The Problem of Anonymity in Crypto

Cryptocurrency is a decentralized digital trading tool that enables users to transact without intermediaries. Its privacy-enhancing features make it an attractive alternative to banks, but it can also facilitate illicit activities that may be damaging to the financial industry.

While the creator of Bitcoin, Satoshi Nakamoto, has never had his or her identity revealed, the same courtesy has usually not been extended to users that have transacted with the network.

Since the distributed ledger of mainstream blockchain networks is accessible to all, it does not matter if the identity of a user is not tied to his or her blockchain address. With details of every single transaction stored on-chain, it is possible to keep tabs on all the transactions using public block explorers, then extrapolate that data with IP address, cryptocurrency exchange accounts, fiat gateways, and more.

Some crypto traders and project developers are keen to protect their identity and privacy, citing the need to protect their wealth and personal safety. However, increased attention on the overall industry has made it hard for them to do so. Regulatory concerns, media inquiries, and social media have peeled away the anonymity that was once afforded to members within the crypto world.

KYC in Centralized Exchanges

As cryptocurrencies become more mainstream, regulators have stepped up their efforts in addressing the various issues they can create, such as the potential for bad actors to enter the market. To avoid becoming a victim of fraud, crypto service providers must ensure that their KYC processes are robust and transparent.

In South Korea, some exchanges have also stopped accepting wallet addresses that have not been properly registered, due to the ‘travel rule’ implemented by the intergovernmental Financial Action Task Force (FATF). This means that exchanges are required to collect transaction data and share them with the Korean authorities whenever needed.

Most cryptocurrency exchanges have implemented mandatory KYC for their users, restricting certain functionalities until their identity has been verified. For example, a user may be limited to a certain withdrawal limit every day until they have performed KYC. They would need to submit a personal selfie along with their identification documents.

Anonymity in DeFi

A major distinction between DeFi and TradFi is the high level of decentralization that the former confers, which also allows for the anonymity of DeFi traders and dApp developers.

While projects like Ripple have been getting into lawsuits with regulatory authorities due to ongoing disputes, DeFi teams are mostly anonymous and are not subject to the same level of accountability. They do not need to have background checks, credit checks, or checks to see if they have any criminal records or are on sanctioned watch lists.

However, with numerous incidents of rug pulls and malicious scams, there have been many calls by regulators to focus on the DeFi market.

A prominent incident that shocked the DeFi sector recently was the exposé behind the CFO of the DeFi protocol Wonderland, @OxSifu, who was revealed to be Michael Patryn, a career criminal with a less-than-outstanding history of illegal dealings. With the lack of any proper check-and-balance, it is all too easy for malicious actors to resume their scams under a new identity within the DeFi sector.

The tide seems to be going against anonymity in this market, and news media were all too eager to assist in this crusade for more clicks and readership. This was the case for BuzzFeed’s reveal of the identities of the co-founders behind the NFT collection Bored Ape Yacht Club.

Bored Ape Yacht Club features an ensemble of different cartoon apes, with their proof-of-ownership stored as an NFT on the blockchain. It is currently the second-most valuable NFT collection based on price, and each Bored Ape avatar is usually sold at an average price of $25,000. The founders behind this collection received the price paid for these 10,000 apes when they were first originally sold, and also received a cut of each subsequent sale.

Earlier this month, BuzzFeed published an article that identified the two co-founders to be Greg Solana and Wylie Aronow, based on public documents on their company’s incorporation in Delaware, USA. Solana and Aronow have publicly stated that they were “doxxed” against their will, though the news media company maintains that they were conducting journalism for the sake of public interest. After all, identifying the founders behind one of the biggest NFT-based companies can provide some transparency into their operations. It is also hard for their identities to stay a secret when the company was estimated to be valued at around $5 billion, with several prominent business dealings with venture capitalists worldwide.

What the Future Entails?

While most DeFi protocols foster trust by implementing automated smart contracts that can be audited, the fact remains that hackers and scammers will always try their luck to exploit the current paradigm.

If the DeFi market continues to grow, it is perhaps inevitable that the governments of different countries step in. After all, they need to protect the rights of their citizens.
The market is perhaps at a crossroads of sorts; what happens from here on out would no doubt influence the future of the crypto market, and only time will tell if future crypto traders are afforded the same level of anonymity they enjoy today.