'Given the current status of Bitcoin and other open blockchains, how can users who purchase
their BTC on an exchange, exposing all of their [personal information], protect their privacy and anonymity?
Especially when governments have very sophisticated tools such as Chainanalysis.
Should there be infrastructure and a paradigm shift on how users switch their assets from fiat to crypto?'
This is a great question.
Right now, it's actually very difficult to protect your privacy because the fiat system
has all of these rules that tie all transactions to identity.
Basically, the fiat system is designed to be a surveillance machine.
If your on-ramp, if your entrance into the crypto space, is through the surveillance
fiat system, then you start your journey under full surveillance.
As a result your privacy is going to be severely compromised.
This isn't something that is necessarily the fault of exchanges.
Exchanges are trying to work as a bridge between fiat and crypto, and fiat is a surveillance system.
They can't not do the surveillance that is required by governments around the world...
when touching the fiat system.
How do you maintain your privacy?
How do you maintain anonymity?
How do you protect your human rights, your ability to transact without everything you do
being under scrutiny (absent any suspicion or wrong-doing)?
How do you protect yourself?
One way is to think about how you get to the crypto economy in a different way.
I've talked about this before, but I think it's worth emphasizing again.
That is, instead of buying cryptocurrency, you earn it by giving your labour, your services.
Effectively, by selling products or services that you would sell otherwise doing your job,
and earning your income in cryptocurrency.
Then, it's not [going through] an exchange.
It doesn't touch fiat.
As a result, it's not part of their surveillance and reporting system.
Of course, you have to report your income.
Or you may choose not to, but you should report your income under any requirements of the law.
But you don't have to report which crypto address you received your income on, so you
have a much higher degree of privacy when you do transactions between individuals...
rather than dealing with a regulated exchange.
Another way is to think about various privacy services that exist, that help you once you
have cryptocurrency acquired through an exchange [or elsewhere].
The receive address, for example after withdrawing it from the exchange, is tainted.
What does that mean?
That means the moment you did a withdrawal, the exchange will have associated your identity
(which they've recorded) with the address you sent the cryptocurrency to.
They will either assume that's someone you're paying, if they have information about that
address belonging to a merchant through other systems that are under surveillance,
or they'll assume that address belongs to you.
As part of the deal that these exchanges have with various analytics firms, in order to
support what they call "know your customer" (KYC) and "anti-money laundering" (AML) regulations,
they will send information on every transaction to the analysis firms, together with the identity that they have.
In return, they'll get some kind of risk score that says whether they should allow that transaction or not.
This is a very dirty deal, whereby in order to receive a risk score from a KYC/ AML perspective,
the exchanges are effectively forced to send all identifying information about all incoming
and outgoing transactions to the analytics firms.
The exchanges then become a giant surveillance machine.
This also applies to all of the merchant processing, centralised points that perhaps are building
e-commerce shops and things like that, or converting cryptocurrency into fiat for merchants.
In order for them to be able to comply with the regulations and get a risk score, or an
AML score, on any single transaction, they have to send all transactions with...
associated identities to the analytics firms.
So the moment you do a withdrawal, your receiving address has been tainted in its association with you.
At that point, the only way to break that association is to do some transactions between your own wallets.
That will obfuscate the sources of those funds [a bit].
Depending on your jurisdiction, that may be perfectly legal or it might not be.
I'm not going to give you legal advice as to whether you should or shouldn't do that.
Simply know that there are tools out there that will allow you to add a layer of privacy to your transactions.
By mixing cryptocurrency transactions with your wallets and other wallets.
In some jurisdictions this is perfectly legal; in others it is not.
It will allow you to perhaps add some distance between an address that has been identified
as yours, and an address that you want to use in the future.