Crypto as Freedom: The Romantic Beginning

In its early years, Bitcoin was positioned as „digital cash“ — no banks, no IDs. Between 2009 and 2013, this experiment gave rise to marginal online markets where BTC enabled anonymous transactions. Silk Road (2011–2013), for example, became a platform for drug trafficking through Bitcoin, and at its peak, accounted for up to 20% of all daily Bitcoin transactions. Similarly, the Russian darknet market Hydra, active from 2015 to 2022, processed over $5.2 billion in cryptocurrency (around 80% of all darknet transactions). Yet, even users of such platforms slowly realized that the “mask of anonymity” was being watched, as U.S. law enforcement put it: “Criminals on the darknet hide behind an illusion of anonymity, but we are watching.”

Alongside Bitcoin, privacy-focused cryptocurrencies emerged — the most famous being Monero. However, even these no longer guarantee full invisibility: in 2020, analysts at CipherTrace announced they had developed tools to trace Monero transactions.

Turning Point: Institutionalization and KYC/AML Integration

Post-2017, the crypto industry began rapidly integrating into the regulated financial system. Centralized exchanges introduced mandatory KYC/AML (Know Your Customer / Anti-Money Laundering) procedures, effectively bringing “digital cash” under banking oversight. Binance, for example, made identity verification compulsory in 2021 and reported that 96–97% of users had completed it.

In the EU, the so-called „Travel Rule“ was introduced, requiring VASPs (Virtual Asset Service Providers, such as exchanges and wallets) to collect sender and receiver data for every transaction. Blockchain analytics technology has evolved alongside these changes. Companies like Chainalysis and TRM Labs collect public blockchain data, cluster addresses, and link them to real-world identities. These tools help law enforcement trace and piece together seemingly minor transactions into a comprehensive picture. For instance, in the Silk Road case, James Zhong tried to launder 50,000 BTC through dozens of transactions, but investigators reconstructed the flow: one address linked to the stolen BTC appeared in the same transaction input as another easily identifiable address belonging to Zhong. The exchange provided KYC and IP data, proving Zhong’s control of both addresses. These successes challenge the notion that „blockchain is forever“ in a static sense — investigators can now revisit years-old transactions with new tools. As Chainalysis notes, it’s inevitable: by design, crypto is easier to track than cash.

USDT and the Illusion of Decentralization

Stablecoins have played a key role in crypto surveillance, becoming the dominant medium for transactions. The most popular, Tether (USDT), has a greater transaction volume than any other crypto and is issued by the centralized company Tether Limited, based in the British Virgin Islands. According to CoinMarketCap, USDT consistently holds the largest share of the stablecoin market (over $110 billion as of June 2025). Its issuers, like Tether and Circle (USDC), work closely with law enforcement and monitor transactions in real-time via specialized tools.

Since June 2024, USDT’s status in Europe has become even more complicated. The EU’s MiCA (Markets in Crypto-Assets Regulation) — the world’s first comprehensive crypto regulation — came into full effect, setting strict requirements for crypto asset issuers, including stablecoins.

USDT currently holds no regulatory status in the EU and is not registered as a permissible asset under MiCA. As a result, major exchanges like Binance began limiting USDT services for European users in early 2024, shifting focus toward MiCA-compliant tokens such as EUR-e, issued by licensed Finnish firm Membrane Finance.

The New Rules: Germany’s 2025 Tax Directive

On March 6, 2025, Germany’s Ministry of Finance released a clarification (BMF-Schreiben) for tax authorities. It mandates detailed documentation and reporting of all crypto-related actions by investors in Germany. Every purchase, sale, or transaction must include the date and time, coin type and quantity, euro value, wallet or exchange address, and other specifics. Noncompliance may result in penalties — tax authorities are now allowed to estimate gains at their discretion, with fines reaching up to €5,000 per violation for missing records.

The “Honest User” Paradox

Many legitimate investors now find themselves paradoxical situation: though they follow the law, they’re subjected to the same monitoring systems as money launderers. It’s akin to airport security — even if you’re just carrying books, you still get screened. The crypto community is divided in its response: some mourn the loss of the “shadow realm,” others joke (“I didn’t break any laws, yet I have to reveal everything”), while many express frustration over diminished freedom. But regulators and platforms increasingly recognize that full-scale anonymity in an open system is unworkable, especially as demand for audit tools and accountability grows.

Is There Still a “Shadow”?

The space for “pure shadow” has nearly vanished. Decentralized mixers and private coins are the last bastions — and they’re under siege. Tornado Cash, once a major crypto mixer, was sanctioned by the U.S. in 2022 for laundering over $7 billion (including $455 million stolen by North Korea’s Lazarus Group). The EU is preparing even stricter measures: starting in 2027, exchanges and wallets may be banned from interacting with anonymous addresses or private coins. In short, true anonymity is rapidly disappearing in Europe. While decentralized tools like the Lightning Network still exist theoretically, regulators are moving toward transparency and accountability.

The crypto market increasingly resembles the traditional banking system, complete with checkpoints. Even if criminals attempt to obfuscate funds across dozens of wallets and exchanges, specialized algorithms can still piece together the puzzle.

This article was prepared by ICON PARTNERS, an international law firm with 12 years of experience supporting Tech, Web3, e-commerce, and FinTech businesses worldwide. ICON PARTNERS operates in over 40 countries, with legal experts in Information Technology, Corporate, Tax, Intellectual Property, and Privacy Law.