Crypto vs. Cash: How Traceable Is Your Money, Really?

If you ask hardcore crypto degens what is the appeal of this new digital asset class, undoubtedly one of the common replies will be pseudonymity. Because transactions are recorded on a public ledger using cryptographic addresses rather than real-world identities, there is an unparalleled degree of privacy when compared to TradFi because transactions are not directly linked to personal information.

While it’s true that cryptocurrencies can offer a higher level of privacy and anonymity, the degree of traceability depends on the specific cryptocurrency and how it is used. With this in mind, it is worth considering just how traceable we are through the money we use - whether real-world, fiat money, or crypto.

They. See. Everything!

It’s no secret that, in traditional finance, there are various mechanisms in place to record and monitor all financial activities, with this kind of traceability being a prominent and built-in feature. The most obvious channel is through bank accounts, with all purchases and transfers of funds documented in bank statements, making a comprehensive overview of a person’s history straightforward for both the account holder and financial institutions to trace and account for various financial activities.

Likewise, when we spend via credit and debit cards, a record is generated, and the information is accessible through both the individual's bank statement and the records maintained by merchants and payment processors. There is seemingly no escape from disclosing how we choose to spend to financial institutions, businesses, and even governments.

While cash transactions are generally less traceable compared to electronic transactions, they might still be recorded by surveillance cameras in certain locations, and even the act of using an ATM machine to withdraw money from our bank accounts is still always recorded.

“As someone who has worked both in the TradFi and DeFi sectors, I recognize that while many people feel uncomfortable with the level of privacy they have when it comes to finance, it is also quite necessary for financial institutions to collect certain data points about their clients,” says Yang Lan, Co-Founder of Fiat24. “My company meets this challenge by allowing users to remain anonymous on the crypto wallet level, with their data stored with us on Swiss soil, and never shared, sold, or abused for any other purpose than for us to meet AML requirements. We bridge the worlds of blockchain and real-world payment data, so we are at a unique intersection here.”

Having made the switch to more online payments, using various digital wallets, for example, actually exposes us to leaving an even more comprehensive electronic trail. All regulated financial institutions, payment service providers, and other relevant entities maintain databases that store transaction details, contributing to this seemingly never-ending traceability process. The interconnected nature of digital financial systems amplifies the visibility of transactions, creating a robust traceability framework.

When you consider all of this, you start to wonder - what are banks doing with all of our information and data? While they might tell us that they use it to improve services, manage risks, and meet regulatory requirements, there is always the fear that they just know far too much and even use the knowledge for marketing and advertising purposes.

So, is crypto really a much better alternative if you value your privacy?

Use Crypto for Privacy?

The decentralized and peer-to-peer nature of cryptocurrencies can be said to contribute to increased privacy, as transactions can occur directly between users without the need for intermediaries, hence reducing the number of parties involved in the transaction process. This is in stark contrast with traditional financial services, where transactions pass through multiple entities, each recording the details.

Having said this, however, the actual degree of traceability and the level of privacy can vary depending on the specific cryptocurrency used and the user's practices, and achieving complete anonymity in cryptocurrency transactions can be complex.

This includes the use of cryptocurrency exchanges, which often require Know Your Customer (KYC) verification and may link transactions to real-world identities. Decentralized exchanges (DEXs) and off-chain solutions, like the Lightning Network for Bitcoin, provide alternatives that may offer more privacy compared to centralized exchanges, but there are trade-offs for using them.

As regulation stands to change and evolve further, with developments and legal requirements influencing the privacy landscape, authorities in some jurisdictions seek to address concerns related to illicit activities. It seems inevitable that even the world of crypto won’t give people the chance to remain anonymous for much longer!

Looking ahead

The necessity for customer identification across both digital and new technologies within the world of finance makes it apparent that we will always be traceable through the way we handle and spend our money. And while this traceability is crucial for financial oversight, it also prompts a debate about the balance between transparency and individual privacy.

Let’s just hope they leave crypto alone for a while longer!