What to do with KYC Bitcoin

If you’ve spent any time going down the bitcoin rabbit hole or bought bitcoin on an exchange, you’ve come across the term KYC (Know Your Customer). You also most likely participated in the process by submitting a ton of personal information to said exchange in order to buy bitcoins. After your purchase, you own what others call
“Bitcoin KYC.

What does it mean? This means that your identity is now tied to the purchase of that bitcoin and the associated wallet address where that bitcoin resides as UTXO (unspent transaction output).

Is KYC Bitcoin Really Bad?

If you place a high priority on privacy and freedom, the short answer is yes. KYC bitcoin is a major piece of identifying data that can be used to track your transactions. Many believe that KYC goes against everything a Bitcoin maximalist believes in. The average Bitcoin user often doesn’t know the difference. I’ll cover personal preferences and tools later for those who want to learn more later. This is not meant to be a guide to privacy, but to let people know about the tools I’ve used that will hopefully help them regain some privacy.

The execution of a simple on-chain transaction of sending bitcoins from one address to another is recorded on the public Bitcoin blockchain. If you’ve never done this or are curious, I suggest you check out a bitcoin block explorer, such as mempool.space, where you can enter bitcoin wallet addresses and see their transaction history. In addition to this public information, having gone through KYC with an exchange allows transaction information to be recorded by the exchange. They can attach this transaction to your ID and location, and they will know how many bitcoins were purchased and how many were sent to another wallet address. As stated earlier, many believe this is not a problem, but I think it is important for new and existing Bitcoin users to be aware of the information shared with KYC exchanges.

So how much of your Bitcoin should be No-KYC?

There is no perfect formula, like 50/50 or 60/40. It comes down to your needs and your daily use of bitcoin. If you already have KYC bitcoin, it’s up to you whether you want to keep it or sell it and try to acquire non-KYC bitcoin. It is unwise to try to make bitcoins already KYC hidden or otherwise private. If you are looking to acquire non-KYC bitcoin, the best idea would be to sell any bitcoin KYC and then use tools like the ones listed below to try and maintain privacy best practices.

As a personal preference, I lean more on the privacy side of non-KYC bitcoins – I don’t think any entity or governing body should know how or what I spend my bitcoin on. That’s not to say I don’t have KYC bitcoin, but I understand the risk I’m taking. It’s quite easy for me to buy bitcoins from an exchange rather than going through extra steps for privacy like those required to buy from Bisq, a peer-to-peer exchange. but when i a m interested in privacy, I consider these services.

Another tool I use to take back my privacy is RaspiBlitz, a Bitcoin and Lightning node. You can build this device at home using a Raspberry Pi. The service I use with it is JoinMarket which uses CoinJoin. I use Electrum (another service from the Raspiblitz suite) to be able to create a new wallet with many new addresses. So when the joined transactions are complete, I can send them to many addresses and not reuse the addresses. This helps reduce the deterministic hierarchy of my UTXO history, something many on-chain analytics companies use to track bitcoin transactions. This is not meant to be a technical guide, but using the two tools mentioned, I can create new and destroy old wallets as needed while still sending bitcoin to my choosing. Now, this is not a foolproof method. If I’m going to deposit bitcoins on my exchange (or wherever I KYC with) because I want fiat, then essentially all the work I’ve done can be undone. Why? Because reusing a bitcoin address is the fastest way to reconnect all intermediate points. So if you end up using JoinMarket and Electrum, your end goal is to keep post-Joint KYC bitcoin away from addresses and places where you need to KYC. Keep your batteries separate.

Ultimately, like everything else between privacy and freedom, Bitcoin also falls into an enigma. There’s no perfect solution for every bitcoin user, but it’s worth getting familiar with how block explorers work, privacy tools, such as JoinMarket, and how much information you have to give up to make a KYC. There is also room for kyc and non-kyc bitcoins, just find your balance and know how to keep them separate.

This is a guest post by Anthony Feliciano. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.