Learn about crypto
By Josef Tětek — Don’t give away sensitive data if you don’t need to. Buy Bitcoin without risking identity theft using this guide.
Know your customer (KYC) requirements are spreading fast. It may feel like there is no way to obtain bitcoin without undergoing a stringent identification process, but that’s not true. Bitcoin is a peer to peer system, meaning private interactions are always possible, if you know where to look.
- Quick refresh: what is KYC
- Privacy isn’t a crime
- Buying KYC-free bitcoin on a decentralized exchange
- Buying KYC-free bitcoin for cash
- Get KYC-free bitcoin via other means
- Don’t fall for scams
Quick refresh: what is KYC
If you’re already familiar with KYC/AML definitions and risks, feel free to jump ahead to the next section.
Know your customer (KYC) is a mandatory identification process that service providers such as exchanges need to conduct on their clients. The supposed benefit of the practice is preventing money laundering and financing of terrorism — commonly shortened to anti-money laundering (AML). The reason I say “supposed” is because the worldwide AML programs do little to curb any money laundering. According to a recent study, AML worldwide has about a 0.1% success rate, while costing institutions a great deal of resources in compliance costs.
But compliance isn’t the major KYC/AML cost — it’s the risk and lost opportunities that these requirements impose on ordinary people:
- Data leak risks: everything leaks, it’s simply inevitable;
- Data sharing risks: you may think you provide data to an exchange, but these data are going to be shared with third parties and government agencies;
- Personal risks: leaked or stolen data can be used against you in an attempt to steal your coins, both remotely (phishing) and physically (home invasion);
- Confiscation risks: laws change all the time and there might come a time when a 6102 type of legislature is passed;
- Lost opportunities: people from sanctioned countries or without required documentation are ostracized from using bitcoin-related services in the same fashion as from the legacy finance industry.
On top of these risks, consider the public nature of the Bitcoin blockchain. When you buy bitcoin on an exchange that has your full identity, this exchange can track your withdrawal and subsequent transactions. In fact, exchanges regularly cooperate with chain analysis companies that make it their business to track users’ transaction behavior.
KYC’d bitcoin is surveilled bitcoin.
Privacy isn’t a crime
Let’s make one thing clear: privacy is not illegal.
In fact, privacy is one of the internationally recognized human rights (Article 12 of UN’s Universal declaration of human rights). Most countries impose limits on cash payments (usually around $10,000), but within these limits, you aren’t breaking the law if you purchase bitcoin from other persons.
So what options do we have to acquire bitcoin privately?
We can divide them into three categories: buying on decentralized exchanges, buying for cash, and acquiring bitcoin via other means.
Buying KYC-free bitcoin on a decentralized exchange
It is still possible to acquire bitcoin through wire transfer without having to undergo KYC. This method is available through peer-to-peer exchanges, the two most popular being Bisq and Hodl Hodl. Both platforms leverage Bitcoin’s native multisig capability, making it possible to trade bitcoin remotely in a trust-minimized manner (although some level of trust is still required, as we’ll explain).
Let’s break down the elements of trading on a decentralized exchange:
- No custody. Decentralized exchanges do not hold any customer funds, which is the main reason why they can remain KYC-free: projects like Hodl Hodl and Bisq simply provide traders with a trading protocol and some code to complete their trades. The downside is that every single trade on a decentralized exchange is a blockchain transaction, making it slower and more expensive — but still a good fit for occasional buys, e.g. under a monthly DCA (dollar cost averaging) plan.
- Order book hosting. Hodl Hodl hosts an order book on its server and provides users with a web interface, while Bisq requires users to install a client, which also works as a server — on Bisq, it’s the user network that hosts the order book. Bisq is thus more decentralized and resilient to shutting down.
- Hodl Hodl order flow and dispute resolution. Hodl Hodl uses a 2-of-3 multisig escrow, where the buyer, the seller, and the exchange each hold one key. When everything goes smooth, buyer and seller both sign the transaction after the fiat payment is received and thus release the bitcoin into the buyer’s wallet. In case of a problem — e.g. the seller isn’t willing to acknowledge the receipt of fiat payment — it is possible to open a dispute. Customer support then gets involved and resolves the dispute in favor of the honest trading party. Read more about Hodl Hodl dispute resolution rules here.
- Bisq order flow and dispute resolution. Bisq has a 2-of-2 multisig escrow with only the trading parties holding the signing keys. To prevent an indefinite capture of bitcoin in case the seller is uncooperative, the multisig also has a timelock element, where the funds get released after a certain period (10 or 20 days, depending on the type of trade). However, this time-locked transaction doesn’t actually release the funds to any of the trading parties’ wallets, but instead into a Bisq donation address. A Bisq arbiter can then reimburse the honest party. Read more about Bisq dispute resolution rules here.
