Digital Dollars vs Privacy Coins and the Fate of Financial Security

Which is better for individuals, privacy coins or digital dollars?

We’re at a juncture here, folks. And not unlike the edge of an abyss, what happens next is filled with unknowns. What we do know is that the chance to build a better economic future has been laid before our feet. 

At the same time, we’re facing government-supported surveillance technology, drone enforcement, compromised servers, bulk data collectors, and sim card snatchers all lying in wait for our data, our money, and whatever financial security we have left.

Fiat is breaking. Our economic indicators do not reflect economic realities. Just recently, the Dow, following an unprecedented plunge, screeched into its newly acclaimed best bull market ever. Meanwhile…

  • Millions of people entered day 10 (at least) of no work, no school, and often no money.
  • Coronavirus infections topped a million globally
  • In New York City, bars are serving up “boozy drinks to go” for taking out and delivery while makeshift hospitals are put together and pleas for supplies skip across the Internet.
  • 6.3 million Americans just filed unemployment insurance claims. 
  • Stock futures continue to drop in the night following more bad news and signaling another downturn in the stock “market”.

The US population, as well as countries, all over are gripped in economic fear and uncertainty, and from what it looks like, there’s lots more on the way. Financial stability, or lack thereof, is on the minds of everyone.

Don’t forget the horizon

Enough of the doom and gloom. We’re switching gears now because that’s what you do in crypto. In fact, the cryptocurrency movement as a whole has created a new breed of economy watchers and builders. We see what’s happening and are knee-deep in creating and building out solutions. 

It’s time to talk about two emerging technologies that many think have a chance to create a more sound money system. Privacy Coins and Digital Dollars.

First, it’s very important to iterate that there are major differences between these two potential solutions:

What’s the difference?Privacy CoinsDigital Dollar
Led by: Developers, tech startupsGovernments and central banks
Provides benefits for:Users who want financial privacy Governments and central banks
Runs on:Public and cross chain blockchain protocolsPrivate and/or permissioned databases, maybe blockchain, maybe not.
Technology is:Ten+ years in the making, established, with secure and evolving protocolsYet to be implemented

There are multiple privacy coins on the market that have been improving financial security for years, including Monero (XMR), Zcash (ZEC), and others. We’ll get to those a bit later. Because financial security and privacy by way of the blockchain began with bitcoin, so that’s where we’ll begin.

The bitcoin solution

Privacy coins began in earnest with bitcoin in 2009. With the anonymous Satoshi Nakamoto’s creation, people had a way to send money to each other without the need for a bank or payment processor. They would only need an internet connection and a device. Nakamoto launched the protocol in 2009 in what many consider a responsive solution to the money system that led us into the 2008 crash.

Built on a public blockchain, transparency is one of bitcoin’s main features. Data entries, excluding personally identifying information, are publicly available on all bitcoin transactions. They’re also stored infinitely on the Bitcoin Blockchain.

Bitcoin Transactions per day – all time

Even though personal information is not stored on the blockchain, it’s possible in several ways to have your identity traced back to you. For instance, if you use a bitcoin wallet more than once, a vendor or cryptocurrency exchange, for example, now knows that it is your wallet address and could check on the wallet’s activity at any time. But CoinJoin, Mimblewimble, and other technologies add additional layers of security to bitcoin.

Since its inception, governments and criminals have sought to use bitcoin to their advantage by trying to hide illicit activities such as avoiding sanctions or dealing in drugs or human trafficking. But most bitcoin users (HODLers, traders, miners and node runners) also use bitcoin – but for different reasons. They are taking advantage of having sovereignty over their own money. A huge step toward financial security.

“In order to make Bitcoin’s privacy ‘great again’, we must be able to distinguish between real privacy and red herrings that can only lead us further off the path.”

GIACOMO ZUCCO – Regarding fiat enabled bitcoin ramps

Enter Chainanalysis

But now there are trackers like ChainAnalysis that collect and analyze data on the blockchain. Then they sell their service to governments, companies, and agencies, providing the data used for following criminal activities, as well as monitoring everyday bitcoin users. 

Because bitcoin wallet addresses are public, once an address has been compromised and the owner’s identity revealed, every transaction thereafter to and from that wallet can be tracked. 

While bitcoin is the coin that moves the market and, to many, is considered ‘digital gold’, privacy technologies are still evolving around it. Bitcoin was created to provide a way out for those who don’t have or can’t afford banking services, as well as for those living in corrupt regimes that inflate the national currency while enforcing strict capital controls.  

Privacy coins are cryptocurrencies that put the primary focus on the user’s financial privacy. There are also cryptos like BTC and XSN that are not strictly privacy coins in the general sense, but that put an intended focus on keeping transactions private just the same.

Introduction to “Privacy Coins”

Since the creation of bitcoin, many other privacy coins have entered the market. Some of them are forks of the Bitcoin Blockchain, like Dash. What that means is that they took the original bitcoin technology, forked it as a new entity, and began building out their own technology on top of it.

