Regulatory agencies and governments are increasingly turning their attention to cryptocurrencies. These decentralized, revolutionary coins are threatening the status quo and centralized entities want to only control them in the same way as fiat currencies. It’s no wonder that many people are worrying whether their beloved privacy coins will survive regulation. The efforts of authorities to
Government oversight of cryptocurrencies is not something new. In fact, shortly after Edward Snowden released NSA documents in the famous whistleblowing case, the US government began targeting bitcoin users.
From the beginning, the creator(s) of bitcoin intended it to be a privacy coin to keep user information protected. But because of the open ledger technology used in cryptocurrencies, tracking transactional data could and still can be relatively easy such as in the examples below:
- When someone wants to spy and track transactions, they may set up spy nodes that attempt to triangulate data.
- When you send crypto to a 3rd party source. As in the example of a payment for goods, that 3rd party now has the wallet address.
- When a startup initially rolls out their coin on the blockchain, everyone on the network can see that first coin issuance by the startup and subsequent transactions from that wallet.
Open and Public Blockchains
Transactional data on ledgers like the Bitcoin Blockchain are open and public. This means they show the date, amount, and receiving and sending wallet addresses. Anyone using the network can see this information. If a crypto user wants additional layers of privacy, they can go to extra lengths to get them. Adding privacy is possible in a in a variety of ways, including the use of a Privacy Coin.
It’s important to note here that the intention of bitcoin was not for protecting the privacy of criminals. Even though that’s how many people think of it, that’s not the purpose of bitcoin. The high level of
- No centralized force can manipulate or control Bitcoin.
- It’s more secure from hacks. Hackers must target thousands of distributed computers (nodes) to try and hack a blockchain. Changing or altering the information would cause serious financial hardship to whoever is trying to do it.
- Bitcoin offers protection for users suffering from failed banks and corrupt governments. It offers a way to send and receive money directly, cheaply, quickly and privately.
- It’s a peer to peer protocol that can be accessed by anyone, anywhere.
Does Privacy and Security Outweigh Criminal Tracking?
The security and accessibility features of cryptocurrencies might outweigh the problems with criminal use. It’s also important to note that criminals have long used fiat for their activities. Yet, banning those currencies never surfaces as a possible response or deterrent (unless you’re a bitcoiner!).
But we are now seeing the banning of cryptocurrencies (except when a banning government wants their own coin to strictly control) taking place in Iran, China and other countries. Iran even considers cryptocurrency, in the form of Telegrams’ GRAM coin, to be “a serious economic threat”.
What most of these centralized authorities have yet to grasp is the futility of banning a technology that is open and available to all.
Dealing with Terrorism and other Crimes
Then there are the government agencies that deal with criminal activities like terrorism, drug trafficking and elections meddling, to name a few. Before cryptocurrencies, these entities had the full support of government-sponsored fiat systems to help them track criminal transactions.
For instance, with anti-money laundering (AML) policies, all banks and credit unions in the US must report cash transactions over $10,000. Many other countries have similar requirements. Now, investigative agencies must deal with privacy coin technologies that make it near impossible to track transactions.
Before we look into what governments are going to do about privacy coins and what the effects will be, let’s briefly review what’s going on with a few of today’s top privacy coins.
Privacy Coins Today
Since the introduction of bitcoin, thousands of other cryptocurrencies have been brought to market. Dozens of these are considered “Privacy Coins” because they use advanced and intentional methods to further protect the privacy of their users. They go over and above the security features used within the Bitcoin Network.
Let’s take a look at three different, popular privacy coins that exist today:
With a system of privacy by default, Monero transactions hide any identifying user information, like bitcoin does. This decentralized coin then goes further to hide transaction amounts, as well as the source of funds and any recipient information. They’re able to anonymize this data through the use of stealth addresses and ring confidential transactions (RingCT).
Many exchanges have either banned XMR or declined to list it. Even so, there are several exchanges where you can purchase this coin, including Changelly and HitBTC. Monero’s current market cap is $726.9 million and XMR is now ranked 14th out of all cryptocurrencies. (updated November 2019 to $948.3 million and ranked #13)
This partially centralized cryptocurrency requires users to run a masternode in order to receive the additional layers of privacy. Dash accomplishes advanced security through cutting edge mixing techniques.
Dash is currently listed on numerous exchanges, including Bithumb. Its marketcap is at $573 million and it’s listed in 16th place. (updated November 2019 to $508.6 million and listed at #22)
Zcash is another partially centralized coin that is not private by default. However, upon a user’s request, they are able to hide information about amounts, recipients, and senders through the Zerocoin protocol which uses Zero-knowledge proof cryptography.
Zcash and Dash are the only privacy coins available on Coinbase at this time. While the privacy features may be implemented for transactions incoming to Coinbase; all outgoing transactions thereafter must be fully transparent.
New technologies for additional layers of privacy are continually being developed and added to existing privacy coin ecosystems. Some strong, recent examples would be MimbleWimble protocol and PayNyms. These new technologies make it exceedingly difficult for authorities to regulate, control and track criminal activities. But on the other hand, global financial freedom is now available to all people regardless of their origin or background.
