Connecting wallets to KYC platforms breaks pseudonymous characters

[Faizan Zen]

One of Bitcoin's characteristics is pseudonymity. However, this characteristic is broken if we connect our wallet to a platform that requires KYC (such as an exchange). Initially I thought there was a contradiction between the pseudonymous character and transparency character, on the one hand it is pseudonymous but on the other hand it is easy to track each transaction through the block.

But it turns out there's nothing wrong with either of these characteristics. Why? Because we always view Bitcoin as an asset, so we always exchange Bitcoin for fiat currency, and so we inevitably connect our wallets to platforms that require KYC

But if we use bitcoin like we use USD (not exchanging it while using it), then the pseudonymous character will be maintained. Although every transaction is transparent and trackable through the blockchain, the pseudonym is not broken. It is only when connecting to a KYC platform that the pseudonym is broken

[Obim34]

Only the exchange and interested parties from the government, depending on why they request for it, have access to your profile.  To the general public trying to track your wallet spending down to finding your identity cannot have access, you still remain pseudonymous.

There are also decentralized P2P as alternatives for those who don't want anything to do with Centralized Exchanges.

[Findingnemo]

One can buy bitcoin without going through any KYC and sell them in same way so it depends on the user's priority to choose. And even if you are using KYC exchange still your identity remains safe and only the government agencies can have access to that data but your neibhor can't know for sure that this address belongs to you just by connecting the wallet address with KYC information on exchanges.

[Z-tight]

But it turns out there's nothing wrong with either of these characteristics. Why? Because we always view Bitcoin as an asset, so we always exchange Bitcoin for fiat currency, and so we inevitably connect our wallets to platforms that require KYC

Do you mean sending funds from your self custodial wallet into a custodial service? Is that what you refer to as 'connecting a wallet' in this thread? You sound like you mean connecting your wallet to an external source, which you should NEVER do.

However, it depends on who is 'looking' for you, using an exchange doesn't mean anyone can go on to associate your wallet address with the kyc information in your exchange account. But if it is government with its endless resources, then it is almost impossible to hide from them and they'd surely find you. The point is, you do not even have to do much to maintain your privacy from regular entities.

[MusaMohamed]

One of Bitcoin's characteristics is pseudonymity. However, this characteristic is broken if we connect our wallet to a platform that requires KYC (such as an exchange)

It is reason people dislike P2P platforms that originated and built by centralized exchanges with KYC requirements. P2P marketplaces are best if built by anonymous teams while if they are built by known teams, their founders and core members can be arrested and have pressure of doing things which are harmful for user privacy.

It's similar with web3 wallets, decentralized exchanges built by centralized exchanges with KYC. They can do whatever marketing for advertising their P2P, DEX, Web3 products but they can not change the fact behind.
Why KYC is extremely dangerous – and useless.

[Faizan Zen]

However, it depends on who is 'looking' for you, using an exchange doesn't mean anyone can go on to associate your wallet address with the kyc information in your exchange account. But if it is government with its endless resources, then it is almost impossible to hide from them and they'd surely find you. The point is, you do not even have to do much to maintain your privacy from regular entities.

Yes, I agree, the government has very strong powers to track things in its territory. We don't really worry if we're not doing anything illegal or breaking the law. But sometimes taxes are very high, and that's one of the most annoying things.

However, for those who own large amounts of Bitcoin, privacy is crucial, especially from the potential threat of hackers

[Dunamisx]

Once we can make use of a centralized platform that request us of giving our kyc and we do so, then our wallet can be tracked and trace to our personal identity because all the transactions we are making through that same wallet address could be seen on the blockchain and this could lead to how our information on the exchange or on the platform could be seen.

[rat03gopoh]

One of Bitcoin's characteristics is pseudonymity. However, this characteristic is broken if we connect our wallet to a platform that requires KYC (such as an exchange).

The term "connect" has several interpretations. Most centralized services provide their own addresses, which they have full control over. You can't connect yours (self-custody) by adding them to their database. Is it easy to say that if I consistently receive bitcoins from the same people to my centralized account, then the deposit address belongs to the sender? I think there are still many possibilities, such as the sender's poor anonymity literacy or other reasons.

[Furball808]

Only the exchange and interested parties from the government, depending on why they request for it, have access to your profile.  To the general public trying to track your wallet spending down to finding your identity cannot have access, you still remain pseudonymous.

Those transactions in the blockchain aren't linked to a specific name or account but if you are using a centralized exchange where that one address is linked to a bank account or anything similar then it becomes easily traceable especially for people with the right resources like the government as said.

But above all why people do not prefer centralized exchanges is how they run things. They see everything, have access to everything and hold everything that they can basically do whatever to your funds.

[Hatchy]

But above all why people do not prefer centralized exchanges is how they run things. They see everything, have access to everything and hold everything that they can basically do whatever to your funds.

Hmm, basically its possible to avoid kyc platforms completely. You just have to go through some process which might be stressful to many. And at the end of it, if you are in a country that where bitcoin is not accepted like the regular currency, you might have to change it to your fiat currency to Cary out transactions.i totally understand where you come from but there are still many obstacles right now that many investors consider, so they just go ahead with using kyc. Except you are a holder that basically haven't spent any of your coins since they were bought and has no link whatsoever to a centralized platform, then it most likely can't be linked to you.. the Blockchain doesn't give you full privacy but anonymity since your personal informations aren't displayed on your transaction.

[Felicity_Tide]

But above all why people do not prefer centralized exchanges is how they run things. They see everything, have access to everything and hold everything that they can basically do whatever to your funds.

