While many of us today understand that Bitcoin isn’t as anonymous as some once believed, it wasn’t always the case. Back in 2013, a significant scandal unfolded when the FBI seized Silk Road, the largest dark web marketplace. This marketplace was designed for users to buy and sell products and services anonymously, with Bitcoin serving as the primary means of exchange. Unfortunately, it soon became clear that the trail of Bitcoin addresses could be traced back to real individuals, primarily due to the introduction of credit card payments for Bitcoin transactions.
The concept of Bitcoin as a ‘private cryptocurrency’ was debunked early on. In the early years, around 2009 to 2011, when Bitcoin transactions were primarily peer-to-peer, it did provide a level of privacy. Sellers and buyers would arrange public meetings where one party would send their Bitcoin, and the other would make the payment directly in cash or through a wire transfer. However, in today’s landscape, with centralized exchanges requiring face scans and biometric KYC documentation, it’s evident that Bitcoin, like most other cryptocurrencies, can be easily tracked.
Many wonder how this transition occurred, turning what was once envisioned as a decentralized, peer-to-peer network into its current state. The mystery surrounding Bitcoin’s origins has raised numerous questions, particularly regarding the identity of Satoshi Nakamoto. Some intriguing speculations suggest that digital currencies, such as Bitcoin, might have been strategically introduced as a Trojan Horse by intelligence networks. The aim? To secure support from libertarian circles and ultimately promote centralized digital currencies. These theories, fueled by Dan Kaminsky’s discoveries and Benjamin Wallace’s propositions, hint at Nakamoto’s potential ties to British & American intelligence agencies.
Whatever the true origins for Bitcoin may be, it doesn’t take much to see the future vulnerabilities and privacy concerns of this asset class.
Bitcoin Maximalists often emphasize that only 21 million Bitcoins can ever enter circulation. However, as Caitlin Long points out, the existence of “paper Bitcoins,” represented by futures and options contracts, can result in an infinite number of Bitcoin derivatives. These contracts essentially stand as promises from intermediaries, like exchanges, to deliver actual Bitcoin. Unless you hold the private keys, you don’t truly possess Bitcoin; instead, you have a claim to Bitcoin, essentially an IOU. Consequently, significant institutional players such as JP Morgan can short Bitcoin without needing to hold a substantial supply of the underlying asset.
Likewise, the most direct approach to dictate what you can or cannot buy involves controlling the entry and exit points for cryptocurrency and fiat transactions, many of which pass through centralized exchanges. A case in point is how exchanges can delist tokens with a simple click, exemplified by Binance’s removal of certain privacy coins in France, Spain, Italy, and Poland.
Suddenly, many individuals find themselves compelled to resort to decentralized exchanges (DEXs) as alternatives for moving funds anonymously. While some DEXs do offer efficient ways to purchase cryptocurrencies using debit cards, converting your cryptocurrency back into traditional currency can often be a complex process. Platforms like LocalMonero or Bisq, despite providing enhanced privacy, frequently face challenges related to low liquidity. Here’s an illustrative guide to highlight the level of difficulty involved in completing an anonymous transaction via decentralized off-ramping alternatives like Paxful or LocalMonero:
- Always access LocalMonero using a VPN or Tor.
- Register using a disposable email like Protonmail or guerrilla mail. Avoid using your real email, address, or name.
- Find a trustworthy seller/buyer on LocalMonero for a cash trade. Sellers/buyers with good feedback and high reputations are safer.
- Use a public phone or a burner phone to coordinate the meeting.
- Select a public meeting place where you have access to free public Wi-Fi.
- Arrive at the venue, complete the transaction, and wait for 2-3 confirmations.
- Avoid using your personal vehicle to commute, as your vehicle’s registration can reveal your identity.
It’s important to note that as of this moment, all of these methods are completely legal, yet unless you are a privacy geek or a low-ranking drug dealer, chances are that you will not go through this much of a hassle. The key message here is that, until a reliable solution for crypto-to-commodity trading becomes available, most major transactions will still involve centralized exchanges like Binance, whether we like it or not. The question that lingers is whether one can still off-ramp anonymously, and I believe it is possible.
First and foremost, take a look at my previous article, which highlights the necessity of creating a centralized exchange account without disclosing your personal information through Know Your Customer (KYC) procedures. Without this crucial step, the subsequent actions won’t have much meaning, as all transactions from the exchange to a business bank account will be linked to your personal ID documents.
Once you’ve laid the foundational framework, the next step is to either receive crypto payments anonymously or anonymize payments coming from centralized exchanges. A common mistake made by beginners is purchasing Monero on Binance and then sending it to someone else, believing the transaction is private. Spoiler alert- it’s not.
In my view, the simplest approach involves buying Bitcoin on a well-known exchange such as Binance, then moving it to a KYC-free exchange like TradeOgre, where you can exchange Bitcoin for Monero. Afterward, transfer the Monero to a cold storage wallet. From there, you can send it to your recipient’s exchange wallet, whether it’s Binance, Kucoin, or Kraken, and they can then convert it to traditional currency with maximum privacy, using their corporate account. This strategy is both straightforward and cost-effective when combined with Tor and a VPN. However, for those looking for even greater discretion, there are various methods to enhance anonymity.
