Digital Identity for Bitcoin: Can Governments Track Down Your Private Wallets?

Key Takeaways:

  • Governments over the world have expressed concerns on cryptocurrencies.
  • Governments following money trails to track funds.
  • US Feds located 3.6 Billion of stolen Bitcoin

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Blockchain has progressed tremendously from its inception as a distributed ledger system for tracking bitcoin holdings.

This technology can potentially replace existing identity management systems with a highly reliable mechanism.

Users will have more control over their own identities thanks to blockchain.

Organizations can only utilize the data with customers’ permission, and no central entity can jeopardize a customer’s identity.

Governments worldwide, including India, China, the United States, and Europe, have expressed concern about cryptocurrencies. Bitcoin was once hailed as underground money that even the world’s most powerful spy services would be unable to follow — but that may no longer be the case.

Examples dating back to 2015, when the founder of the ‘Silk Road’ Bitcoin market was sentenced to life in jail for aiding the sale of $1 billion in illegal substances, prove differently. Investigators can still follow the money.

Even the most secret cryptocurrencies, such as Monero, DASH, and Verge, may be tracked to some extent. This is because blockchain is a distributed ledger. Every transaction is recorded and preserved on a ledger, which is open to the public.

Blockchain and Anonymity:

Bitcoin is based on a blockchain, a chronological record of when Bitcoin was created, where it was used, and by whom.

This list, sometimes known as a ledger, is open to the public. Anyone can observe which wallets spent which Bitcoins and where they were spent, although a jumble of numbers and letters obscures the person who spent the money.

For illustration, if you know a person who spent money on a specific service—say, a VPN—on a specific day, you can look up whose Bitcoin address paid money on that VPN in the ledger.

Even if your search yields more than one or two addresses, you can look into where the money was spent elsewhere. You have a second data point if one of the obtained addresses makes a Wikipedia donation, as John regularly does.

The major problem with Bitcoin is its wallet, which is where your Bitcoin is kept. Unfortunately, the majority of cryptocurrency wallets are pseudonymous rather than anonymous. Anonymity is about being “nameless”, but your wallet provides you with a fictitious name, a pseudonym.

Anonymous vs Pseudonymous

Although many cryptocurrencies, such as bitcoin (BTC), are more traceable than cash transactions, some cryptocurrencies, such as Zcash (ZEC), Monero (XMR), Grin (GRIN), and Beam (BEAM), were created with anonymity and privacy in mind (BEAM).

Although certain transactions are made anonymous to aid illegal activity, privacy is a core human right that governments must provide to citizens and is necessary for greater freedom.

Many people in the crypto community use pseudonyms for privacy reasons, either to conceal their true identity as part of a drive toward self-sovereignty or to protect their privacy and security. Bitcoin appeals to many people because anonymity is built into the system.

The discussion between privacy activists and policymakers over the benefits and drawbacks of pseudonymous and anonymous cryptocurrencies is still ongoing. Still, given the rapid pace of technological advancement and widespread acceptance of crypto, a solution should be reached soon.

Self-sovereign Identification

It is intrinsically unalterable and more secure than existing identity systems that have been made possible via blockchain.

This has the potential to dramatically transform how we connect to various internet services using our identities.

Individuals would prove their identity using their self-sovereign ID, eliminating the need for passwords.

  • Self-sovereign identity would theoretically allow users to:
  • Maintain control over their identities
  • Access to and updating of data (though third-party verification may be required with some claims)
  • They can choose which information they want to keep secret.
  • Data is transported (to another organisation or even another jurisdiction if they relocate)
  • If that’s what you want, remove the identity.

Specific requirements would have to be met by such a system:

  • Algorithms that can verify a person’s identification and its claims
  • Regardless of the platform or design used
  • Identities that will last a long time
  • The ability to communicate with one another
  • Only with the user’s permission will data be shared.
  • Organisations should be able to access only the information they require, not the entire database.
  • User rights are protected.

Exchanges and Proof of Identity: 

All exchanges that allow you to trade your government-backed cash for cryptocurrencies require proof of identities, such as a passport, driver’s licence, or government-issued ID. To function, exchanges, like ordinary banks, must use know-your-customer (KYC) protocols.

This may entail requesting your identification, proof of income, and other information. They do it because they have to, much like banks: Governments worldwide are cracking down on money laundering, regardless of how it is done.

Authorities may see who bought how much and when by just asking the exchange for your information because the ledger is public.

You can buy crypto without KYC, but it’s more complicated and possibly risky than using a KYC-compliant exchange. Decentralized exchanges and Bitcoin ATMs are the most prevalent ways to buy crypto without authenticating your identity.

A central entity does not govern a decentralized exchange. Peer-to-peer marketplaces and automated market makers are the two forms of decentralized exchanges (AMMs).

The Feds’ Method for Locating $3.6 Billion in Stolen Bitcoin:

The US government’s $3.6 billion bitcoin bust this week appears to reflect its five-year effectiveness in blocking some illegal money-laundering activities. Last Thursday, the Justice Department claimed it executed a search warrant and seized 94,636 bitcoins from two alleged money launderers’ online wallets.

Heather Morgan, 31, and her husband, David Morgan, are also 31 years old.

Ilya Lichtenstein, Ilya Lichtenstein, Ilya Lichtenstein, 34. The seized bitcoins are the majority of roughly 120,000 bitcoins taken in a hack in 2016 from the cryptocurrency exchange Bitfinex.

The couple moved the stolen funds, according to the federal government’s complaint, through sites like AlphaBay, which exist on the dark web—a part of the internet accessible only through unique browsers designed to hide identities—and mixers, which break up crypto transactions to make them harder to track. In addition, the government used multiple email addresses to create bogus accounts with unhosted wallets and roughly ten different bitcoin exchanges.

The couple has not been charged with the original Bitfinex theft, and no one else has been charged yet.

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Aadrika Sharma

I enjoy writing and try to learn new things every passing day!