When a new user hears the word cryptocurrency, the first thing that springs to mind is anonymity. In fact, in its early days there was an assumption that because cryptocurrencies such as Bitcoin were untraceable and anonymous, they were a safe haven for criminals. The notion was that crypto allowed users to conduct private transactions that banks, governments, and law enforcement organisations were powerless to track. However, while cryptocurrency does provide privacy, personal information such as an investor's name, address, and phone number can still be traced.
In the initial 2008 white paper that introduced blockchain technology via bitcoin, the concept of invisibility or anonymity was promoted. The idea was based on the fact that just two parties are involved in the activity because cryptocurrency enables for direct peer-to-peer transactions over the internet.
However, any blockchain transaction is documented using the sender's and receiver's crypto-wallet addresses. All the transactions that come in and out of this wallet are recorded on the blockchain, which is open to the public. Also, because central authorities have made KYC necessary for exchanges, a wallet address can eventually be traced. As a result, cryptocurrency transactions are often known as pseudo-anonymous transactions.
If privacy is an issue, investors will be relieved to find that Bitcoin is one of the most secure payment solutions available. This enables them to conduct business without fear of hackers gaining access to their information or revealing their identities.
However, a skilled hacker or government agency might still acquire access to the blockchain's data and learn about a person's identity. Surprisingly, this is rarely performed directly by hacking the blockchain, but rather through more indirect methods such as password phishing.
This means that protecting one's identity when using cryptocurrency boils down to employing standard internet security precautions like creating a unique password, being cautious of the networks one uses, and avoiding clicking on questionable links in emails.
In a nutshell, cryptocurrencies are not completely anonymous. All transactions have an audit trail and can be linked to the creator. Though some central banks are unsure about the utility of cryptocurrencies as a product, there are many websites that accept cryptocurrencies as legitimate payments. So, they are neither anonymous nor illegal.