xpubs from different accounts in the same wallet have a significant similarity (12 leading characters in common, excluding ‘xpub’) and can therefore be associated. If you share multiple xpubs with third parties you should use a unique passphrase rather than using a different account index in the derivation path.

This is an edge case and it is very likely that it affects no-one. It is not common knowledge and given the increasing sharing of xpubs with exchanges (for automatic withdrawals) this is useful information to be aware of.

(note: don’t use KYC exchanges, use noKYConly)

How this could be an issue:

  1. A user makes a wallet

  2. They use xpub 0 (corresponding to account 0) on a DNM to process withdrawals to cold storage automatically (I doubt any DNM offer this service currently, get in touch if you know one does).

xpub 0 (m/84’/0’/0’): xpub6DTSDUqGFofVDYwzd3GNcarScVAn6W7zeSfHyerVPdePdJSyp1uuCmPQu7TezdWVTHn3izyPFEgc7zwWjdHb14tNiXnQE4YyT5cF6NH1VZF

  1. They sign up to regulated exchange X and use xpub 1 (corresponding to account 1).

xpub 1 (m/84’/0’/1’): xpub6DTSDUqGFofVF7SsHqrBjLd5ZKrPs9eu2GCuT9ryx4gc9WFfqQkXnG9NKUuFsiBcErkEUDT2eisUt9FEVzrY1spvmxNiCehddzc8PiUiKPc

  1. A 3 letter agency gets access to the DNM logs and either
  • requests the exchanges in their jurisdiction to check for xpubs starting with xpub6DTSDUqGFofV
  • has already compelled exchanges to submit xpubs as they are submitted.
  1. They identify that an xpub starting with xpub6DTSDUqGFofV has been used on exchange X allowing them to identify the DNM vendor.