Other privacy coins are built on blockchains other than bitcoin’s. For instance, Monero came into fruition back in 2014 through a fork of the Digibyte (DGB) Blockchain, and Stakenet’s XSN coin is built upon their own native blockchain.

Monero Pricing Chart – CoinMarketCap

Privacy coins have run up against regulators in the past. The result has often been seen in the delisting of privacy coins from centralized exchanges. But they still, for the most part, have continued their growth trajectory on decentralized exchanges and OTC markets. 

Let’s take a quick look at six of today’s most intriguing privacy coins. We’ll start with Monero, which has a settled spot in the top 20 on CoinMarketCap. After our privacy coin review, we’ll dive into perhaps the most fierce future competitor of privacy coins – digital cash, sometimes known as a central bank digital currency (CBDC).

Monero (XMR)

Crypto’s long favored privacy coin, Monero, has been growing its network since 2014. It’s a native coin, XMR, which is a decentralized cryptocurrency, meaning a form of digital cash that is operated by a worldwide network of users. 

Monero uses privacy technologies including ring signature, ring confidential transactions, and stealth addresses to hide or ‘obfuscate’ the details of each transaction using Monero.

For instance, if you buy Monero and then send some to a friend, your identity, the transaction amount, and the coin’s destination are completely hidden. By default. 

digital dollars vs monero

Zcash (ZEC)

One cryptocurrency that has combined the transparency of bitcoin with the privacy focus of Monero is Zcash. With two types of transacting available, some users can keep their transactions transparent, such as for people who live in regions where privacy coins are restricted. Other users may prefer a private transaction. So you have the choice to keep your transaction private or not. 

Zcash was launched in 2016 by technologists from multiple innovation hubs, including MIT and Tel Aviv University. The Zcash crypto coin is a form of digital cash that ‘shields’ transactions. They developed Zero Knowledge Proof technology (zk-SNARK), which ensures that transactions may be verified without revealing the corresponding parties. Possession can be proved without revealing who owns the corresponding wallet. 

When users transact with this currency, they have two options: using z-address, which is private, or t-address, which signifies the transaction will be transparent.

digital dollars vs zcash

Stakenet (XSN)

Stakenet’s XSN coin is not what you would generally expect in an article about privacy coins. But Stakenet’s trustless, interchain economy combines masternodes with the Lightning Network, plus a slew of hard privacy features. 

As a platform for building decentralized apps, Stakenet uses the XSN currency for all aspects of the ecosystem. By enabling cross-chain transactions, they’ve increased operability between blockchains, and thus more potential for usability.

Their latest wallet has TOR privacy built-in, with just a 1 click access, quite possibly the easiest TOR activation available today. Stakenet’s masternodes are also employed on the Network for the trusted nodes running the TOR network, to protect integrity. Additionally, the platform provides off-chain privacy by way of a decentralized exchange and the Lightning Network, so that transactions are secure and private by default. They also plan to offer privacy choices like Zcash, so people have a range of options. 

digital dollars vs stakenet

Navcoin (NAV)

Navcoin was established in 2014 and runs in a fully decentralized, autonomous manner. The global community of stakers secures the network while earning passive income (NAV). With no central authority, major decisions are made by the community through consensus, and governance of the protocol is shared by all. 

Since Navcoin came into existence, it’s had a focus on fast and easy payments, but also on transaction privacy. As with Zcash and XSN, NAV users have the choice of transparency or privacy.

A ValueShuffle protocol is in place for NAV transactions. Simply put, it’s an extension of CoinShuffle, which enables peer to peer, decentralized mixing.

Important note: Privacy coins, like all public blockchain-based currencies, are globally scaled, meaning anyone from anywhere can access the blockchain with a device and an Internet connection. 

Nix (NIX)

Like most privacy coins, optional privacy is hard coded into the NIX Platform. Having launched in 2018, NIX could be considered a second-generation privacy coin. The platform itself features interoperability between different blockchains, so developers are able to build decentralized applications (dApps) with the benefit of NIX’s privacy layer if they so choose.

There are two primary privacy features in the NIX protocol:

  1. Ghost Vault – Allows users to mint brand new NIX coins, which have no previous transaction history, so they can’t be tracked.
  2. 2-Way Ghosting – This technology enables complete privacy on both ends of each transaction, by using “addressless transactions”.

NIX uses a masternode system of “Ghostnodes” that validate privacy transactions on the NIX blockchain. These special nodes usually earn higher returns than regular staking nodes. Privacy transaction fees get distributed by smart contracts every day, so there is incentivization also securing the validation of private transactions.

digital dollars vs NIX

DAPS Coin (DAPS)

DAPS Coin has claims on being the first privacy coin to use Bulletproofs, RingCT and Ring Signature technologies with a staking coin. Like Stakenet, they too have a dynamic masternode program. What sets them apart is their Proof of Audit verification method for verifying blocks or transactions. 

DAPS uses 24/7 online collateralized nodes that keep the network strong and service the other nodes. In addition, their proof of stake system, PoSv3, provides better energy efficiency than a traditional proof of stake protocols. 

