Cryptocurrencies are decentralized non-governmental digital currencies and are widely tradeable as per James Angel, an associate professor of the Georgetown University. Although Bitcoin is the most popular form of cryptocurrency, there are several other options as well.
Most of the cryptocurrencies run on the blockchain technology in which transaction data are added to a ledger of past details of transactions. Cryptocurrencies have their own sets of benefits and disadvantages. While it gives full data control to the user, a simple mistake on the users’ end might cause them to lose their data forever. In short, the traceability of cryptocurrencies is a matter of concern.
Bitcoin is actually fairly traceable. It is because although bitcoins have no numbers, a unique digit is assigned to the wallets. Whenever a digital transaction is made, these unique numbers are investigated along with the IP address and the amount of transaction. The traceability of Bitcoin or any other cryptocurrency such as Litecoin or Ethereum can be optimized with some simple protocols. One should always create a new wallet at the beginning and end of each transaction. This will allow the investigator to follow the transaction pathway easily. Coinbase is a popular US exchange that inherently follows this protocol for maintaining cryptocurrency transparency and traceability.
On the other hand, users can wash their money by buying foreign currency through debit or credit cards and then just shifting it back to the cryptocurrency’s wallet. This is referred to as ‘washing with a combinator’. If a user wishes to assume an appreciable level of anonymity, he can transfer the existing coins through wallets in the form of exchanges and gambling sites, thereby reducing traceability.
Each and every transaction is added to the blockchain that is mutually shared by all the participants in the network. Therefore, all the transactions are public and supposedly traceable. Exchanges take a record of the users’ KYC (Know your customer) when they purchase the coins. Subsequently, all the following transactions can be ideally traced back to the user. Nowadays, there are several firms that are capable of tracking the exchange of digital currencies. This helps in the tracking of illegal or fraudulent transactions. The only downside is that blockchain does not record the identities of the two parties involved in the transaction. Hence, bitcoin and most other cryptocurrencies can be best described as pseudo-anonymous rather than being anonymous. The identities can, however, be traced back to the initially recorded cryptocurrency address.