Is Bitcoin Really Anonymous?

While cryptocurrency has a reputation for anonymity, the reality is more complicated.

A few weeks ago, $3.6 billion in bitcoin was seized from a Manhattan couple who were arrested and charged with money laundering in connection with a 2016 hack on the Hong Kong cryptocurrency exchange Bitfinex. It was the largest financial seizure in the Justice Department's history.

Law enforcement went to great lengths to trace the illicit funds, including tracking the stolen bitcoin through a complicated web of transactions spanning multiple countries. It took six years, but authorities eventually caught up. 

From the beginning, bitcoin and other cryptocurrencies have been associated with anonymity and privacy. The notion of invisibility with the technology was touted in the original 2008 white paper introducing blockchain technology via bitcoin.

Because cryptocurrency allows for direct peer-to-peer transactions made via the internet, the idea is that only two parties are involved in the activity. No banks, governments or intermediaries are necessary. But considering the $3.6 billion bitcoin bust, as well as other recent examples, how anonymous are crypto transactions really?

Bitcoin has now caught on with mainstream investors, and this principle of private transactions has become much more precarious. If this financial activity can be traced, then cryptocurrency like bitcoin is more pseudonymous than anonymous. 

To understand how anonymity and cryptocurrency relate to each other, CNET sat down with two blockchain technology experts: Dr. Steven Gordon, who teaches a course on cryptocurrency and blockchain at Babson College; and Feng Hou, Maryville University's digital transformation chief, who works on implementing blockchain tech.

Here's what they told us. 

Are bitcoin transactions anonymous?

No. Bitcoin transactions can be traced, as demonstrated by the recent bust in Manhattan as well as last year's Colonial Pipeline hack, in which authorities were able to recoup some of the ransom payment from the attackers. 

How is cryptocurrency traceable?

The federal focus on crypto-related crime, combined with the increasing sophistication of law enforcement tools to trace illicit cryptocurrency payments, means that such dealings are not anonymous. But aside from the uptick in resources dedicated to stopping crypto crime, there's a simpler reason why these kinds of transactions aren't really anonymous for regular Americans. 

Cryptocurrency transactions are recorded on a blockchain, which is generally public. At the same time, crypto trades are not necessarily linked to an identity, which provides a bit of anonymity for users. While there are select goods and services you can buy directly using bitcoin, in most cases it needs to be exchanged into local currency to actually spend it. And converting bitcoin into US dollars, a heavily regulated currency backed by the federal government, creates a distinct paper trail. 

"If you want to use bitcoin or any other cryptocurrency for buying things," Gordon said, "then you're probably going to need to transfer the cryptocurrency into dollars at some point."

In order to turn bitcoin into dollars, you generally need to find a company that provides this service, such as a cryptocurrency exchange, a money transfer service or select banks. Companies like these usually abide by the "Know Your Customer" principles, which means identity verification is required to use the service. As Gordon said, "Regardless of how anonymous or pseudo-anonymous bitcoin is, the services that transfer bitcoin into dollars are not anonymous, and so therefore transacting it would not be anonymous in any meaningful sense."

How are suspicious crypto transactions reported?

KYC refers to a financial services industry standard that protects against money laundering and other financial crime. For example, institutions under the Federal Deposit Insurance Corporation must have a clear relationship with their clients to develop a "customer risk profile," which is used to identify and report suspicious transactions to authorities.

That means banks and other financial institutions are obligated to have the personal information of customers on file in order to be insured. Although the FDIC doesn't insure crypto, cryptocurrency exchanges operating in the US have adopted KYC standards. Both Coinbase and FTX.US require customers to confirm their identities. It's also worth noting that the FDIC, in concert with other regulatory agencies, is looking into new laws for crypto assets.

Is any cryptocurrency truly anonymous?

There are cryptocurrencies that people claim are 100% anonymous. However, any claim of fully anonymous transactions should be treated skeptically. 

"We know that, through forensics analysis, we can always get to the bottom of it," Hou said. "So, just to put this straight out, any cryptocurrencies claiming that they're 100% anonymous, we have to take it with a grain of salt."

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