How do government agencies track Bitcoin? (2024)

The fundamental feature of blockchain technology is transparency, so anyone can access the ledger to track transaction information made on the blockchain. This also helps agencies like the FBI (US Federal Bureau of Investigation) strengthen their anti-money laundering and counter-terrorism financing activities.

In principle, the blockchain technology behind Bitcoin ensures the anonymity of its users but also promotes transparency of transactions. Therefore, according to Cointelegraph, Bitcoin can be seen as a “pseudo-anonymous” (pseudo-anonymous) network. Understanding this mechanism, government agencies worldwide can enlist experts’ help to track Bitcoin and verify the owner’s identity if it is suspected that the person is using the cryptocurrency Unrighteous.

Authorities such as the police, the US Federal Bureau of Investigation, or the US Internal Revenue Service (IRS) rely on public cryptocurrency transactions to track individuals and organizations that evade taxes or use cryptocurrencies. For money laundering and terrorist financing. As the IRS can track Bitcoin owners’ and investors’ information to increase taxes on their capital gains or income.

Companies like Chainalysis often provide blockchain analysis and monitoring services. If they find a Bitcoin transaction related to a crime, they can work with the FBI to track some crypto funds internationally.

Besides analyzing available data, authorities can also request information from centralized exchanges. As a rule, exchanges are obligated to share that information. Coinbase is a prime example of a centralized exchange (CEX) run by a single entity. To be licensed to operate in a country or territory, centralized exchanges must commit to complying with regulations.

For example, most centralized exchanges have a Know Your Customer (KYC) process to limit the illegal use of cryptocurrencies, which verifies a customer’s identity and allows them to trade on the exchange.

After the KYC process, the exchange can share customer data with law enforcement if required. By using information obtained from CEX, the IRS can identify the owner of Bitcoin wallets.

However, not every exchange cooperates with the authorities and requires customers to go through KYC. For example, decentralized exchanges (DEXs) often ignore KYC and are difficult to manage because they have no head office and are not run by a single company