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Many newcomers to the crypto market believe that transactions involving digital assets are entirely anonymous. In reality, the situation is a little bit more complicated and nuanced.
A novice's misconception is understandable: when you send cryptocurrency from your wallet, it does not look like a rent check that you, John Smith, write to your landlady Susan White. So it is quite natural to assume that your personal information is hidden behind all the digits and letters that comprise your crypto wallet address. However, in most cases, this full concealment is an illusion: in fact, transactions in cryptocurrency are pseudoanonymous. Because blockchain is an open public ledger, each user's address is open to the public. It can, therefore, be hypothetically traced back to their exchange account via a thorough analysis of the network.
And this is actually a good thing. In the real world, many bad actors try to conduct shady deals with the help of the cryptocurrency â again, incorrectly assuming that it is anonymous. To prevent cybercrime, many of the leading crypto exchanges have introduced heightened security measures, including the procedure known as "KYC" (the abbreviation for "Know Your Customer"). Brick and mortar financial institutions have been practicing KYC for nearly 20 years â the requirements have first been introduced in the US as part of the post-9/11 Patriot Act. It is unthinkable now that you'd be able to open a bank account without showing several forms of ID. This is the bank's way to verify that you are a real person and not a fraudster trying to carry out a fraudulent, or, worse, criminal transaction. Getting to know who you are gives the bank and, consequently, its customers a greater degree of security. And most people will agree that ensuring the security of their customers' funds is one of the bank's critical functions.
The same principle applies to crypto exchanges â the closest thing to a bank on the crypto market. Most exchanges take their security extremely seriously: a lot of assets, even though it is expressed in the form of 1s and 0s, is at stake (the estimated crypto market capitalization is over $200 billion!), and that means that exchanges leave no stone is unturned in the effort to protect it.
In addition to the strict and all-encompassing internal security procedures and protocols that crypto exchanges implement on their side to prevent hacks, attacks, and bank runs, they ask their users to do their part by undergoing the KYC procedure. The actual steps of the procedure differ between different exchanges, but the substance is essentially the same â in order to ensure the transparency of transactions and (in some cases) guarantee the legitimacy of token sales, users are asked to provide evidence of who they are before they can open and operate a crypto account. In the past few years, this has become a standard operating procedure at all the leading crypto exchanges. Those exchanges that still allow their users to operate their accounts incognito impose certain restrictions on the types of activities users can engage in. This two-way cooperation translates into peace of mind for both the trading venues and their users: the bad actors are weeded out from the outset, and the market can continue running smoothly.
But internal security protocols and KYC procedures are by far not the only ways crypto exchanges and other major market players use to ensure transaction security and compliance and to protect themselves and their customers. They employ a wide array of specialized applications and tools, including such analytical tracing tools as ĐĄrystal Blockchain, Elliptic, and Chainalysis, and such anti-fraud procedures as proof of funds and proof of transaction.
On the other side of the equation are users so concerned about their privacy that they utilize their own so-called "mixing" tools to make sure their transactions can't be traced back to them. Among such tools are Coinjoin and Wasabi Wallet.
Let's now take a quick look at what security procedures are implemented by some of the major crypto exchanges on the market.
At Binance, the world's biggest crypto exchange by volume, most of these security features are also available. You can enable/disable 2FA, whitelist your trusted addresses, and undergo the KYC procedure. In addition, they offer an Anti-Phishing Code â a code that helps users make sure that an email they received from Binance is legit.
HitBTC, an exchange that has been around since 2013 without being hacked or compromised, has multiple levels of security protocols and privacy settings. Users' data is encrypted and stored in accordance with the most stringent contemporary security protocols. The bulk of the funds is kept in cold storage. They also offer KYC and 2FA procedures as well as the "whitelist" feature that allows users to add their trusted deposit addresses.
At Coinbase, the world's largest Bitcoin broker, identity verification is a required procedure, with severe restrictions placed on the account for those who chose to bypass it. Verified users enjoy a wide range of security features: cold storage, 2-step verification, cold storage, whitelists and address books. Coinbase also offers a feature they call Vault â a multi-email approval procedure for any withdrawal. Vault withdrawals have a 48-hour time delay, during which they can be cancelled if you the user changed their mind or if the withdrawal itself was originated by an unauthorized party.
As you can see, the crypto exchanges go all out to protect you and your funds. So we leave it up to you, the reader, to decide if the loss of pseudoanonymity â because true anonymity in the crypto world is a fantasy! â is ultimately worth it to avoid the stress and anxiety over the security of your digital holdings. Clearly, to us, it is!
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.