Anonymous Money Transfers and the Pitfalls of Cryptocurrency Transactions
Privacy is a human right officially recognized by the United Nations. Despite this high status, for most people, the word “anonymity” is often associated with criminal activity. Hidden networks, which are at the forefront of anonymity tools (think “darknet”), are also widely seen as the domain of illegal actions. Regardless of what the media says, everyone occasionally feels the need for privacy. If you disagree, consider why tools like TOR and VPNs are so popular, why people hesitate before posting opposition thoughts on social media, and why you’re happy not to link your phone number to certain services when it’s not required.
Any serious discussion about privacy inevitably leads to the question of anonymous money transfers. Old-school scammers might recall bank transfers to fake identities, today’s fans of banned substances will mention Bitcoin, and more advanced users will talk about other cryptocurrencies. In this article, we’ll touch on these topics and aim to go deeper than your average clickbait post.
Disclaimer: The author does not condone illegal activities or encourage criminal behavior. This material is intended to broaden the horizons of finance and IT professionals.
How Cryptocurrency Works
At the core of any cryptocurrency is a digital signature algorithm, which ensures the authenticity of transactions within the network even when there is zero trust between participants. A digital signature is a cryptographic algorithm that involves two keys: a public key and a private key. The private key is used to sign information, and the public key, which is freely distributed, is used to verify the signature. Both the key and the signature are just small sets of bytes. If the signature check fails, the message is considered forged or corrupted and should not be trusted.
In the context of cryptocurrency, digital signatures allow every network participant to be confident in the validity of transactions without a central authority. If user A sends funds to user B, the entire network can be sure that user A actually did it.
Each transaction in a cryptocurrency network is placed in a block, which contains not only transaction data but also service information crucial for the network’s integrity. Blocks are created by miners—participants who provide computing power to keep the network running. Mined blocks form a chain—the blockchain. For each block mined, the miner receives a reward: a set amount specified in the cryptocurrency’s code, plus transaction fees from the transactions included in the block. As new blocks are created, new coins are generated, increasing the total supply.
Before including a transaction in a block, the miner checks its validity by reviewing the blockchain to ensure the sender has enough funds. If not, even if the block is successfully mined, it will be rejected by the network and the mining effort wasted. To confirm a transaction, users typically wait for several confirmations, meaning that the block containing the transaction has been accepted by other miners and new blocks are being added on top of it.
The Value of Cryptocurrency
Even though the price of one Bitcoin has long surpassed 4 million rubles, its value is not backed by anything tangible. The same goes for other cryptocurrencies: their prices are purely speculative—higher demand means higher prices, but everything is extremely volatile. For example, the mood of crypto brokers can swing wildly based on any news, however minor. Today you might have 1,000 rubles in crypto, but tomorrow, due to a ban on crypto operations in China, it could drop to 500 rubles. The same volatility can also lead to price surges.
In reality, all cryptocurrency is just data stored on the hard drives of miners and other network participants who sync their local blockchain with the global one. The average transaction is just one or two kilobytes, so for a while after a cryptocurrency launches, its entire blockchain can fit on a home computer. The most expensive part of crypto is paying for electricity and buying powerful hardware.
The price of a benchmark cryptocurrency, regulated solely by the community without any centralized intervention, can never be stable. Due to this volatility, cryptocurrency is a poor choice for storing money—unless you’re an investor betting that things won’t collapse tomorrow and you’re in it for the long haul.
In everyday use, cryptocurrency is a transit tool: you receive it as an equivalent of fiat currency (like rubles or dollars), and soon after, you exchange it back for real money.
If you come across a cryptocurrency whose price magically stays the same, know that it’s just a second-rate imitation falsely calling itself a cryptocurrency. Such coins are essentially digital representations of assets controlled by a small group of people who maintain their value.
It’s precisely this volatility that makes cryptocurrency unsuitable as a national currency—you wouldn’t want to wake up and find your salary isn’t enough to buy toilet paper.
We could fantasize about a single global cryptocurrency as a universal payment method, but let’s be realistic: the real economy can’t run on mining farms.
Anonymity in Cryptocurrency Transactions
Digital decentralized payment systems don’t offer transfers by phone number or recipient name, since cryptocurrencies rely on cryptography, not legal agreements. Owning cryptocurrency means having a set of keys, which together are just a few kilobytes. For the uninitiated, it’s just a small file that lets your wallet app access your account and make transfers.
Bitcoin—the first and most popular cryptocurrency—doesn’t have real identifiers for senders or recipients, but it’s still considered non-anonymous. Every transaction is visible to all network participants because it’s included in the public blockchain. Any Bitcoin transaction is a brief record of which account sent how much to which other account. This makes Bitcoin transactions highly vulnerable to analysis: knowing an account number, you can see both the sources of its funds and where the money was sent.
To maintain privacy, it’s strongly recommended to use a new address for each payment. Unlike a bank card with a fixed number, a Bitcoin wallet can generate nearly unlimited addresses. However, even this doesn’t guarantee complete privacy, because anyone analyzing the blockchain can see all wallet addresses and track where funds go. If a user sends all their accumulated funds in one large transaction, all their previous addresses are exposed.
