Crypto: Public Key Management

One of the foundational philosophies of Bitcoin and other cryptocurrencies is anonymity. However, the underlying blockchain technology has built-in anonymity for limited areas only. Ignoring these limitations and trading cryptocurrencies on a naive and uninformed basis expose the identity of the coin owner to government authorities.

Efficiently hiding the identity of the coin owner is a citizenship right in most countries. However, the red line between self-justified privacy and illegal behavior is not so obvious. In the crypto asset world, nothing is as it appears. Smart advice protects digital values sustainable and fully in compliance with existing and already foreseeable laws.

The broken anonymity of cryptocurrency ownership

Local and international exchanges operate under the laws and regulations of the jurisdictions where they have been set-up. Also, they can be affected by the regulatory framework where they operate and their customers are located. To enforce regulations in a foreign country, one of the administrative tools is to block a non-complying foreign website from the Internet.

In most jurisdictions, any cryptocurrency transaction made on a legitimate exchange will sooner or later be disclosed to the local authorities. All data available to the exchange provider will be easily copied into a governmental database which may use the blockchain technology to get this done. Therefore, these public keys and all their history and future are disclosed and compromised forever.

The data from a foreign crypto exchange server are currently not easily accessible to foreign revenue departments and other authorities abroad. However, the OECD already works on a proposal for an international crypto information exchange agreement (“CIEA”) as a complement to the existing broad network of tax information exchange agreements (“TIEA”).

Given the reporting requirements already existing in several jurisdictions, there is a huge network of indirect links between the public key and the identity of the coin owner. The situation is similar to Whatsapp, which stores in its database even the phone numbers of individuals who never signed up for this messenger service.

Public key management to identify and avoid a breach of privacy

The legitimacy to keep the ownership in crypto coins fully private is an ethical question which can be answered differently in different countries and under different conditions. To maintain and protect an area of privacy and discretion in a highly-regulated world might be seen by coin owners as a value in its self. The arguments are similar to being in favor of cash instead of cashless payments.

Full anonymity is assured with a freshly generated public/private key in an (empty) private wallet. If managed properly, new coins which are mined in the own mining facilities will have no paper-trail to any specific person. The same is unfortunately true for stolen Bitcoins.

The acquisition of keys from a third party can be done in certain areas without disclosing the identity of the buyer. Cases are purchases on an unregulated P2P marketplace, private over-the-counter transactions which are initiated by newspaper ads, Craigslist advertisements and similar no-names-asked opportunities.

An option which has to be evaluated on a case-by-case basis is the purchase from individuals and organizations which are professionally obliged to maintain secrecy, like lawyers and tax consultants. This is nothing dubious or improperly. Professionals in the offshore industries are engaged in these legitimate services for decades.

Coin whitewashing as legally compliant protection of confidentiality and privacy

The Bitcoin owner is obviously allowed to accomplish a transaction which secures or achieves a greater level of anonymity. This is similar to wearing sunglasses when passing by at the surveillance cameras, blocking the webcam on the computer or deducting money from the credit card for a cash payment.

Professional services to assist, advise and actively support such anonymization procedures move into uncharted territory and should be well aware of an explosive mining field. To act on a coin whitewashing assignment does not mean at all that the professional know-your-client (KYC) and client due diligence (CDD) requirements can be degraded. Money laundry and terrorist financing (ML/TF) conspiracy is — quite rightly — severely punished.

There are additional tools available which have been proved to protect the communication anonymity of the citizens against a dictatorship and are recommended by NGOs and human rights groups all over the world. Digital data can be sent and forwarded via several parties to anonymize the original sender. And encrypted digital data can be mixed together so that it is not traceable anymore which individual contributed which string of data into the pool.