One common option involves mixers and tumblers, which can be explained using a simple analogy. Imagine you have a plastic cup and a collection of pennies from both your wallet and your friend’s wallet. Now, pour all the pennies into the cup and give it a good swirl. Afterward, return to each person the same number of pennies they initially contributed. However, the individual coins they receive will likely be different from the ones they initially gave. This is precisely what crypto tumblers and mixers do, whether you’re dealing with Bitcoin, Ethereum, or stablecoins.
At the time of writing this article, all of the forthcoming methods mentioned are completely legal, even though Tornado Cash was shut down by the Treasury in August 2022. However, my concern with coin mixers, like Tornado Cash (TORN), is that the coins they process are “tainted.” In simpler terms, it’s still possible to trace that these coins have undergone mixing in a mixer. The blockchain’s inherent transparency, storing all transaction information on a public ledger, compromises the level of privacy. This is precisely what led to the freezing of USDC that had been processed through TORN. Exchanges meticulously examined the transaction history and refused to accept any USDC that had passed through the Tornado Cash Dapp. Circle, the company behind USDC, went even further by freezing USDC from blacklisted addresses associated with the app.
To address this issue with coin mixers, one potential solution is to introduce a delay in payments. However, it’s important to note that this method is effective primarily for cryptocurrencies that prioritize user privacy, such as Monero. The postponed payments feature allows users to delay the transfer of their anonymous coins for a specific duration, which can range from a few hours to several days, depending on the specific mixer used. The primary purpose of this delay is to significantly complicate the efforts of blockchain experts attempting to trace the origin and destination of these coins.
When a user opts for a mixer offering postponed payments, their coins are temporarily held in a pool for the designated delay period. During this time, the mixer can merge these coins with those from other users, creating a larger pool of anonymized coins. Once the delay period comes to an end, the mixer then distributes the mixed coins to their intended destinations.
By introducing this delay in coin transfers, mixers can effectively thwart blockchain analysts from tracking the path of these coins.
A more effective but somewhat expensive method is called chain hopping. The idea behind chain hopping is to add an extra layer of security to the mixing process by not relying on a single blockchain network. Instead, the mixing service uses multiple blockchain networks and hops from one network to another to blend the funds. This technique makes it challenging for anyone to trace the funds, even if they know the initial source of the cryptocurrency.
In layman terms, imagine you’re driving a car on a highway with multiple exits, switching from one highway to another and changing your vehicle’s appearance along the way, say at a parking lot.
First, you pull over to a parking lot (a different wallet) on the same highway, where you exchange your unique car (convert your cryptocurrency) for a new one (a different cryptocurrency). Then, you re-enter the highway, but now you’re driving an entirely different car (using a different blockchain network). This new car is unrecognizable compared to your original one.
Now, even if someone had spotted your initial car and noted its details, they won’t be able to follow you on this new highway because you’re driving an entirely different vehicle. In a real-world scenario, exiting the highway with a new car would be challenging due to toll booths recording your entry and exit. However, crypto cross-bridges have addressed this issue, allowing your “new car” to smoothly transition to a different road. Chain hopping makes it exceedingly challenging for anyone to track your journey from start to finish, just like taking different highways and switching cars along the way would make it nearly impossible for someone to follow you throughout your trip.
The final method I’d like to share is “peel chains” or payment splitting. This technique breaks down a large transaction into smaller ones sent to different addresses to make it more challenging for anyone to trace the funds’ origin and destination.
To explain payment splitting, think of it as someone sending a secret message in World War Two through multiple postcards. Imagine you have an important message (representing a large transaction) that you want to send to the Resistance without anyone knowing the full content or its destination. Instead of writing the entire message in one letter, you break it into smaller parts and send each part on a separate postcard.
For instance, if you had a 10-part message, you would send each part on a different postcard to various addresses (similar to how a mixer splits a transaction into multiple smaller transactions sent to different addresses). This approach makes it much tougher for anyone to piece together the full message or track its route.
The advantage of payment splitting is that it adds an extra layer of security and privacy. Even if someone were to intercept one postcard (or one transaction), they would only have a fragment of the complete message (or payment), making it nearly impossible to figure out the entire story or where the remaining parts went. The downside is the cost, as you must pay a “stamp fee” (transaction fee) for each postcard sent.
For the time being, Monero (XMR) stands as the top choice for cryptocurrency trading. It eliminates the need for relying on chain hopping or mixers to anonymize crypto transactions. Unlike many other tokens, its value comes from its practical use rather than mere speculation. However, in the long run, the possibility of a government ban on Monero looms, with the IRS offering a substantial reward of $625,000 for breaking XMR’s code. If all centralized exchanges are compelled to remove it, using Monero will become more burdensome and costly.
In conclusion, the cryptocurrency landscape is in constant flux, demanding more advanced methods in the future. My primary concern regarding the techniques I’ve outlined is their dependence on centralized exchanges. Should a bottleneck emerge in exchanges like Binance, Kraken, or Kucoin, entering and exiting the cryptocurrency realm will necessitate fresh approaches. This is why the community’s long-term strategy involves developing an off-ramping solution involving commodities, tangible goods, or service trading.
For a deeper consultation on wealth management strategies and actually implementing them, feel free to reach out via email at info@coinswithoutborders.com.