Bitcoin Q&A: Exchanges, identity, and surveillance


‘Given the current status of Bitcoin and other
open blockchains, how can users who purchase their BTC on an exchange, exposing all of their [personal
information], protect their privacy and anonymity? Especially when governments have very sophisticated
tools such as Chainanalysis. Should there be infrastructure and a paradigm shift
on how users switch their assets from fiat to crypto?’ This is a great question. Right now, it’s actually very difficult to
protect your privacy because the fiat system has all of these rules that tie all transactions
to identity. Basically, the fiat system is designed to
be a surveillance machine. If your on-ramp, if your entrance into the
crypto space, is through the surveillance fiat system, then you start your journey under
full surveillance. As a result your privacy is going to be severely
compromised. This isn’t something that is necessarily the
fault of exchanges. Exchanges are trying to work as a bridge between
fiat and crypto, and fiat is a surveillance system. They can’t not do the surveillance that is
required by governments around the world… when touching the fiat system. How do you maintain your privacy? How do you maintain anonymity? How do you protect your human rights, your
ability to transact without everything you do being under scrutiny
(absent any suspicion or wrong-doing)? How do you protect yourself? One way is to think about how you get to the
crypto economy in a different way. I’ve talked about this before, but I think
it’s worth emphasizing again. That is, instead of buying cryptocurrency,
you earn it by giving your labour, your services. Effectively, by selling products or services
that you would sell otherwise doing your job, and earning your income in cryptocurrency. Then, it’s not [going through] an exchange. It doesn’t touch fiat. As a result, it’s not part of their surveillance
and reporting system. Of course, you have to report your income. Or you may choose not to, but you should report
your income under any requirements of the law. But you don’t have to report which crypto
address you received your income on, so you have a much higher degree of privacy when
you do transactions between individuals… rather than dealing with a regulated exchange. Another way is to think about various privacy
services that exist, that help you once you have cryptocurrency acquired through an exchange
[or elsewhere]. The receive address, for example after withdrawing
it from the exchange, is tainted. What does that mean? That means the moment you did a withdrawal,
the exchange will have associated your identity (which they’ve recorded) with the address
you sent the cryptocurrency to. They will either assume that’s someone you’re
paying, if they have information about that address belonging to a merchant through other
systems that are under surveillance, or they’ll assume that address belongs to you. As part of the deal that these exchanges have
with various analytics firms, in order to support what they call “know your customer”
(KYC) and “anti-money laundering” (AML) regulations, they will send information on every transaction to the
analysis firms, together with the identity that they have. In return, they’ll get some kind of risk score that says
whether they should allow that transaction or not. This is a very dirty deal, whereby in order
to receive a risk score from a KYC/ AML perspective, the exchanges are effectively forced to send
all identifying information about all incoming and outgoing transactions to the analytics
firms. The exchanges then become a giant surveillance
machine. This also applies to all of the merchant processing,
centralised points that perhaps are building e-commerce shops and things like that, or
converting cryptocurrency into fiat for merchants. In order for them to be able to comply with
the regulations and get a risk score, or an AML score, on any single transaction,
they have to send all transactions with… associated identities to the analytics firms. So the moment you do a withdrawal, your receiving
address has been tainted in its association with you. At that point, the only way to break that association
is to do some transactions between your own wallets. That will obfuscate the sources of those funds [a bit]. Depending on your jurisdiction, that may be
perfectly legal or it might not be. I’m not going to give you legal advice as
to whether you should or shouldn’t do that. Simply know that there are tools out there that will
allow you to add a layer of privacy to your transactions. By mixing cryptocurrency transactions with
your wallets and other wallets. In some jurisdictions this is perfectly legal;
in others it is not. It will allow you to perhaps add some distance
between an address that has been identified as yours, and an address that you
want to use in the future.

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