As I started my recent research into cryptocurrency, I had two opposite thoughts. First - what an incredibly private (and anonymous) way of managing "money." And... Nothing is ever really private! Which thought was correct?
It turns out that both are correct.
Cryptocurrency is based on blockchain technology where transactions are recorded as blocks containing information about each transaction including the parties, amount, timestamp of the transaction, and the unique transaction identifier. Each transaction is updated simultaneously on all ofrwf the multiple copies of the decentralized, distributed ledger.
Much like with "money" where you use a wallet to carry your cash, cryptocurrency transactions involve a wallet. However, unlike "money", crypto itself does not live in a wallet - it only exists within the blockchain. Instead, the wallet is used to hold the private keys that prove you own your crypto assets and allow you to make transactions. If you lose your private keys, you lose your assets.
A private key generates a corresponding public key that creates a public address which is needed for other individuals or entities to send you crypto. Public keys decrypt your encrypted transactions, allowing the transactions to be posted to the distributed ledger, where each copy of the ledger verifies if there are sufficient funds to make the transactions, confirm the transactions, and finally record the transactions.
Private key custody
One "key" to privacy expectations is related to your private keys. Anyone who has access to your private keys has access to your transaction details and to your cryptocurrency assets. Since you keep your private keys in a wallet, the type of wallet you use matters. There are different types of cryptocurrency wallets, including paper wallets, hardware wallets and online wallets.
Although you can write your private keys on paper and store them in a safe location, that makes it much more difficult to use them. A hardware wallet stores keys in a thumb-drive device that you can then store safely. By only connecting it to your computer when you use it, you increase security and privacy. Finally, you can use an online wallet.
Are your transactions private if you keep your private keys private?
Not really.
Remember, although transactions use encrypted strings of alphanumeric characters, those transactions are posted publicly and permanently. And they are traceable to you, although your identity is obscured.
Simply relying on your wallet and your private keys does not guarantee your transactions are private. So, how can you keep your transactions private? Here are some simple actions to consider.
Will you need to become comfortable with cryptocurrency? If so, when?
It seems that not a day goes by without more news about cryptocurrency. For example, did you know that Visa recently released plans for a Universal Payment Channel that will serve as a hub between blockchain networks? How about the fact that an entire country adopted Bitcoin as currency?
In my opinion, all accountants and bookkeepers should begin understanding cryptocurrency technology basics now. And even more importantly, you should be prepared to track and value crypt transactions for your clients within the next year.