There are many different opinions about cryptocurrencies like Bitcoin. One of them is that they cannot be traced back or can only be traced poorly. This view is based on a misunderstanding, because in addition to Bitcoin transactions, those with Litecoin, Ethereum, Dogecoin, and many other digital assets are not anonymous. Instead, the transactions are pseudonymous, which means that no one can know right away who owns a certain address, to which coins have flowed or from which an outflow is recorded.
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If you are able to associate certain information with the respective address, then you can not only make the transaction flow visible on the blockchain but also make precise statements about who owns the coins.
In the following, we would like to introduce why cryptocurrencies can be traced, how this works and where the limits of the procedures lie.
Why can cryptocurrencies be traced?
The blockchain is a cohesive dataset whose information can be verified by any person at any time. This is one of the basic ideas of Bitcoin because the ability to audit forms the foundation for its transparency. In the end, no party should be able to change completed transactions or simply create Bitcoin out of thin air. Because most cryptocurrencies have been created based on the model of Bitcoin and only have undergone technical changes in some fields, they also work according to the same principle as Bitcoin.
So that the transparency of Bitcoin does not make the users of the technology transparent right away, Bitcoin addresses are pseudonymous and most cryptocurrencies also follow this example. A Bitcoin address might look like this:
This is a Bech32 address, which we can easily recognize by the fact that it starts with the identifier "bc1". We can't say who owns the address, but it can be observed and because all the information is on the blockchain, we can draw conclusions when other addresses interact with it.
Blockchain Forensics - On the Trail of the Perpetrators
The term blockchain forensics covers a number of methods that can be used to secure traces left behind by every person who uses Bitcoin or other cryptocurrencies. It not only evaluates transactions but also tries to merge this specific data with other available data.
The simplest method here is research, because many people publish their Bitcoin addresses on the Internet, which simplifies an assignment to a certain group of people. However, scammers and fraudsters are sometimes much more skillful in order to remaining anonymous. In these cases, data is associated with information that is not public or at least cannot be collected through a simple search.
This includes, for example, inquiries to Bitcoin and crypto exchanges, which are used by many scammers to convert their digital assets into dollars, euros, or another currency. Once you get a hold of this data, then you can trace back where the money has gone and you can insist on the release of the money with the help of a lawyer. The same applies to the cryptocurrencies that scammers have received through fraud. Most exchanges then block the affected accounts and retain money and Bitcoin. In the end, the scammers are not as anonymous as they might think.
What are the limits of blockchain forensics?
Each user of Bitcoin can increase their privacy by using different wallets for different purposes. Fraudsters also know this and try to make analysis more difficult in order to remain anonymous. However, this is usually insufficient, especially when an expert is at work. Simply changing the address is therefore not enough.
More difficult, however, are transactions with a Bitcoin mixer, which should ensure that the connection between the sender and the recipient of a transaction can no longer be reconstructed and at least the recipient remains anonymous. While it is true that this is a very reliable method for these purposes, even here scammers can make serious mistakes and thus involuntarily leave traces. What may be sufficient for simple user privacy in everyday payment transactions is not an obstacle in the context of analysis by a professional blockchain forensic expert.
More worrying, however, is the use of the cryptocurrency Monero (XMR), which, unlike Bitcoin, is not transparent. Instead, a number of methods are used that make the transaction flow anonymous, including the protection of addresses. It is worth mentioning that scammers do not always achieve complete anonymity, but often only the so-called plausible deniability. Therefore, it cannot be proven beyond doubt that the funds are connected to a crime. This is also the reason why Monero is becoming increasingly popular on the Darknet. At the same time, this cryptocurrency is losing ground as fewer and fewer exchanges plan to offer it for trading. Overall, the risk is too great for them that they might be associated with abuse. In some countries, such as South Korea, the trade in Monero has simply been banned.