Crypto Is Not Anonymous: How Criminals Are Caught on the Blockchain
Crypto Basics

Crypto Is Not Anonymous: How Criminals Are Caught on the Blockchain

Created 1yr ago, last updated 1yr ago

Bitcoin is not an anonymous way to make payments online — read more to find out why criminals are getting caught with Bitcoin.

Crypto Is Not Anonymous: How Criminals Are Caught on the Blockchain

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Over the years, crypto has been consistently linked to criminal activities, partly because most believe that it is the ultimate financial tool for cloaking dirty money. However, judging by the impressive rate at which law enforcement agencies are unraveling crypto crimes, this is far from the truth. Contrary to popular belief, it is relatively easier to track crimes committed using cryptocurrency than it is to surveil cash-based illegal activities. Continue reading to know how criminal activity is much more traceable on the blockchain than you might have thought. 

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Misconceptions Surrounding Crypto’s Affiliations With the Crime World

In 2009, the Bitcoin network was launched as a potential alternative to a struggling traditional financial system. The anonymous creator(s) of Bitcoin, Satoshi Nakamoto, designed the crypto network as a viable solution to the bureaucratic limitations of fiat. Unlike existing financial systems, Bitcoin utilizes a peer-to-peer payment network that enables censorship-resistant transactions. Remember that the world was in the middle of one of the most devastating financial crises in history — so it was no surprise that Bitcoin became popular amongst libertarians shortly after it went live. 
Apart from the censorship resistance attributed to Bitcoin, the cryptocurrency was also believed to provide anonymity because network participants use pseudonymous addresses (instead of their real identities) when executing Bitcoin transactions. The general belief around that time in Bitcoin’s beginning was that it was impossible to track Bitcoin transactions. In other words, Bitcoin was viewed as an anti-censorship and anti-surveillance asset. 
It was not long before the digital asset became a popular payment method in the emerging dark web where drugs and all sorts of illegalities thrived. The first of many marketplaces that took advantage of Bitcoin’s censorship-resistant feature was the Silk Road in 2011. 

After under two years of operations, the Silk Road had become too big to go unnoticed, and law enforcement agencies around the world began to collaborate to track and apprehend the mastermind behind the entire network. But if Bitcoin truly preserved the anonymity of its users, there was little or no chance that these efforts would yield the desired results right? Well, that was not the case. 

In 2013, the long arm of the law eventually caught up with the culprits, and the Silk Road was shut down. More surprisingly, the FBI was able to confiscate $1 billion worth of Bitcoin. How was this possible if Bitcoin guaranteed anonymity? 

How Are Criminals Tracked on the Blockchain?

To understand the futility of using crypto for criminal activities, it is worth exploring the workings of a blockchain, which is the underlying technology of cryptocurrency. A user first has to create a crypto wallet before going ahead with buying or receiving digital assets. Note that each wallet comes with a unique identifier — in the form of a string of alphanumeric characters — that plays an important role in the execution and validation processes of all crypto-related transactions. These identifiers are what we call wallet addresses.
Whenever a user attempts to send crypto, the wallet requests the recipient's wallet address to ensure that the ownership of the crypto in question is transferred to the right participant. Think of wallet addresses as the blockchain equivalent of traditional bank account numbers. 

Just as account numbers are logged in bank ledgers, the blockchains underpinning most crypto networks also log users' wallet addresses. Before a transaction can be considered valid, validators must first load vital data and identifiers related to the transaction on the blockchain. The blockchain therefore contains the following information, for the most part: the wallet address of the recipient, the wallet address of the sender and the amount transferred.

(This is not necessarily the case with privacy-oriented coins like Monero and Zcash, which are explained here).

More often than not, blockchains are impervious to manipulations — all data stored on blockchains are immutable. This is unlike what we have in the traditional banking system, where individuals or entities with the right clearance or permission can alter the content of bank ledgers. 

Another thing that the creator and users of the Silk Road did not understand was that Bitcoin’s underlying technology ultimately functioned as a public ledger — anyone interested in tracking Bitcoin transactions could access the ledger. You do not need warrants or endless paperwork to surveil the content of blockchains. In essence, it was only a matter of time before law enforcement agencies figured out how to compile this data, analyze it, unravel patterns and trail illegal transactions and wallet addresses.
More importantly, the standardization of the crypto exchange market is also not helping the case of crypto criminals. Many more exchanges are adopting Know Your Customer (KYC) and anti-money laundering (AML) requirements. As such, law enforcement agencies have a chance to link wallet addresses to real identities when criminals attempt to cash out funds or perform other exchange-based transactions. The fact that the records on blockchains are immutable means that crypto criminals cannot truly go scot-free.

The Rise of Blockchain Analytics Companies 

Apart from the crypto crime-fighting activities of law enforcement agencies across the globe, companies have emerged with sophisticated blockchain analytics tools that make it a lot easier to fish out illegal activities. In most cases, the analytic processes involved are autonomous and adaptive to the ever-changing crypto landscape. These companies often (but not always!) partner with law enforcement agencies to fast-track investigations and unravel complicated crypto cloaking systems. Some of the prominent names in this sector are Elliptic, Chainalysis and CypherTrace. 

Are Privacy Coins and Crypto Mixing Tools Viable Alternatives for Criminals?

Alternatively, criminals can shift their attention to privacy-focused cryptocurrencies that implement algorithms for hiding the transaction details of users. There is also the option of using crypto mixing tools that let people cloak the source of their crypto assets. In theory, these systems could receive crime-related cryptocurrencies from criminals, mix them with other crypto gotten from various sources and redistribute untainted coins to users. This process makes it a lot harder to trail crypto or wallet addresses associated with illegal activities. 
While these two options currently provide a potential escape route for criminals and other crypto users that crave total anonymity, regulators, blockchain analytics companies and law enforcement agencies have begun to explore ways to eliminate this advantage. For example, Europol and a local Dutch fiscal investigation agency partnered to shut down one of the largest cryptocurrency mixing services in 2019. 
As for privacy coins, some regulators are pressuring exchanges to delist crypto privacy projects. The goal is to either unlock the privacy features of these cryptocurrencies with the help of blockchain analytics companies or force them out of the market. Considering the level of scrutiny on privacy coins and mixing services, it is safe to say that the wall is gradually closing in on crypto criminals. 


By using crypto as their core payment system, the Silk Road and other crypto crime perpetrators at the time were unknowingly leaving breadcrumb trails that law enforcement agencies could potentially capitalize on. While you will think that the current set of illicit entities would have learned from past mistakes, the opposite seems to be the case. Criminals continue to use cryptocurrency to carry out or fund their illegal activities. As expected, they often discover that crypto is crime-unfriendly.
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