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Can Crypto Transactions Be Traced?


In line with a recent news item on BitPinas about e-sabong (electronic cockfighting), there was a question of, are crypto transactions really untraceable?

This article aims to debunk the myth that crypto can be untraceable.

Disclaimer: This is not financial advice. Do due diligence before investing in cryptocurrencies.

Fundamentals of Cryptocurrencies

What are Cryptocurrencies?

Cryptocurrency is a digital currency. An alternative form of payment created using encryption algorithms. The use of encryption technologies denotes that these digital currencies function both as a currency and as a virtual accounting system. 

What are Crypto wallets?

To be able to use cryptocurrencies, the enthusiast needs a cryptocurrency wallet. These crypto wallets are either a cloud-based service or are stored on the computer or on any mobile device. Crypto wallets are the tool through which encryption keys are stored and confirm the owner’s identity and link to their digital assets.

There are two types of crypto wallets: custodial and non-custodial

Non-custodial wallets give crypto enthusiasts ownership of the assets. With the use of the private keys or seed phrases, this gives the owner access to the wallet. Therefore anything that happens to the wallet is the responsibility of the owner. Assets lost are not retrievable by any institute, like what banks can do for their customers. An example of this is MetaMask.

On the other hand, custodial wallets are given by companies for crypto enthusiasts who can store their assets but have no ownership of the assets. Instead of private keys or seed phrases, the enthusiasts need to undergo Know Your Customer (KYC) to be able to use the application to store and/or trade their assets. KYC requires enthusiasts to provide their identity through submitting government-issued identification cards and documentation to prove their identity. If any loss of assets, these can be retrieved by the company with cooperation from authorities. Examples of this are Binance, Coins.ph, PDAX and Coinbase.

What is Blockchain Technology?

The blockchain technology behind cryptocurrencies is composed of digital codes or smart contracts that create a database of digital records of transactions (ledger) and is immutable because of the design of the blockchain to have a consensus of the blocks if new information is true or not. Therefore, it cannot be altered or hacked from within the chain. 

All transactions can be seen by anyone that has either the crypto wallet address or transaction hash. Any transactions made by the wallet address can be traced using websites like Etherscan for Ethereum-based transactions. Making it transparent to all.

Examples of Cases that Transactions Were Traced

Colonial Pipeline Incident

An incident in the United States of America, where a gasoline pipeline company, Colonial Pipeline, encountered ransomware from hackers, identified as DarkSide. DarkSide demanded 75 Bitcoin (BTC) or $4.4 million from the company in return for a tool to restore their computerized operation. This incident happened in May 2021.

The Federal Bureau of Investigation (FBI) was able to retrieve a month after a portion of the ransom. The amount retrieved was 63.7 BTC or around $2.3 million.

Axie Infinity Hacking Incident

In March of 2022, Axie Infinity had a breach on their system and millions of US Dollars in the form of crypto was stolen by hackers through the Ronin Bridge. A month later, Binance was able to recover around $5.8 million from the hackers.

For more details on this, see BitPinas article.

Closing Thoughts

Although blockchain technology promotes anonymity, it does not mean that transactions are untraceable. The ledger-like technology of blockchain will always record every transaction a crypto holder will do and wherever the asset may go to, it will be traced by anyone in the same network. With the help of local authorities, they may have the capability or means to trace where the end user or hacker may be located.

This article is published on BitPinas: Can Crypto Transactions Be Traced?

Therefore, if illegal activities may resort to using cryptocurrencies to hide their money trail, it is still traceable by anyone. This is how useful blockchain technology is; it builds trust and security.



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