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Crypto Law/Level I · What crypto is in law/1.1 Why law reaches crypto/Lesson 5

Pseudonymous is not anonymous

Why a public blockchain is closer to a permanent public record than a secret, and how identities get linked to addresses.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Self-custody with a fresh receiving address for each payment, which most wallets do by default, is free and lawful privacy from the public; holding is not reported by anyone, but every sale, swap or reward must still go on your return.
  2. Never post your addresses or holdings publicly and give exchanges only the identity data the Bank Secrecy Act requires; this is lawful opsec, though brokers report your sales on Form 1099-DA from 2025 regardless.
  3. Paying a friend or merchant directly from your wallet is a user act, not money transmission under FIN-2019-G001, so no licence is needed; the catch is that spending is a taxable disposal, and 31 U.S.C. §5324 forbids splitting cash deals to dodge reports.
  4. Assume any link to your name is permanent: IRS John Doe summonses under 26 U.S.C. §7609(f) and CARF/DAC8 exchanges reach exchange records years later. Lawful privacy is from the public, never from a tax authority or court.

MaterialsThe Bitcoin white paper (2008), section 10, ‘Privacy’, on bitcoin.orgA public block explorer for a network you use, with one of your own addressesFinCEN guidance FIN-2019-G001 (9 May 2019) on crypto businesses and money transmission26 U.S.C. §7609(f), the US rule for IRS ‘John Doe’ summonses

Wonder

  1. If my wallet has no name on it, who can see what I do with it?
  2. How do investigators connect an address to a real person?
  3. Does the public record ever go away?

Explore

  1. Two words are often mixed up. Anonymous means there is no link between an action and a person. Pseudonymous means the action is tied to a persistent identifier, here a blockchain address, which is not a name but can be linked to one. Public blockchains such as Bitcoin and Ethereum record every transaction openly and permanently: the sending and receiving addresses, the amount and the time. Anyone in the world can read that record with a free block explorer. The law treats this record like any other evidence, and it does not fade with time.
  2. The design was never meant to hide transactions. Section 10 of the 2008 Bitcoin white paper, published under the name Satoshi Nakamoto, says privacy comes from ‘keeping public keys anonymous’, so the public ‘can see that someone is sending an amount to someone else’ without knowing who. It compares this to a stock exchange tape showing trades without names. The same section warns of the weak point: ‘if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.’ One link to a name can expose a whole history.
  3. The most common link is an exchange account. In the United States, FinCEN’s guidance FIN-2019-G001 of 9 May 2019 explains that businesses which exchange or administer convertible virtual currency are generally money transmitters under the Bank Secrecy Act, with duties that include an anti-money-laundering programme and record-keeping (lessons 1.3.4 and 5.2.3). In practice that means identity checks. Once an exchange knows that an address deposited to or withdrew from your account, anyone who can get the exchange’s records can follow the address forward and backward on the public chain.
  4. Authorities can obtain those records. Under 26 U.S.C. §7609(f), the IRS may serve a ‘John Doe’ summons on a business about unnamed customers only after a court proceeding in which it shows the summons concerns an ascertainable group, that there is a reasonable basis to believe the group may have failed to comply with tax law, and that the information is not readily available elsewhere (lesson 4.3.3). Brokers also report sales to tax authorities on forms such as the new Form 1099-DA (lesson 2.3.5). Other countries are building similar reporting systems (lesson 7.2.7).
  5. The Bitfinex case shows how long the record lasts. In 2016 a hacker stole 119,754 bitcoin from the Bitfinex exchange. On 8 February 2022 the US Justice Department announced the arrest of Ilya Lichtenstein and Heather Morgan and the seizure of more than 94,000 of those bitcoin, worth over $3.6 billion at the time. Agents with search warrants found files in an online account holding the private keys to the wallet that received the stolen funds. In November 2024 Lichtenstein was sentenced to five years in prison and Morgan to 18 months. Lesson 9.3.4 covers tracing evidence.
  6. Privacy tools change the picture only partly, and they carry their own legal questions: mixers and privacy coins are covered in lessons 5.2.6 and 7.3.6. A practical check: look up one of your own addresses on a block explorer and note what a stranger can see, including the balance, every past transaction and the addresses you dealt with. Then list who already knows the address is yours, such as an exchange, someone who paid you, or a public post. The aim is to understand what your public record reveals, not to hide anything from lawful requests.

Key facts

  • Public blockchains such as Bitcoin record the addresses, amounts and times of transactions in a ledger that anyone can read.
  • Section 10 of the Bitcoin white paper says privacy depends on keeping public keys anonymous and warns that revealing a key’s owner can expose that owner’s other transactions.
  • FinCEN guidance FIN-2019-G001 of 9 May 2019 states that exchangers and administrators of convertible virtual currency are generally money transmitters under the Bank Secrecy Act.
  • Under 26 U.S.C. §7609(f), an IRS John Doe summons requires a prior court proceeding showing an ascertainable group and a reasonable basis to suspect non-compliance.
  • In February 2022 US authorities seized more than 94,000 bitcoin, worth over $3.6 billion, linked to the 2016 Bitfinex hack.
  • In November 2024 Ilya Lichtenstein was sentenced to five years in prison and Heather Morgan to 18 months in the Bitfinex laundering case.

Exercise nine, six, three, one

9CollectList up to 9 ways one of your addresses, or an address in a public example, could be linked to a real person, such as an exchange account, a payment request or a social media post.
6ClusterSort them into 6 categories: exchanges and brokers, payments to or from people you know, public posts, merchants and services, government requests, and links you are unsure about.
3DistillReduce the 6 categories to 3 groups: links that already exist, links that could be created by a legal request, and links that depend on what you choose to share.
1CrystallizeWrite 1 sentence explaining, in your own words, the difference between a pseudonymous blockchain address and true anonymity.

Fact check

Dates, figures and claims checked against the published sources listed below.

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