Mixers—services that obfuscate the source of funds—are in high demand. Their principle is simple: the mixer receives a large sum from the client, splits it into many smaller, harder-to-track transactions, and then sends it back to the client’s addresses. If the mixer sends the entire sum to one address, it’s almost useless, since it’s easy to trace the reappearance of a large sum in the blockchain.
The transparency of the blockchain is a major blow to user privacy. This was clear soon after Bitcoin went mainstream. That’s why there are now various cryptocurrencies built with privacy as a core feature. The most prominent and actively supported is Monero. In short, Monero uses a ring signature mechanism that maintains transaction authenticity while providing anonymity similar to a crypto mixer: analyzing the Monero blockchain, it’s nearly impossible to link sender and recipient.
If you’re interested, you can find detailed technical information about Monero and other crypto algorithms in open sources.
This would be the end of the story if Monero or other anonymous payment methods were accepted in regular stores, but they’re not. This brings us to a critical issue that many people overlook: exchanging cryptocurrency for real money. This is the most vulnerable point for any crypto user’s privacy.
Converting Cryptocurrency to Fiat
In the late 2010s and early 2020s, governments worldwide (including Russia) began to focus on controlling cryptocurrency circulation. Ignoring this tool was no longer an option: everyone recognized the value of virtual assets, and a wave of laws followed to restrict crypto transactions, since cryptocurrencies are actively used by criminals. Since then, all major crypto exchanges require users to verify their identities when dealing with crypto.
Where there’s demand, there’s supply, so after users left official exchanges, many online exchangers sprang up. These usually operate without official registration in any country and don’t require client verification to comply with laws.
There’s a high risk of fraud, since you have to send payment to the exchanger first. To mitigate this, you can use aggregators like BestChange. These platforms let you choose the best exchange rates and provide statistics on each exchanger, including the number of reviews and negative feedback. This motivates exchangers to act honestly and helps users find a relatively reliable service in a minute or two.
Such exchangers are convenient, but keep in mind that operating in a legal gray area means the rubles you receive may not have the cleanest history. According to recent news, the government is doing a lot to make surveillance dreams come true. For example, in November 2020, the Ministry of Finance proposed jail time for undeclared crypto (as reported by RBC), and in September 2021, the Central Bank recommended blocking cards and accounts involved in crypto exchanger transactions (reported by Bits Media).
Thousands of crypto transactions happen daily, and illegal exchangers regularly change their payment details and avoid keeping large sums in one place to reduce risk. Because of this, current regulatory attempts to protect citizens from undeclared wealth are unlikely to succeed. The crypto market—both exchanges and instant exchangers—is very active and rapidly evolving.
It’s important to remember that you must trust crypto exchangers: no one can guarantee their honesty. If some popular exchangers are run by bad actors and keep detailed logs—recording crypto account numbers, amounts, dates, final bank account details, and other user info—then over time, a detailed profile can be built on every regular crypto user. Typically, you provide an email address for exchanges, and some services even require a phone number. Combined with unchanging bank details, this makes for a perfect dossier!
Therefore, to maintain anonymity when using cryptocurrency regularly, you should: 1) choose exchangers that don’t ask for excessive personal data (like your phone number), 2) avoid using the same exchanger all the time, and 3) change your payment details as often as possible.
How to Start Using Cryptocurrency
People new to crypto often wonder, “Where do I start?” Most begin with accounts on exchanges and exchangers that let you store, receive, and send crypto from an internal wallet. If you’re an active user of such a service, here’s a reality check: a wallet on a website is not your wallet! There have been many cases where crypto services disappeared overnight, taking all their users’ funds with them. The true owner of a crypto wallet is the one who controls the cryptographic keys—a website password doesn’t count as ownership.
To get started, you need to learn about wallets. Popular coins usually offer user-friendly official wallets.
For example, the official Monero wallet can work without downloading the entire blockchain, keeps your keys secure, and has a nice interface. Naturally, there’s no email or phone number required.
The official Bitcoin wallet isn’t as convenient, but the open-source, long-standing alternative Electrum offers full wallet control, fast access to the Bitcoin network via public nodes, and an intuitive interface—making it a great choice for beginners.
Your crypto wallet app will require a password, but this is just an encryption key for the local file containing your main keys. After creating a wallet, your first priority should be learning how to back it up. This is an easy process, but neglecting it can be disastrous: you could lose access to your wallet forever.
An alternative is a seed phrase (a “mnemonic phrase” of a few dozen words), which is a human-readable version of your main cryptographic key and allows full wallet recovery. The danger is that if someone else gets your seed phrase, they have full access to your funds without needing your password. The password only protects the file on your local disk! This may seem odd, but that’s how it works. You must keep your mnemonic phrase safe: 1) use paper, not digital storage, which can be stolen from anywhere in the world, and 2) don’t keep it in an easily accessible notebook—use a bank safe, a hidden spot at your parents’ house, or even a stash buried in the woods.
Of course, you should always consider your own needs and abilities. Carelessness in a professional approach is worse than inexperience.