Blockchain technology is the foundation for cryptocurrencies such as Bitcoin (BTC). Transparency is a basic aspect of blockchain technology, meaning that anybody, including the government, may view all bitcoin transactions made on a given blockchain.
Because blockchain technology is transparent, Bitcoin transactions are available to the whole public. In addition, the history of Bitcoin transactions is permanently preserved on the Bitcoin blockchain, which makes it easy to examine BTC transactions. Thus, the government, in the shape of law enforcement agencies, may monitor the Bitcoin blockchain.
So, can law enforcement, the Federal Bureau of Investigation (FBI), and the Internal Revenue Service (IRS) track Bitcoin ownership? Moreover, do the government know who owns each Bitcoin? Traceability of BTC transactions relies on whether a user’s blockchain transaction activity can be connected to their identity.
Anyone is able to see the transactions of any Bitcoin wallet address. Authorities are able to determine where Bitcoins originate and where they are being transferred by analyzing the addresses used for Bitcoin transactions. Thus, authorities get knowledge of what is occurring and when.
Numerous Bitcoin users disclose their identities at some time (for instance, on centralized exchanges or through interactions with known wallets). Consequently, BTC transactions are not always completely anonymous, and the government may track Bitcoin ownership anytime (a series of) Bitcoin transactions can be connected to an individual’s identity.
With this additional information, governments may enforce responsibilities such as Bitcoin or cryptocurrency tax obligations and combat illegal activities such as money laundering.
In essence, Bitcoin’s blockchain technology is anonymous, but yet traceable owing to its inherent transparency. Thus, Bitcoin may be described as “pseudo-anonymous.” Government organizations are employing cryptocurrency specialists to assist with Bitcoin monitoring and identification verification.
How can authorities such as the police, IRS, and FBI really follow Bitcoin? As enforcers may not be able to directly identify the persons involved in a Bitcoin transaction, they might attempt to examine the blockchain and analyze BTC movement patterns. In this way, they want to profile, de-anonymize, and identify transaction parties.
Then why would governments engage with these organizations? Importantly, the majority of Bitcoin transactions are not linked to illegal behavior.
However, law enforcement agencies such as the police and FBI continue to pursue individuals and organizations who utilize cryptocurrencies such as Bitcoin for illegal reasons, such as money laundering or fraud. Similarly, an organization like the IRS wants to monitor BTC owners, traders, and investors in order to collect taxes on capital gains and income.
Companies like Chainalysis provide blockchain monitoring and analytics services. These organizations examine if particular BTC traveling between wallets is connected to criminal behavior, and they may engage with the FBI to aid in the worldwide tracking of certain Bitcoin money.
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