Taxation is one of the key reasons the governments want to monitor cryptocurrencies. Many people have learned a lot from crypto, and many individuals and companies use cryptocurrencies to perform trading. Governments hope to avoid money laundering by monitoring cryptocurrency transactions. Many firms are willing to help policymakers monitor crypto transactions.
Governments had seen blockchains and cryptocurrency as a danger from the moment when Bitcoin started to gain attention. The belief was not unfounded since, for illicit and unethical reasons, original applications were restricted only to the dark internet. You could purchase or sell something on the dark web’s notorious markets like The Silk Road, from cocaine to hitmen, child pornography, to hackers.
But as BTC and the general crypto-currency industry expanded, the underlying technology’s legal uses and implementations called the blockchain followed suit. Currently, the best Fortune 100 companies and government agencies are growing with the help of distributed leverage. The regulation comes with legitimate usage. The crypto-markets Wild West period is set to come to a close in the following years. Regulators around the globe are coming to terms with the fact that cryptocurrency transactions need to be tracked. As regulations are established, tools for tracking crypto-transactions are being produced, particularly on the BTC network.
The anonymity phase is set to end. But not all of that is bad. There are also positive aspects of the legislation.
Misconceptions Concerning Traceability
There’s been a longstanding public misunderstanding that Bitcoin network transfers are private and can’t be monitored. The transfers are, in fact, pseudonymous. That actually signifies that they are linked to a wallet that can be traced to an IP address or to a server where the wallet is hosted by a network or a third party that monitors traders in a way.
Why Track Transactions?
Governments are trying to monitor cryptocurrencies for different reasons. Most of them include:
One of the main reasons for tracking is taxes. Many traders have profited a substantial amount from cryptocurrencies, and lots of people and companies use cryptocurrencies to conduct trades. This is an enormous loss to policymakers, and they wish that traders will pay taxes on the cash they receive.
Cryptocurrencies have rightly been accused of assisting in numerous unlawful moves. The policymakers can only trace the offenders when they can unweave the web of transactions heading the Dark Net.
Money Laundering (AML)
Some of the fears around crypto that policymakers have are that traders would move their money to another nation. To put it more clearly, money laundering. Governments are hoping to halt that by tracking cryptocurrency transactions. This is mostly achieved under the basis of national security, too.
Many exchanges have also started following their state’s KYC and AML or Anti-money Laundering regulations. Soon the better part of big exchanges will follow their example
Regulation – Insider Trades
Crypto-marketplaces really aren’t regulated. And they don’t operate like conventional financial markets in financial institutions. Thus there isn’t a method for regulators to know if a person is conducting unlawful behavior as insider trading unless they monitor all transfers using blockchain analysis software.
How is tracking done?
How are policymakers monitoring of crypto-transfers?
The conventional ‘follow the money’ concept has been used throughout much of the banking industry’s established past. The policymakers follow the trail of the money. They mark some wallets, check patterns for withdrawal or cashing out, and map them to IP addresses. These wallets can sometimes be connected to an exchange, too, and one requiring KYC/AML. Typically a thorough review of such info provides clues or perpetrators that can further be tracked to the funds’ sources.
Regulated exchanges must report any strange activity. The majority of those exchanges ask for KYC and AML banking requirements when the customer signs up. The exchanges can track suspicious activities with a growing amount of checks in place. They are compelled to report that to those institutions with authority.
For example, Japanese exchanges voluntarily published data on their exchange in 2018 on more than 5000 illegal transactions. Authorities in the US have filed a lawsuit naming the known Coinbase platform to compel them to release user info.
Chainalysis is a blockchain analytics firm leading the way in uncovering records of transfers done on various blockchains. They also built tools that allow companies, policymakers, and investors to look into big blockchain info to fund where the cash is going.
The US Internal Revenue Service (IRS) contracted this firm in 2017 to identify ‘anonymous wallets’ used by crypto-currency users to hold tokens. By 2018, the majority of law enforcement institutions could enter that software.
From the early days of Bitcoin, another organization made some pro features for flagging and identifying origins and flow of money. Bitcoin Map has been developed by the company and is a prime sample of its software abilities.
CipherTrace is also a big name that aims to de-anonymize such transfers. They are saying they can trace more than 700 cryptocurrency tokens. While privacy coins such as Monero aren’t counted in, this is a substantial market chunk. Malta’s financial institutions with authority have already put CipherTrace in charge of battling blockchain cases of money laundering and terror financing.
Diar reported that the US government agencies had invested a minimum of $5.7 million to recruit private contractors to monitor cryptocurrency assets. That counts in the IRS, the FBI, and the DEA.
Data analytics comes with tracking info from the publicly available blockchain to follow the trades back to the traders. This includes the pooling of addresses known through some of the different identification routes. When labeled, regular monitoring of the flow of money across these can assist in enlarging the scope of known wallet addresses that conduct trade with it.
The IRS has submitted letters asking crypto-traders to give their money for taxes. The IRS has said it will continue to use data analysis to find more rogue taxpayers dealing with crypto.
Is privacy still a thing?
Not all is lost. While others don’t care about giving out their transfer info with policymakers, fans of crypto prefer total privacy. However, there are no foolproof ways to reach a perfect place.
Mixers are some of the most significant instruments for this purpose. Mixers take your tokens and mix them arbitrarily with tokens from other users, run them via other cryptic addresses and anonymously put your tokens in a private wallet. They charge this service a large fee. But it could be a cost worth paying for fanatics of anonymity.
Keeping privacy coins such as Monero is another way. Such cryptocurrencies are meant to provide anonymity and do not have a public address connected to any previous transfer. This renders Chainalysis-like applications inefficient. Nonetheless, there is a possibility that one will be identified via wallets or exchanges of third parties. And if you wish for total anonymity, keep Monero in your private wallet or a wallet of paper. It is very improbable that anyone can trace it.
Although remaining anonymous is a possibility, it certainly gets harder each time. Declaring profits on cryptocurrency trades is becoming safer, as well as paying taxes. When tools grow, so make choices in terms of privacy. But the battle between government resources and privacy choices is definitely never going to end.