Why one customer has many addresses
A customer with one wallet routinely holds hundreds of addresses. A wallet declaration names the ones they told you about, on the day they told you.
A wallet is software that manages private keys, and most wallet software creates a fresh address whenever it needs one. One customer running one wallet can sit behind hundreds of addresses within a year, without doing anything unusual and without deciding to.
Where the addresses come from
- A new address for each payment
Wallets hand out a fresh receiving address every time, so that two people paying the same customer cannot see each other’s payments.
- Change returning from a transfer
On Bitcoin and chains like it, the unspent part of a transfer comes back to an address the wallet created for the purpose. Spending once can create an address you have never been told about.
- One seed, many addresses
A modern wallet derives every one of its addresses from a single secret. The customer backs up one phrase and thinks of it as one wallet, which from their side it is.
- A deposit address at a business
An exchange issues the customer an address to deposit into. That address belongs to the exchange, and the exchange can reassign it later.
What a declaration captures
When a customer declares a wallet, they are telling you about the addresses they know of, at that moment. The wallet goes on generating addresses afterwards, and nobody notifies you.
The right-hand column is not evidence of concealment. The wallet goes on creating addresses after the declaration, and nobody is notified when it does.
The dashed column is not concealment. Those addresses did not exist on the day of the declaration.
The custodial case is different again
When the address belongs to a business rather than to the customer, many customers sit behind it. A deposit to that address tells you the funds reached the business. It does not tell you which of their customers received them, and usually only the business can say.
This is why a counterparty that is a licensed business often ends a trace. Tracing past it tells you nothing that the business’s own records would not tell you better.
What this changes
| Do not | Do |
|---|---|
| Ask for the customer’s address | Ask which addresses they have declared, and when they declared them. |
| Treat an undeclared address as concealment | Establish when the address was first used, then compare that to the date of the declaration. |
| Read a deposit at an exchange as a payment to a person | Record that the funds reached the business, and ask the business who received them. |
| Count addresses as a measure of activity | Count transfers. An address count mostly measures which wallet software the customer runs. |
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