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Can I Hide my Wealth in Crypto or on the Blockchain?

The advent of crypto has seen people drifting away from traditional banking to storing their money in crypto. It all began with the release of Bitcoin in 2009, after which other cryptocurrencies followed suit. People from all over the world can now store, trade crypto assets, convert them to fiat (traditional money), or run transactions with them. So, the answer is a resounding Yes–you can hide your wealth in crypto.

An Overview of Hiding Money in Crypto

It’s estimated that between 2016 and 2020 alone, there was about a 190 percent increase in the number of verified crypto wallets. According to a Gemini report, we’re currently looking at 21 million (14 percent) American adults who own crypto. This is a huge population of American crypto users, representing a significant decline in traditional banking. And it further leaves people thinking that decentralized finance will take over traditional banking.

This means that the government and tax organizations will have little tax control for crypto users. Another factor is cryptocurrency’s anonymity, which makes it super private and greatly reduces the odds of tracing a wallet address or transaction to the owner. It becomes even much harder to track cryptocurrency addresses or ownership with UTXO cryptocurrencies.

UTXO (Unsent Transaction Output)-model cryptocurrencies like BTC, DASH, BCH, LTC, etc., make it frustrating for attackers or investigators to deanonymize crypto owners’ wallets. The mechanism involves sending your balance or unspent crypto after transactions to another address. Intuitively, a wallet balance is meant to remain at the same address after a transaction. But, no! Asset privacy and security are top of the priority in the UTXO model.

Hiding your wealth in crypto got way easier with UTXO wallets because they automatically generate those new addresses for your balance every time you run a transaction. This anonymity model is so potent that even dusting attacks―which are the closest things to deanonymizing wallet addresses―break a sweat to figure out those wallets’ identities.

The big question now has to do with centralized exchanges (CEXs). Are funds deposited from centralized to decentralized exchanges traceable or not? First, you must understand that centralized exchanges act as intermediaries or third parties between crypto buyers and sellers. Many crypto users see them as reliable since they’re controlled and operated by a company.

However, customers are expected to add their personal information and go through compulsory KYC (Know-Your-Customer) verifications, which hamper your privacy. Those KYC verifications usually include your biodata (e.g. face scans), licenses, certificates, and in-depth details about yourself. With such details, it’s fair to say you aren’t completely anonymous on the CEX company-side as the details can use them to trace your transactions and flag them in case of any suspicion.

The truth is that funds from a CEXs to a DEXs wallet address are recorded on the blockchain, e.g., Ethereum or Bitcoin as another send transaction. However, transferring from a decentralized wallet app like Trust Wallet to a decentralized exchange boosts the transaction’s anonymity because of the absence of KYC verifications.

While crypto transactions were originally meant to be anonymous to oust third parties, people have also leveraged that anonymity for other activities such as hiding illegal wealth while keeping their identities secret. Such heavy transactions are more traceable and susceptible to flagging by law enforcement agencies like the FBI. So, such people now use crypto like Bitcoin to sell illegal items online, giving law enforcement agents a run for their money.

A popular example was Silk Road, an illegal online marketplace―home to illegal goods like drugs, weapons, and other illegal services. And as you might imagine, Ross Ulbricht, the founder, and his team hid their billion-dollar illegal business under the anonymity of crypto―Bitcoin specifically. But Ulbricht’s billion-dollar, illegal, Bitcoin-using empire came crashing when the FBI tracked him down against all odds, which later saw him facing life imprisonment in 2015.

Although dusting attacks have mostly been used to deanonymize crypto wallet addresses, law enforcement has not failed to utilize the transparent nature of the blockchain to detect and fight criminal activity. For instance, on January 2021, 10 men were arrested in Netherland after a trail of Bitcoin addresses connected the bitcoins they’d just converted to millions of Euros to illegal drug sales investigated by the FBI and Interpol.

There’s also another rather hilarious application of hiding wealth in crypto which involves married people hiding assets in crypto to evade paying their alimonies. It even got funnier when a 2016 CoinTelegraph article emphasized that hiding assets in a divorce using Bitcoin is risky, but it pays. Similarly, a University of Carolina law journal claims that Bitcoin’s anonymity and optimization for fast transactions make it easier for spouses to hide marital assets.

Conclusion

You’ve seen that crypto is an effective means for hiding wealth. Its anonymity and transparency have worked well for the unbanked and users who want to take a break from mainstream banking. However, these interesting crypto perks have also been utilized for running illegal transactions and hiding the proceeds. But as researchers continually seek ways to unmask crypto users’ identities, crypto developers and users are adapting by devising smarter means to maintain anonymity and security, which are core crypto characteristics.