Ooh trust me buddy, it turns out that majority ends up using centralized exchanges today despite the hate. Bitcoin as a p2p electronic cash system was already perfect, but a lot of people seek convenience, and that's what their local fiat offers because that's literally what every businesses/stores accepts even without questioning. So, the whole concept of KYC, completely eliminates the pseudonymity and a lot of users have already accepted it. I feel, discussions about pseudonymity, anonymity, privacy, etc, might continue to decrease as the society/world keeps getting advance because a lot of people are definitely going to lose interest.

[Ruttoshi]

It's good to seperate your bitcoin holdings from the wallet that is connected to your exchange address. That's have a separate wallet that you are using for your exchange transactions and have a different wallet that you use in keeping your bitcoin savings.

If the exchange did not leak out your information to the government or sell it out or there is leakage in their data base, no one can trace your bitcoin transaction to you for using a KYC exchange to trade your bitcoin into fiat.

However, those that their country currency is among bitcoin pairs in a decentralized exchange and is not in DEx and I can only use a centralized exchange.

[Creeper0]

Do all the small and big merchants in your country accept Bitcoin? Can all kinds of products be purchased with Bitcoin? There is no place yet where you can buy everyday items with Bitcoin. So how do you manage your life if you are a Bitcoiner?

There are many people on this forum who get paid in Bitcoin, how can they avoid breaking their pseudonym? Even when you pay a bill in real life with Bitcoin, your pseudonym is still being broken. In fact, you can use a pseudonym if you want to with a third party and keep the pseudonym intact, but it is not easy to keep the pseudonym intact with the person you are doing business with. To keep the pseudonym intact, you can only make online payments with Bitcoin if it is available in your country.

[Donneski]

I think the confusion comes from mixing two different layers. Bitcoin itself is pseudonymous at the protocol level, it only records addresses and transaction flows. KYC enters the picture when we choose to use regulated exchanges that require identity verification.

So it’s not really a contradiction in Bitcoin’s design. It’s the result of linking a neutral protocol to a regulated service. Once you submit KYC, you’re creating a bridge between your real world identity and at least one on-chain entry point but that doesn’t mean the protocol itself stopped being pseudonymous.

The system hasn’t changed. The privacy profile changes based on how we interact with it.

[EluguHcman]

One of Bitcoin's characteristics is pseudonymity. However, this characteristic is broken if we connect our wallet to a platform that requires KYC (such as an exchange). Initially I thought there was a contradiction between the pseudonymous character and transparency character, on the one hand it is pseudonymous but on the other hand it is easy to track each transaction through the block.

Don't also contradict between Decentralization or users custodian status else, the platforms with the demands of KYC process requirements weakens the privacies of the user with the uploads of personal datas that reviews certain records that can hold you on trap.

The authority also has the permission to decide against your will over your own funds because you don't own your keys. It is like the security reminder that Not your Keys not your Coin phrase.

So it breaks personal securities differently with while the Blockchain and Bitcoin digital concepts makes it a little convenience from the banks and same time potential to be attacked by hackers over the security weaknesses in regulating custodian platforms.

[Gost ms]

To maintain your privacy, you need to use a reliable KYC platform. Because no one other than the government has the right to see your privacy. If the government of your country contacts that KYC platform and asks them for your information by showing your wallet address, they will know. But it is not possible for all other people to know this information. However, we have to be careful, sometimes we get involved in such fraudulent KYC platforms that expose our privacy.

[serjent05]

But if we use bitcoin like we use USD (not exchanging it while using it), then the pseudonymous character will be maintained. Although every transaction is transparent and trackable through the blockchain, the pseudonym is not broken. It is only when connecting to a KYC platform that the pseudonym is broken

If we use Bitcoin like we use  USD, this means we use Bitcoin to pay for our purchases. I do not think that pseudonymous character will be maintained.  Remember online selling platform still needs KYC for the buyer so that they can deliver the item to its rightful buyer. Aside from that, at the current situation of the market, people still need to convert Bitcoin to cash in order to replenish their funds, this mean they have to sell their Bitcoin to cash and that still needs the seller information so that the BTC buyer can send the money (cash) to the sellers account.

Bitcoin pseudonymity has been broken the moment Bitcoin became a purchasing tool in the current Bitcoin adoption situation.

[uchegod-21]

On the blockchain, your identity is your wallet address, it  remains so as long as you do not give any clue what your true identity is. The introduction of KYC by exchanges is a risk factor and same people who claim bitcoin is anonymous do not seem to be bothered about it.
To those who have ever done KYC, you cease to be completely anonymous the moment you attached your true identity to your address.  That is what you get for still doing things the traditional way.

[moneystery]

Since exchanges implemented KYC, when someone links their wallet, their identity can be linked to that wallet address and the wallets linked to it. If someone wants to maintain their wallet's pseudonymity, they shouldn't link it directly to an exchange account that requires KYC, instead, they can use other channels, whether P2P, mining, or others. However, due to people's preference for convenience, they often choose centralized exchanges, disregarding their privacy.

[Richbased]

For the fact that bitcoin was born out of pseudonym doesn't mean that its transaction cannot be traceable, that's why we have the public ledger where all decentralized transactions are being stored for the purpose of transparency because if there is no where to record those transactions, there would have been a lot of controversy that would have surrounded bitcoin because people can make false claims about a transaction and there will be no evidence to counter those claims.

It is true that KYC breaks pseudonymous characters but it only happens when you need to convert your bitcoins to fiats but if you leave your coins in self custody wallets, it can stay there for many years without the knowledge of anyone.