How Governments In Various Countries Track Bitcoin and Cryptocurrency Transactions


One of the biggest criticisms against cryptocurrencies has been the anonymous and untraceable nature of it. It has been smeared by politicians, experts, and mainstream journalists alike as a hiding place for almost any hacker, drug dealer, gang member, terrorist or despot you could possibly name.

To curb this problem, governments have been increasingly trying to trace the circulation of digital currencies. Notwithstanding the reputation of most cryptocurrencies as anonymous, they've been aided in this pursuit by the fact that most cryptos are not anonymous, but rather pseudonymous. By linking transactions to fixed wallet addresses, and by keeping a public record of every single transaction ever made on their chains, most popular cryptocurrencies provide national governments with an almost perfect means of keeping tabs on our financial. activity. This makes cryptos not anonymous, rather they work only as a pseudonym.

While many governments have begun capitalizing on this very convenient affordance by building systems that compile transaction data and scraped private info into a single database, most have only just begun moving in this direction. Additionally, there are a number of privacy coins that don't offer a public record linking transaction to wallets, while there are also mixing tools for making the transactions of non-privacy coins private.

Let us have a quick look at the state of the government oversight on cryptos in various countries.

Japan Crypto Regulations

To see the extent of the Japanese government’s crypto monitoring, we can see the National Police Agency (NPA) announced plans to implement a system that can reportedly “track” cryptocurrency transactions within Japan. The software is being developed by an unnamed private company and will cost the NPA around $315,000 next year to run. In particular, its main function will be to trace transactions reported to it as ‘suspicious', linking them together into a visualization that will, in theory, enable it to pinpoint the sources and destinations of illegal money.

What this means is that such a system isn't likely to have much direct application to anyone who circumvents (regulated) exchanges when receiving and sending crypto. That said, even if certain users stay away from Japanese exchanges they could still be linked to illicit crypto if said crypto has passed through an exchange and already raised suspicions.

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Russia Crypto Regulations

A comparable narrative is currently appearing in Russia, where the Federal Financial Monitoring Service (Rosfinmonitoring) has contracted for a system that will collate various sources of information regarding suspects in finance-related crimes. The system will be used to create profiles for suspects, to which the authorities then add whatever relevant info they can gleam about him or her: phone numbers, bank card details, physical addresses, and crypto wallet addresses. Once again, the system hasn't been designed specifically to compromise the cryptography of Bitcoin or any other crypto, but rather seeks to simply add wallet information – where available – to any other data Rosfinmonitoring has on a suspect.

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While the systems being rolled out by Japan and Russia largely depend on cooperation from crypto-exchanges and on piecing together disparate sources of information, there are indications that some governments, including that of United States, have taken a more direct approach to identifying crypto users.

US has developed a covert piece of technology that can actually extract raw internet data from fiber-optic cables in order to identify the IP addresses and IDs of those sending and receiving Bitcoin. According to documents obtained by whistleblower Edward Snowden in 2013 and published by the Intercept in March 2018, the technology in question is a program developed by the National Security Agency (NSA) and known as OAKSTAR. Masquerading as a piece of virtual private network (VPN) and downloaded by some 16,000 users in such nations as China and Iran, the program instead siphons data from an “unspecified ‘foreign’ fiber cable site.”

As alarming as OAKSTAR and the activity surrounding it are, no new information has emerged recently to indicate that the NSA has extended its Bitcoin-tracking endeavors to other cryptocurrencies. There's also the fact that its ability to link certain people with Bitcoin wallets is predicated on these people unwittingly downloading a piece of software that secretly extracts their internet data. As a result, if users stick to VPN packages they know and trust, it's likely they will avoid the NSA's long claws.

China Crypto Regulations

If you think US was bad at crypto tracking activities, China has sepped up its game to the next level. Reports emerged in March that the Public Information Network Security Supervision (PINSS) agency has been monitoring foreign crypto-exchanges that serve Chinese customers. Even though the government has banned domestic exchanges and trading on foreign alternatives, this hasn't stopped every Chinese trader from seeking out crypto abroad. Because of this, PINSS has been ‘monitoring' foreign exchanges so as to “prevent illegal money laundering, pyramid schemes [and] fraud.”

While such monitoring had been underways since September 2017, it couldn't explain just what kind of monitoring was being pursued, or whether the Chinese government was actively trying to identify individuals trading in crypto. Still, whatever the extent of the surveillance involved, the knowledge that other nations are tracking crypto would indicate that Chinese traders should also add themselves to the growing list of ‘people who ought to be careful.'

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India Crypto Regulations

Indian crypto traders have been fretted since January 2018 when they discovered that their government was keeping tabs on them for tax purposes. Actually, chances are they would have learned about this, since the Indian tax department sent notices to tens of thousands of investors, after having conducted national surveys and having obtained user data from nine Indian exchanges.

This provided a clear signal that the government was indeed tracking cryptocurrency transactions, something which it had begun contemplating in July 2017, when India's Supreme Court demanded information from it and the Reserve Bank of India on the steps being taken to guarantee that crypto isn't being used for unlawful objectives.

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UK and EU Crypto Regulations

The UK and EU governments jointly announced in December 2017 that they're planning a “crackdown” on crypto-enabled money laundering and tax evasion. Although this doesn't validate tracking, it would at least imply it, since the ability to enforce AML legislation requires that governmental bodies and departments should have some means of not only detecting when someone is earning crypto that needs to be taxed but also discovering just who that person is. Hence, UK and EU authorities need to have some kind of tracking system in place, otherwise, their threats of ‘cracking down' on money laundering and the like will compare to only so much hot air.

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