In the early days of Bitcoin, the currency ran on a platform that was largely anonymous apart from the username, which did not have to be connected to the person’s actual legal name. Bitcoin was so anonymous that the actual identity of the creator, Satoshi Nakamoto, was never revealed! This anonymity led to a series of scandals, notably the Silk Road website created by Ross Ulbricht and the money-laundering company BitInstant, created by Charlie Shrem.
Bitcoin Anonymity and Scandals
The scandals below are just a couple that took advantage of Bitcoin’s anonymity to try to commit crimes and evade law enforcement. Other scandals include Ponzi schemes and money laundering, to name a few.
The Silk Road
In January 2011, Ross Ulbricht created a website known as the Silk Road, named after the ancient trading route between Asia and Europe. His goal was to take advantage of Bitcoin’s anonymity to enable users to purchase illegal drugs off the Internet. The anonymity feature of Bitcoin meant that the purchases of the illicit items could not be traced by law enforcement. In November 2013, an FBI task force cracked the Silk Road website and traced the creator as being Ross Ulbricht. Amongst other charges, Ulbricht pled guilty to trafficking in narcotics.
BitInstant
BitInstant was a Bitcoin exchange started by Charlie Shrem and his partner, Gareth Nelson. A user on the BitInstant network, known as Robert Faiella, purchased large numbers of Bitcoins Bitcoins to sell at higher values to his own customers. However, Faiella did not have a license to engage in financial exchanges. Faiella was known only as BTCKing; however, law enforcement tracked down his true identity and prosecuted Faiella.
Remaining Anonymous
The above scandals serve as a warning to any who might attempt to take advantage of the anonymity associated with Bitcoin to commit financial crimes. If the FBI feels the need to become involved, it will use its means to crack the true identity of users engaging in money laundering or illicit trading.
Bank accounts generally require a lot of identifying information, such as a person’s address, social security number, place of employment, references, etc. Bitcoin does not require this. Every Bitcoin user has a Bitcoin address used to send and receive funds. This address is not tied to the user’s identity. Therefore, in order to make a transaction using Bitcoin, one does not need to reveal any personal information. With this in mind, the easiest way to remain anonymous on the Bitcoin network is to not connect any identifying information to your Bitcoin address.
However, there are ways for people who operate computer nodes to uncover someone’s identity. A system known as clustering connects multiple Bitcoin users to each other. If one of those users has revealed his or her identity, a node operator can use that information to determine the identity of all users in that particular cluster. Keep in mind that all transactions are stored publically in the Bitcoin blockchain and are visible to anyone.
There are some things that Bitcoin users can do to protect their anonymity. The first is simply to make sure that your Bitcoin address is not connected to any personal, identifying information. Anyone on the Internet can see your Bitcoin address; it is public so that people are able to send Bitcoins to you. Beyond not connecting your Bitcoin address to any identifying information, make sure that it is not connected to any public forums, such as a blog or social media page.
The second way to remain anonymous on Bitcoin is to not use any fiat currency in a Bitcoin exchange. Because fiat currencies are intensely subject to money laundering laws, many governments require that identifying information be disclosed before an exchange using their fiat currencies can be made. When Mt. Gox was breached in February 2014, many users’ identifying information was leaked because it had been used to make exchanges with fiat currency.
The third way to remain anonymous on Bitcoin is to always enable a VPN before accessing Bitcoin. A VPN is a virtual protected(private) network, and it keeps people from being able to trace your activities online. Using a VPN will prevent hackers and ne’er-do-wellers from being able to determine that you are the person behind a certain Bitcoin address. If you don’t have a VPN, a public WiFi spot would provide an added layer of protection in the battle to protect your anonymity. This is because your personal information is not required in order to log into the WiFi network. However, this method is not as effective on a Mac computer, as Macs can be identified on a public network.
The fourth way is to use a different address every time a new transaction is made. If multiple addresses are connected to your Bitcoin wallet, the amount of Bitcoin that you own is spread out rather than conglomerated into one lump sum. This will keep anyone from being able to determine how much Bitcoin you actually have. However, if your identity becomes connected to any one of those addresses, all of your addresses can become connected to your identity.
The fifth way is to avoid using a thin wallet. A thin wallet is a Bitcoin wallet that does not operate on the full peer-to-peer network. Rather, it uses a single server and a method known as Simple Payment Verification. This method makes the wallet more efficient, but it sacrifices security in the process.
The sixth way is to obtain your Bitcoins anonymously. Bitcoins purchased on an exchange site are usually connected to your identity because identifying information must be used to purchase them. Websites like LocalBitcoins can be used to purchase Bitcoins in a face-to-face fashion using cash rather than a credit or debit card; this method of purchase eliminates the paper trail connected to an electronic transaction.
Again, be forewarned that using Bitcoin to engage in any kind of fraudulent activity will invoke the interest of law enforcement, and a task force will be created to crack your true identity. Make sure that your objective of remaining anonymous is intended to protect you from any kind of identity theft rather than enable you to commit a financial crime without being caught.
