Financial Privacy

Many people simply do not want others (relatives, employees, or the government) to be able to see or monitor their financial activities. The truth is that financial privacy is a critical element of both financial security and individual freedom. Payment privacy is also highly valued by retailers, corporations, and other businesses that process payments. These merchants have a moral and legal obligation to protect and maintain the privacy of their customers’ personal information. Financial privacy has become a hotly debated topic in the crypto world, with many believing that bitcoin is anonymous.

How anonymous is Bitcoin?

If you understand the principles of the bitcoin blockchain, you will understand that every transaction is written to the public ledger, which anyone can view. Therefore, it is more accurate to say that bitcoin is pseudonymous rather than anonymous. User identities are not part of the details of bitcoin transactions, but under some circumstances, it is possible to find out the names of wallet owners.

Normally, there is no need to link your wallet to your identity, but once you have linked your wallet to a KYC-compliant crypto service, your identity can be linked to any past or future transactions done with that wallet. Simply put, any user payments can be easily monitored once they have KYC-ed their bitcoins. 

However, solutions such as bitcoin mixers or tumblers are the way to make it a little more difficult for these companies to trace bitcoin transactions. The privacy of the bitcoin blockchain is enhanced thanks to the bitcoin mixer. 

Typically, a bitcoin transaction goes like this: A user transfers cryptocurrency from one wallet to another. Anyone can access a bitcoin explorer and enter the wallet addresses or transaction ID to find out the source of the coins, the recipient of the coins, and the total amount of exchanged coins.

One of the first resources these companies – or anyone else – can use is blockchain.com. Users can easily locate all transactions that have taken place, as well as unconfirmed transactions if they want to see if their recently sent or expected transactions are being processed. 

In addition, financial privacy can be quickly breached if the transaction ever reaches a KYCed address, an address whose owner is known and validated. If you value your financial privacy, you should try to avoid KYCing your bitcoin wallet.

Payment Privacy and On-Chain Analytics Services

On-chain analytics or forensics companies are also a result of these characteristics. CipherTrace and Chainalysis are two examples of organisations that use these characteristics of bitcoin to monitor the behaviour of bitcoin users. It is reasonable to assume that governments will be working closely with these companies in the future to tax their citizens on their bitcoin profits, as well as to track down any suspicious activity.

Given that both of these tools are free and open to the public, it is possible that analytic companies or governments will have access to more sophisticated and complex tools to assist them even further.

No wonder the need for privacy has led to the creation of bitcoin mixers, sometimes referred to as bitcoin tumblers. Bitcoin mixers provide a very convenient way to maintain finacial privacy.

What is a Bitcoin mixer?

A bitcoin mixer is software (or a service) that accepts bitcoins from multiple users, mixes them up so that it is impossible to tell who sent how much, and then sends the mixed bitcoins to their designated wallets. If you were to view such a transaction in an explorer, you’d see the address of the mixer as the recipient (in the case of an outgoing transaction from your wallet) instead of a bitcoin address. Similarly, if you typed in the address of a transaction recipient and looked to see where the coins came from, you’d only find the addresses of the bitcoin mixer. 

A bitcoin mixer is called a “mixer” because it mixes your coins with other users’ coins so that none of them can be traced back to their original wallet addresses. So when you use this solution, you can send or receive bitcoin while remaining completely anonymous. These anonymous transactions aren’t always free, and bitcoin mixing services usually charge a fee of 1-4% of the exchanged amount. 

The bottom line, it’s incredibly easy to track every action that takes place on the blockchain. Moreover, if your wallet has been KYCed, it won’t take much to link your real-world identity to that wallet. If you want to keep your payment privacy intact, don’t link your wallet to any KYC-compliant crypto service. And if you need to anonymise your coins, look for a reliable and trustworthy bitcoin mixing service.