Many of cryptocurrency’s early adopters were drawn to the promise of anonymity. With Bitcoin, they’d be able to directly transact with each other without having to go through a bank.
Such crypto transactions were primed to be the digital equivalent of exchanging cash, in the sense that they’d be easy to facilitate and free from supervision. Users would be able to store value in digital wallets without having to give up any personal information.
Naturally, this came with drawbacks. After all, banks and financial institutions carry out Know-Your-Customer (KYC) checks for a reason — to prevent criminal activity such as money laundering.
In 2011, Bitcoin began gaining notoriety for its illegal uses. It was the currency of choice for users of Silk Road — a website now remembered as one of the most infamous marketplaces for illicit trade.
Silk Road generated over 600,000 Bitcoin in revenue, worth over S$36 billion today, over the course of two years. It was only by the end of 2013 that the Federal Bureau of Investigation (FBI) was able to shut down the website and arrest the owner, Ross Ulbricht.
The FBI were only able to find Ulbricht because he had used his real name on websites such as LinkedIn and Stack Overflow, where he spoke about running Silk Road. After prosecuting him, they seized the revenue which he held in his own crypto wallet. However, others who shared in the revenue still remained hidden.
To date, over half of Silk Road’s total revenue remains unaccounted for. But as technology develops to help regulate the crypto space, the funds could yet be recovered. Authorities have started implementing novel ways to identify blockchain users, even if their wallets come without an ID.
Can users be identified through their crypto wallets?
Inherently, a crypto wallet doesn’t record any information which could identify its owner. What does get recorded is every transaction being made to and from a crypto wallet. This information is stored on the blockchain and can be viewed by anyone.
With millions of transactions being made everyday, it used to be nearly impossible to keep track of crypto trails.
However, tools have been developed over the years which can collate data from the blockchain and visualise the flow of cryptocurrency from one wallet to another. Using such tools, one may identify a wallet which contains stolen or illicit crypto.
After that, it becomes a waiting game. As long as the crypto remains on a decentralised platform, authorities are unable to seize it or directly track down the owner.
However, if the owner were to try converting the crypto into fiat money, they’d likely reveal themselves in the process. This comes as a result of the crypto regulations now implemented in countries including Singapore.
How does Singapore’s crypto regulations monitor transactions?
The primary way to buy cryptocurrency using fiat money or convert cryptocurrency to fiat money is through a centralised exchange (CEX).
In Singapore, this includes companies such as DBS Vickers and Independent Reserve. Such licensed exchanges are regulated under the Monetary Authority of Singapore (MAS)’s Payment Services Act. Following are the points laid out in the act which the exchanges must comply with:
a. customer due diligence by verifying their identities and businesses;
b. monitoring of customers’ transactions for signs of money laundering and terrorism financing;
c. screening of customers against relevant international sanctions list by the United Nations; and
d. maintain detailed records of customers activities and put in place a process to report suspicious transactions to MAS.
As is apparent, if one were to buy crypto in Singapore using SGD, they would have to give up their personal details. The same applies if they were to transfer crypto from their decentralised wallet to a CEX.
Going back to the previous example: authorities can monitor decentralised wallets containing illicit crypto, and if the owner attempts to transfer it to a CEX, they can then have it seized.
This is possible because CEX users don’t actually have crypto stored in individual wallets. All the value remains stored with the CEX itself, along with a record of how much each user owns.
There are also regulations about the information which must be shared between CEXs when a transaction is being made.
What is the Crypto Travel Rule?
As of January 2020, MAS implemented the Crypto Travel Rule which was laid out by the Financial Action Task Force.
According to the rule, when cryptocurrency is being transferred between two CEXs, information of the users involved in the transaction must be shared between the exchanges.
When the transaction exceeds S$1,500 in value, the sender’s address, IC number, and date of birth, are all sent over to the receiving CEX. For transactions below that threshold, only the name and wallet ID is shared.
Currently, there are no regulations stopping cryptocurrency being sent to or received from a decentralised wallet.
Exchanges are alerted that such transactions carry a higher risk of being illicit, and are left to carry out enhanced due diligence measures at their own discretion.
Loophole: P2P crypto exchanges
P2P exchanges allow users to bypass CEX regulations and convert between cryptocurrency and fiat money.
On such platforms, users trade with each other directly after agreeing upon a set price. One user sends over money via bank transfer and in return, the receiving party sends crypto to their wallet.
Since there is no record linking the two transactions and the cryptocurrency never leaves a decentralised wallet, it’s impossible to track down the parties behind the trade.
P2P exchanges are often used by people residing in countries where it’s illegal to own crypto.
They can also be exploited by users who are trying to offload stolen crypto. Aware that they’re unable to withdraw their coins through a CEX, these users can sell off large amounts on P2P exchanges by offering a rate which is slightly lower than that of the market.
What does the future hold?
By virtue of decentralisation, the power to stay anonymous on a blockchain remains with the user. However, authorities are still able to regulate the space by monitoring entry and exit points. This appears to be a fair compromise as it dissuades the illicit use of anonymity, while allowing regular users to continue reaping its benefits.
That being said, new ways to mask blockchain transactions have now begun to emerge. As the technology evolves, it’s more than likely that new regulations will follow suit in the near future.
Featured Image Credit: CoinFlip