Transparency and decentralization were among the founding crypto principles. Initially, Bitcoin was supposed to be traded on a peer-to-peer (P2P) basis, meaning that there’s no human or institutional intermediary.
Over a decade down the road, much of that ethos has been sidelined. Some of the biggest crypto companies, including major exchanges like Binance and Coinbase, are centralized. As such, they must comply with customer data collection requirements known as KYC.
KYC in crypto
To operate in countries such as the UK, the US, and Australia, FinTech companies have to play by many of the same rules that apply to traditional finance, including those known as Know Your Customer (KYC).
Under KYC, financial companies are required to run identity and background checks on every prospective customer before letting them in. The goal is to prevent the circulation of funds used for illicit purposes, most notably money laundering and terrorism financing.
That said, you can have plenty of legitimate reasons to wish to stay anonymous when trading crypto, and it’s still possible.
How to stay anonymous when trading crypto?
The biggest factor impacting privacy in crypto trading is the business model of the exchange you’re using. If it’s centralized, it acts as an intermediary in all transactions, ensuring sufficient liquidity so assets can be bought and sold with ease. Choosing a centralized exchange usually entails identity checks.
Decentralized exchanges (DEX) use a different model. Instead of assisting in the transaction process, they provide the digital infrastructure and create liquidity by means of smart contracts. These autonomous protocols, also known as automated market makers, allow users to trade peer-to-peer and largely escape regulatory oversight. Some even support Tor connections.
Still, they're not nearly as popular as centralized services. Even when they were strongest, they haven't broken 20% in Spot Trade Volume (%).
Bear in mind that not all decentralized exchanges accept fiat currencies, and some have poorer security systems. Buying coins from these sources can in some cases be risky. Make sure you have run enough research on the one you like before using it.
Are crypto ATMs private?
Another way to purchase cryptocurrencies anonymously is via a crypto ATM. Many of these machines offer more than Bitcoin, including Ether, Dogecoin, Litecoin and Monero. Some also allow fiat withdrawals and accept debit cards.
Crypto ATMs are particularly popular in the United States, with over 32,000 machines scattered across the country as of March 2022. The networks installed in the US constitute nearly 90% of all crypto ATMs worldwide.
It’s not that crypto ATMs aren’t subject to regulatory measures. In the US, every operator has to register with the Treasury Department's Financial Crimes Enforcement Network. Exchanging large amounts of money requires some form of identity checks in line with the local anti-money laundering laws, although private, anonymous operations are possible up to a given value.
Unfortunately, privacy and convenience aren’t cheap. Crypto ATM fees can vary from 4% to as much as 20% per transaction. What’s more, crypto ATMs are a likely target of future regulatory efforts, because the privacy of small-scale transactions encourages smurfing, a process in which criminals split their cash into smaller portions to avoid prosecution. For now, though, crypto ATM users can exchange moderate amounts of cash to cryptocurrencies without risking detection.
Buying crypto on local forums
Cryptocurrencies are also available on local forums where holders looking to sell their coins can be found by prospective buyers. Traders on those forums can sometimes ask prospective clients for ID, but it’s not obligatory, so customers can always find a trader with less strict requirements. The transactions are secured by an escrow service, which reserves requested funds ahead of a confirmation that the transaction has succeeded.
Those with a particular focus on privacy can also opt for a similar service on the dark web or acquire coins via a tumbler service. Bear in mind, though, that dark web services are extremely risky and must be used with caution.
Instead of finding ultra-private ways to buy established coins, you can choose an ultra-private coin. Monero (XMR) is the most popular of those. Like many cryptocurrencies, it can be mined, earned, or purchased.
Monero encrypts all transaction details, including the participating addresses, transaction amounts and address balances. No transaction history is available. Buying Monero from a decentralized exchange is arguably the most private way of acquiring crypto, although the Monero blockchain can hardly be called transparent. Not only does it eschew KYC requirements, but it also obfuscates the information that classic blockchains make public by design.
If you’re not sure how to start, the Monero website has plenty of user-friendly educational materials, including examples of merchants who accept the coin. But behind the sympathetic UI sits a fearsome reputation. Monero has become the go-to currency for money laundering, darknet markets and ransomware.
Some crypto advocates argue that ultra-private cryptocurrencies harm the sector, painting a picture full of drug dealers and terrorists. When the U.S. Internal Revenue Service announced a $625,000 bounty for tracing Monero and other privacy-enhanced cryptocurrencies, the contract went to a respectable crypto intelligence company, Chainalysis, which once claimed it could track the majority of transactions involving other privacy-enhanced cryptocurrencies, Zcash and Dash.
Weighing the risks
Independence of central structures was at the core of Bitcoin’s professed ideals, but winning the mainstream game means playing by mainstream rules.
The crypto space seems to have largely accepted the necessity to comply with KYC regulations, acknowledging that it’s the inevitable consequence of growth. Besides, the compromise is not without advantages. Regulated crypto is more fraud-resistant and user-friendly, driving adoption and investment.
Anonymous, P2P crypto trading has become the minority, a sort of sub-industry for hardline cryptopunks and the darker corners of the internet. It preserves the founding principles of Bitcoin, but offers little in the way of user protection. To buy crypto anonymously, you have to come to terms with a wholly different approach to trust.