Can Crypto Wallets Be Traced?

Cryptocurrency has become increasingly popular among investors due to its promise of private transactions. But can crypto wallets be traced? Read this comprehensive guide to find out.

Can Crypto Wallets Be Traced?

Understanding Bitcoin traceability is essential for anyone who uses cryptocurrencies. All Bitcoin transactions are public, traceable and permanently stored on the Bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent to. These addresses are created privately by each user's wallets.

Many people believe that Bitcoin is completely anonymous, but this is not the case. It is very likely that a Bitcoin address used in a transaction will be tracked if it is analyzed by forensic experts. Bitcoin transactions are actually pseudo-anonymous because they are not tied to an identity. Bitcoin has become popular among major investors, and this principle of private transactions has become much more precarious. If this financial activity can be traced, cryptocurrencies such as bitcoin are more pseudonymous than anonymous.

The federal focus on cryptocurrency-related crimes, combined with the increasing sophistication of law enforcement tools to track illicit cryptocurrency payments, means that such transactions are not anonymous. But aside from the increase in resources dedicated to stopping crypto crime, there is a simpler reason why these types of transactions aren't really anonymous to ordinary Americans. Cryptocurrency transactions are recorded on a blockchain, which is usually public. At the same time, crypto trading is not necessarily tied to an identity, which provides a bit of anonymity to users. While there are select goods and services that you can buy directly with bitcoin, in most cases it is necessary to exchange them into the local currency to actually spend them. To convert bitcoins into dollars, you usually need to find a company that provides this service, such as a cryptocurrency exchange, a money transfer service or select banks.

Companies like these often adhere to Know Your Customer principles, which means that identity verification is required to use the service. As Gordon said, regardless of how anonymous or pseudo-anonymous bitcoin is, services that transfer bitcoins to dollars are not anonymous, so making transactions would not be anonymous in any meaningful sense. This means that banks and other financial institutions are required to have customers' personal information on file to be secured. Although the FDIC does not insure cryptocurrencies, cryptocurrency exchanges operating in the United States have adopted KYC standards. Both Coinbase and FTX USA require customers to confirm their identities. It is also worth noting that the FDIC, in collaboration with other regulatory agencies, is studying new laws for crypto assets.

There are cryptocurrencies that people claim are 100% anonymous. However, any claims of completely anonymous transactions should be treated with skepticism. A Bitcoin address alone is not traceable, since there is no identifying information stored directly on the blockchain. But there are ways that a person's identity can be tied to specific wallets they own and the transactions they've made. While digital currency can be created, moved and stored outside the purview of any government or financial institution, each payment is recorded in a permanent fixed ledger, called a blockchain. Because virtual asset service providers (VASPs), such as cryptocurrency exchanges, require users to comply with know-your-customer (KYC) regulations, exchanges provide one Bitcoin wallet per user.

Wallets contain a collection of public keys that are derived from the private key, which is the key that can unlock the wallet and provide access to your funds. You can only access your funds if you have a Coinbase account or if you have a wallet that is not hosted, such as a non-hosted wallet. Since Bitcoin is based on a public ledger, which is a public ledger, everyone can see the address of their crypto wallet. This means that while cryptocurrency has a reputation for anonymity, it may not be as private as many people think.

Greg Myslim
Greg Myslim

Friendly crypto evangelist. Subtly charming social media lover. Unapologetic web buff. Incurable bacon lover.

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