- Reputation system. A risk of fraud on both platforms is further minimized by an acquired reputation score (Hodl Hodl) or an account age (Bisq). Hodl Hodl even allows linking a user profile from other P2P platforms, to bootstrap a reputation score for newcomers that have a good standing elsewhere.
The trading fees on the two decentralized exchanges are in the range of 0.3%-0.6% on trade volume (plus miner fees).
Please note that remote fiat payments aren’t really anonymous. While you greatly increase your privacy by trading on a decentralized exchange, you could still be compromised by trading with a big account on Hodl Hodl or Bisq if that account were to be forced by authorities to surrender all trading details, including counterparty payment data. A possible mitigation would be to trade from a bank account held by an LLC instead of a personal account.
Buying KYC-free bitcoin for cash
Cash is the best privacy coin: once you withdraw your money from an ATM, there is no way to track your transactions. Buying bitcoin for cash is the most privacy-preserving way, but it also comes at a cost of increased risk and possibly higher fees.
- Bitcoin ATMs. Most ATMs require only a phone number when buying bitcoin below a certain limit (usually up to a thousand dollars) — having a prepaid SIM card for such purpose is advisable. You can find an ATM at your location at Coin ATM Radar. ATMs usually have higher fees ranging between 5–10%.
In-person purchase. The crucial thing here is trustworthiness. Ideally, you should buy from your bitcoiner friend, who perhaps earns bitcoin and occasionally needs to sell some to pay for food and bills. Or you could ask around at your local Bitcoin meetup. There are sites that offer matching in-person purchases, but this carries an unknown risk: you are basically meeting a stranger who knows you are carrying a lot of cash on your person. The risk here is obvious, and there have been cases of muggings in such situations.
A nice possible benefit of in-person purchases is the ability to buy sats directly from the Lightning Network. This is recommended also for privacy purposes. If on the other hand you make an in-person purchase with an on-chain transaction, it’s advisable for both parties to CoinJoin their coins, both before and after the trade. This way, neither party is any wiser to how much bitcoin the other person has. Alternatively, traders can utilize the account feature available in Trezor Suite to prevent an accidental merging of coins that could reveal the user’s total net worth.
Get KYC-free bitcoin via other means
Buying bitcoin isn’t the only way to get your sats privately. You can also earn, mine, or otherwise obtain bitcoin in indirect, non-obvious ways.
- Home mining. Profitability calculators may tell you that your operation would be unprofitable, but you are not looking for an immediate operating profit here. Normally, miners sell what they mine to pay for the electricity costs. But what if you considered home mining as a way to exchange your fiat into bitcoin in a very discreet way? Instead of buying bitcoin every month, you simply pay a larger electricity bill, and stack coins to your Trezor without anyone knowing. Home mining can be a form of auto DCA, where you never have to touch an exchange, visit an ATM or meet with a trader. Check out Econoalchemist’s guide for instructions and tips on home mining.
- Earning bitcoin. Earning a part (or all?) of your wage in sats is a very convenient way of obtaining bitcoin in a KYC-minimized manner. It’s not totally anonymous since the employer knows who you are and keeps accounting records, but on the other hand they usually don’t have to report such transactions to authorities, like the exchanges do. If your employer doesn’t pay out in bitcoin, maybe it’s time to take a look around. Check out bitcoinerjobs.co and SatoshiLabs careers!
- Selling stuff for sats. With BTCPay Server it’s easier than ever to sell stuff online for bitcoin. Most buyers will appreciate it when you allow Lightning payments, which BTCPay supports. A nice thing about this form of stacking is that you can operate with very little margin: similarly to home mining, you are essentially exchanging fiat spent on the sold goods for bitcoin thus obtained, and you are not necessarily aiming at having a short term operating profit — your real profit is the KYC-free bitcoin. Your main concern here is to sell stuff for which bitcoiners will be willing to part with their sats — a challenging task!
In general, to obtain bitcoin privately, you want to have costs in fiat and revenues in bitcoin across whatever you choose to do — whether it’s mining, running an e-shop, a stall at a farmers’ market, or freelance work.
Don’t fall for scams
There are multiple ways to obtain your bitcoin while preserving privacy. As governments around the world ramp up their fight against bitcoin and privacy, keeping true to cypherpunk values and asking no permission to opt-out of the legacy financial system is becoming even more important than ever before.
But keep one thing in mind: there are many scams in the cryptocurrency space, even those that leverage the increasing demand for privacy. Do not blindly go for the first non-KYC exchange you find and do not accept just any offer to buy bitcoin privately. Trade on exchanges with a long track record and many reviews. Do not trust anyone with your coins — always use multisig escrows. Meet only with people you have no doubts about. Do your homework and be vigilant.
The future is uncertain. But if you learn to value your privacy, take your time researching your options, and store sats in your Trezor, you’re gonna make it.
Go to Source