Today, when customers pay merchants with cash, check, credit, or debit card, they do not have access to the merchant’s bank account balance. Also, employees cannot access the balance of their employer’s bank account from the information on their paycheck. If the merchant accepts cryptocurrency as payment or if an employer pays their employee crypto, that is not the case! Anyone with access to the blockchain can check to see which wallet address received the crypto they sent. They can then take a deep dive into that wallet address and retrieve the following details:
- Current coin / token balances
- Transaction history from the time the wallet was created.
- Including all other wallets that sent crypto to this address.
- Including all exchanges of one crypto to another.
- Including all wallets that received crypto from this merchant’s / employer’s wallet
This may come to a surprise to those of you who believed cryptocurrency transactions were anonymous. This was NEVER the case. Due to the transparent nature of the blockchain, all transactions are recorded to an open ledger. Transactions are pseudo anonymous, which means no one knows who owns the wallet UNTIL THEY DO.
I’ve been told, it’s human nature to maintain privacy. During our hunter / gatherer days, our ancestors learned the importance of keeping their sources of subsistence private. Once you brag about your secret fishing hole, the fish will soon be gone!
Fortunately, the technology that supports cryptocurrency has also provided a way to obfuscate the source of funds so blockchain data cannot be used to break a fundamental rule of human nature; the one of privacy.
Today, there are several methods used to ensure your pseudo-anonymous transactions stay private. This list is by no means exhaustive but can be used to learn more about the technology available today.
- Privacy coins like Dash, Zcash, Monero, Bytecoin, and Verge have blockchains with privacy designed in their protocol.
- Coin mixer or tumbler sites like the ones below, receive tokens from users and mix them together before they are distributed. The best practice is to let enough time pass to allow a thorough mixing of coins. Once coins are sent to a new wallet, their history is eliminated allowing users to regain anonymity on the blockchain.
- Tornado Cash (Ethereum)
- CoinJoin (Bitcoin)
- BitMix (Litecoin)
- SmartMix (Bitcoin Cash)
As of this writing, there are no laws prohibiting the use of privacy coins or mixing sites. In my opinion, privacy during payment transactions is critical for the adoption of cryptocurrency by merchants. It is also imperative for those employers paying their employees in crypto.
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Author: Stephen Stubblefield, Sanctuary DEX Technical Advisor