Mandatory stealth addresses are also used throughout the ecosystem, masking the addresses to keep them private from all other parties. 

digital dollars vs zcash

Downsides of privacy coins

Unlike bitcoin, which without additional privacy layers can be tracked by government agencies, privacy coins are designed to be immune to this type of interference. The whole idea is to have financial privacy and keep spying eyes out of it. 

But that doesn’t mean you’re a criminal. Financial privacy means keeping your finances safe from external forces (more on these forces later in the article). Despite that, many countries around the world have strict regulations disallowing the use of privacy coins

Additional cons to privacy coins include:

  • Liquidity – because privacy coins are often restricted from centralized exchanges, those interested in buying, selling or trading have fewer options and must often seek out over the counter markets or use developing decentralized exchanges. By restricting them to decentralized exchanges, it is harder and takes longer to build strong liquidity for the privacy coin. That can mean it’s more difficult to acquire or sell off the coin, and also there is often a much higher level of volatility with coins that have low liquidity. 
  • Governments do not like them –  And they may make privacy coins illegal, which would also negatively affect liquidity and discourage use.

Public awareness around data breaches may make it difficult for some governments to impose a ban on privacy coins. In times of economic turbulence, however, these data-protecting cryptocurrencies become a bastion of hope.

“Privacy. It is every human’s right and yet it has become a ‘commoditized’ currency traded on the Internet.” 

Suvrangsu D. – The Merkle

Where digital dollars come in

Now that you’ve had a good look at privacy coins and what they are all about, let’s switch gears. Central banks around the world, as well as big tech and payment companies, are all clamoring to institute the first functional digital dollar. A few are testing out early versions of a central bank digital currency. China, Sweden, the Bahamas, France, and the European Union are all in the research and testing phases, with the US and other nations not far behind. 

This race to have the first CBDC has major implications because the USD’s status as a global reserve currency has been shaken in recent months. Governments are knee deep into bringing their own version of a CBDC to the global public, knowing that being first may be the advantage they need to bring financial security to their respective economies – and maybe even create a new world reserve.

What is a digital dollar?

The definition of digital dollars is electronic or digital money that is only available in digital form but mimics the properties of fiat currencies. Digital dollars allow for instantaneous transactions and settlement, as well as 24/7, cross-border transfers of ownership of assets and currencies. 

digital dollars

Financial stability and digital dollars 

Becoming financially stable has taken on a new meaning as the global economy led by the US faces the Coronavirus pandemic and the result of decades of unsound monetary practices. With money systems in this day and age, financial security is becoming not just about having enough money to survive. It’s more about protecting your money from outside forces. 

So what are these outside forces?

  • Data breaches on centralized servers continue to put our data at risk.
  • Surveillance tech is being used during the pandemic: drones, chips/implants, humans with QR codes.
  • Governments are using this time of economic crisis and the pandemic to push through enabling legislation for increased data surveillance – via bulk collection and efforts to ban end-to-end encryption.
  • Politicians and government officials who shape economic policy have no real incentive to improve it, their only incentive is to keep their job.
  • The fiat economy is highly manipulated and politicized to benefit a few.

“Surveillance of encrypted messaging is a movement toward forfeiting democracy.” 

Nozomi Hayase

So with these externalities affecting your ability to have any privacy whatsoever, a digital dollar may actually take all of this up a level.

If a government issues a digital dollar with its own wallet, several things may happen:

  • A cashless society could develop, where the only money available in a country comes from one source – your CBDC wallet.
  • Financial inclusion could increase, but financial privacy gets left in the dust. Now the government has direct access to where and how you spend and take in money. 
  • This control over your financial data could seep into other areas of your life. For instance, if a country rolls out capital controls during wartime or pandemic, you may have no recourse or back up options if all your money is already strictly controlled and monitored. 
  • A digital dollar could end up being easier to inflate and control than fiat.

The EU has been one of the few government entities who believe private payment choices (i.e. Libra) should still be developed alongside central bank digital dollars. This reflects a willingness to admit that we don’t really know what will emerge as the primary digital currency. It also lends to the notion that in the future of financial security, market demands may have a say in what kind of money consumers are using. 

Other regions, China in particular, are not so open to this competitive environment. Instead, the digital dollar goes a long way toward their policies of control and surveillance. 

The dangers of digital dollars

By eliminating the hard money we’ve come to know as dollars and cash, our financial rights are impugned, our financial data becomes a potential surveillance tool, and everyday people are expected to trust the government with their money, something that has never come easy. 

“About four-in-ten adults (41%) think the public’s level of confidence in the federal government is a “very big problem.”

Gallup Data on Americans Declining Trust in Government

So here we are at an unprecedented place in history, where the money is falling apart and governments are desperately trying to hold onto control. The poor levels of trust that normal citizens have about their own government does not bode well. Especially now that politicians expect people to trust them as they devise a new central bank digital currency. 

Financial security now means more than just having enough money. It means financial data privacy and security. Governments must figure out a way to create digital dollars that do not infringe on our financial security. If they don’t, their competition will.

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