Posted 2 years ago | by Ben Armstrong

Is Bitcoin Traceable?

Recently, BitBoy Crypto produced a video in which strangers were asked questions about Bitcoin and then presented with the option to take $5 of cash, a $10 gift card, or $15 in Bitcoin. Eight people in all were interviewed. Five people took the cash, two people took the gift card, & one person accepted the Bitcoin. While the social experiment was an interesting look at how people view & understand the value of Bitcoin, it may have been even more eye opening as to what the average person outside of the "crypto bubble" actually thinks & believes about Bitcoin.

One of the most commonly held beliefs by the people interviewed was that Bitcoin is untraceable. They view it as a secretive currency used to purchase illegal items & substances on the dark web. It would be easy to understand why people believe this. At one time, Bitcoin was considered to be untraceable meaning that someone could make purchases in secret that could never be discovered through a transaction log.

In the early days of Bitcoin this was true. Of course, this led to the rise of the website Silk Road which ultimately led to the arrest & imprisonment of crypto icon Ross Ulbricht. At one time, as many as 44% of Bitcoin transactions were illicit in nature. Recently though, that number has dropped by some estimates to 1%. So why the drop?

The reason for this drop is simple. Bitcoin is now traceable. Even though very little about Bitcoin has changed over the years, investigators and white hack hackers have gotten much more savvy when it comes to following the complicated trail of Bitcoin transactions. There are even blockchain analysis companies like CipherTrace & Chainalysis that assist in this.

The rise of Bitcoin adoption has also led many legit blockchain companies & exchanges to try to be as compliant as possible to US regulations. Along with this has come more stringent Know Your Customer (KYC) procedures.

This is absolutely huge to the traceability of Bitcoin. Right now there are about 460 million Bitcoin addresses, but only about 27 million of them actually hold Bitcoin. Coinbase alone has 13 million users. While all of those users may not have active Bitcoin wallets, it's safe to assume that Coinbase has at lease a few million of those active Bitcoin addresses. That means that any address that sends Bitcoin to a Coinbase address or receives Bitcoin from a Coinbase address has now had their privacy jeopardized.

Through finding one person's Bitcoin address through a wallet or exchange that requires KYC, US Department of Justice (DOJ) officials have been able to bring down crime syndicates and hacker groups. It's like a sweater with a loose thread. No matter how small that first thread is, it can be unraveled until nothing is left.

Just this week DOJ officials were able to blacklist the BTC addresses, along with one Litecoin address, of three Chinese nationals accused of drug smuggling & money laundering. This is not the first time that the DOJ has "doxxed" (internet slang for revealing something anonymous) cryptocurrency addresses. In November, the Bitcoin addresses & identities of two Iranian hackers were revealed by the DOJ. The two men were accused by the DOJ of attacking various cities & organizations across the United States with a complicated ransomware attack and demanding Bitcoin in exchange for removing the ransomware. The attack became known as the SamSam attack. In both of these cases, the addresses associated with the criminals were blacklisted.

In situations where officials blacklist certain Bitcoin or other cryptocurrency addresses, any address that continues to send to or receive from those addresses becomes a new target for the DOJ. And while there doesn't seem to be any evidence, one could logically assume that every address that had previous transactions with the blacklisted ones are also targets.

The Bitcoin decentralized network of addresses can be seen like a giant brain teaser. The more addresses that are known through KYC, the easier it is to find the owners of the rest. While Bitcoin is an innovative currency that can decentralize the world's financial system, it is not private. There are protocols such as Mimblewimble and others that developers believe could be added to the Bitcoin code to restore that privacy. But that may not be good thing for Bitcoin. It certainly would bring additional scrutiny to Bitcoin & more importantly those who own Bitcoin.

Despite what US Treasury Secretary Steve Mnuchin recently said, cash is a far better option for black market purchases. It's safer and less traceable than Bitcoin. And yet, the general public still believes that Bitcoin is not a traceable currency and is perfect for black market purchases. The only thing that can change this is education. The Bitcoin community must do a better job of reaching outside of its core supporters and explaining the advantages of the currency to those who know nothing about it. Or else the crypto community will only become more of an echo chamber.

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