first place. Not because we all want to buy illegal stuff online or dodge taxes. The majority of crypto users simply want their private lives to stay, well, private.
However, it’s not that simple. Although Bitcoin and other cryptocurrencies do offer a higher anonymity level comparing to, for example, VISA, they are not completely invincible.
Unless you step up your cautiousness, don’t expect untraceable transactions.
What Compromises Anonymity in Crypto
The moment you want to convert crypto to fiat and back, major problems emerge. Local authorities monitor the work of all businesses, including exchanges and other financial organizations very thoroughly. Regulators oblige them to implement KYC and AML procedures. The aim behind these policies is to make sure your identity as a customer will be checked, and then double and triple checked.
KYC, aka Know Your Customer, can vary depending on the company’s general approach to the whole regulation situation. The normal check can become even stricter if something about your background looks suspicious or risky. Or if you plan on transferring a big amount of money.
So when you want to purchase your very first Bitcoin or, say, Ethereum on a well-established crypto exchange, prepare, at the very least, to send them a scan of your ID. You may be also asked to send a selfie, holding your ID, or even pass a video interview.
Once it’s done, your identity is no longer a secret and the government (or whoever regulates such things) can trace all your transactions back to you. This can easily be done if you do not use different public keys for different transactions.
The first rule of safety is pretty simple: one address (or one public key) for every different transaction. For this, use only HD wallets, which automatically create a new address for each new transaction.
But, apparently, creating multiple addresses in some cases may still not be enough for a perfectly untraceable transaction.
When you receive BTC (works for all the other crypto) from different addresses and after someone decides to pay someone in BTC, your wallet compiles the transaction by pulling BTC from different addresses and uses these addresses as inputs.
What does this mean?
Well, considering that all transactions are recorded on the blockchain, if one of your addresses was once linked to your real identity, the whole anonymity of such transaction becomes quite questionable.
How to Increase Your Anonymity
But don’t panic just yet! There are a few things that you can do.
First of all, if your IP address is linked to your ID, and you’re using your private Wi-Fi connection to execute transactions, that’s definitely not safe enough.
Make a habit of using Tor browser or VPN services, which encrypt and reroute your traffic.
There are also some platforms that offer to swap your bitcoins with other bitcoins or create temporary addresses — so-called mixing services —so the outputs and inputs will be mixed. However, we do not recommend using random third-party services unless you’re 100% sure they are legit.
Instead of buying crypto on major exchanges, you can use a Crypto ATM if you’re lucky enough to have one around or use the Localbitcoins platform to safely make cash deals from a reputable seller. However, always use your common sense and be extremely cautious when it comes to meeting sellers in person.
But, of course, there are cryptocurrencies that focus specifically on anonymity, although governments and regulators do not welcome them with open arms. These privacy coins are often developed by a group of really devoted enthusiasts who believe in fundamental human rights.
Let’s have a look at some of them.
As the creators themselves say, ‘Monero is designed to be a private, secure, and untraceable cryptocurrency.’ It uses a technology called “ring signatures” which swaps your public keys to achieve a higher level of anonymity.
Monero also implements a specific protocol to generate multiple one-time addresses that can only be linked by the payment receiver and it’s almost impossible to reveal them via blockchain analysis. It is considered to be one of the most advanced privacy coins.
Zcash uses a Zero-knowledge proof feature that allows for verifying transactions and leaves the sender’s or buyer’s identity as well as transaction amount a secret. Selective disclosure features allow users to share some transaction details, whatever they might need it for.
Zcash is also the first widespread application of zk-SNARKs, a novel form of zero-knowledge cryptography. zk-SNARK, short for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge,” assumes that one can prove possession of certain information without actually revealing it, and without any interaction between the prover and verifier.
Dash offers optional transaction anonymity via its PrivateSend feature. It allows you to divide your Dash into parts and “mix” these parts with other participants. This way the origin of the funds used in the final transaction remains a mystery. PrivateSend provides users with a higher level of privacy compared to the centralized mixing services as each round of mixing is facilitated by a different masternode, a unique feature of the Dash network, making it impossible to track funds on the blockchain.
Private coins have often been criticized because of the anonymity they offer. They say people use them to close illegal deals, but let’s be honest. If a person wants to commit a crime, they will find a way to do it, with or without privacy coins.
Other Ways to Stay Anonymous
Lumi is a secure crypto wallet that offers its users a high level of anonymity.
Firstly, we are an HD wallet and create a unique address for every transaction that you execute.
Secondly, we do not ask for any of your personal information, other than your email.
And, finally, you can exchange your crypto right inside the wallet app and we still won’t ask for your ID.
If privacy is something that you really care about, then don’t forget to turn on your VPN next time you sign transactions via Lumi!