Can the government track Bitcoin?

At the basis of cryptocurrencies like Bitcoin (BTC) stands blockchain technology. A fundamental characteristic of blockchain technology is transparency, meaning that anyone, including the government, can observe all cryptocurrency transactions conducted via that blockchain.

Bitcoin transactions are publicly accessible because of the transparent nature of blockchain technology. Besides, the history of Bitcoin transactions is permanently stored on the Bitcoin blockchain, implying that it is not hard to observe BTC transactions. The government, in the form of law enforcement authorities, may thus watch what happens on the Bitcoin blockchain.

So, can authorities like the police, the Federal Bureau of Investigation (FBI) and the Internal Revenue Service (IRS) trace Bitcoin ownership? And, do authorities know who owns which Bitcoin? The traceability of BTC transactions depends on whether someone’s transaction activity on the Bitcoin blockchain can be linked to their identity. 

Anyone can observe all cryptocurrency transactions of any Bitcoin wallet address. To find out where the Bitcoin is coming from and where they are being sent, authorities can analyze the BTC addresses that are used for transacting. In this manner, authorities get insights into what is happening and when. 

Many Bitcoin users reveal their identity at some point (for instance, on centralized exchanges or through interactions with known wallets). Thus, BTC transactions do not always remain 100% anonymous and the government can trace Bitcoin ownership whenever (a series of) Bitcoin transactions can be linked to one’s identity. With that new knowledge, governments can enforce duties such as Bitcoin or cryptocurrency tax liabilities or fight criminal conduct like money laundering.