Regulations and Privacy Coins
Governments and financial ministries all over the world are currently working to rein in the financial privacy offered by cryptocurrencies.
As a direct result, some world commerce centers like Singapore and Malta are seeing an influx of tech startups. These forward moving companies are setting up their blockchain-based businesses in alternative locations to avoid the strict yet not fully defined regulations in their home countries.
It makes sense that regions with the highest levels of financial infrastructure, like Japan, US, and China, would earmark the most resources and time toward regulating what they consider to be under their control – currency. But privacy coins are making them particularly worried for many reasons, including:
- Countries may now have a way to avoid economic sanctions imposed upon them. As an example, sanctioned countries can receive cryptocurrency without anyone tracking the transaction or anyone even knowing about it.
- The enforcement and oversight of sanctions becomes almost impossible.
- Their economic policy as well as their version of world diplomacy depends on strict control of and access to everybody’s money and all transactions.
We can’t solve problems by using the same kind of thinking we used when we created them. – Albert Einstein
Before the Bitcoin white paper and blockchain technologies were introduced, a peer to peer, decentralized form of money was never possible. The internet and social media have made these possibilities a global trend that seems unstoppable.
Yet governments, who are slowly beginning to realize the implications of decentralization, are now attempting to clamp down in an effort to maintain control of what has for centuries been their jurisdiction. They are starting to understand that a new money system is charging their way, one that is in the hands of the people.
Regulatory Response to Privacy Coins
In response to this perceived threat, regulatory bodies today have set their eyes on privacy coins.
Crime units like the Financial Crimes Enforcement Network (FinCEN) view cryptocurrencies and privacy coins in particular to be a threat. It’s a logical viewpoint. Because they are the ones who must monitor and deal with suspicious monetary activities, such as getting around imposed economic sanctions.
They feel the use of privacy coins could take sanctions off the table as a tool in deterring perceived terrorist organizations and hostile countries. These countries may now use privacy coins and maintain complete anonymity.
Historically, the US has imposed severe economic sanctions in both Iran (1979-2015) and North Korea (1994 to present), though to this day both nations are considered problems areas for America.
Governments fault privacy coins for “weakening Western diplomatic efforts” and thereby escalating conflicts with global hot spots. But many citizens might look at it differently; do sanctions truly advance diplomatic efforts in volatile regions? Some would even argue that sanctions have worsened relations.
Solving the Anonymity Problem in Criminal Transactions
In presenting testimony to a House Financial Services Subcommittee, Thomas Ott, associate director of Financial Crimes Enforcement Network [FinCEN]’s enforcement division, suggested a 3-pronged approach to controlling illegal activities in the cryptocurrency industry:
- Regulations of ‘registered virtual currency money transmitters’ (exchanges).
- Civil enforcement action, such as with monetary penalties.
- Working with law enforcement and prosecutors to help them trace virtual currency activity and identify suspicious currency activities.
How they plan on doing any of this remains to be seen. Money laundering tools already exist for bitcoin and other cryptos (i.e. tumblers), not to mention fiat. Furthermore, developers are working on increased layers of privacy as we speak. Of course, banning privacy coins may be impossible, since the technology to build them from scratch is open source and publically available.
Many crypto enthusiasts say that transactional and financial privacy is something we should all have. The essence of these technologies is not to enable criminals to commit crimes. Contrary to that belief, the ramifications are much more broad, predominantly benefiting all potential crypto users.
Clamp Downs on Privacy Coins & the Result
Japan Bans Privacy Coins
In the spring of 2018, Japan’s Financial Services Agency (FSA) banned Japan-based exchanges from listing privacy coins. Popular crypto exchange Binance subsequently moved their operations to Malta. According to CoinMarketCap, Binance now leads exchanges by trade volume. (updated November 2019: Binance is #3 in liquidity on CMC.)
Additionally, CoinCheck, another Japanese exchange, delisted Monero, Dash, Zcash and Augur in response to the FSA’s ban. We’ll check in with these privacy coins later in the article.
Korean Exchange Delists Privacy Coins
Separately, South Korean exchange Korbit delisted DASH, Monero, ZCash and Augur, in a perceived move against privacy coins, also suggesting a move against privacy crypto.
Korbit’s actions represent a self regulating move, since the South Korean government has yet to solidify any exchange licensing system. This could also have been a reaction to Japan’s ban on privacy coins. Another possibility is that the ban was placed to calm public fears after Bithumb made some monopolistic moves by attempting to list Popchain, and while Upbit faced charges of “irregularities”.
US Department of Homeland Security (DoHS)Takes Stab at Privacy Coins
The DoHS issued a pre-solicitation to small businesses during November and December of 2018. During the 30-day period, a number of research topics were opened up for queries, most notably H-SB019.1-008, called, “Blockchain Applications for Homeland Security Forensic Analytics”.
Their proposal called for solutions that would help law enforcement agencies gain forensic analysis capabilities on blockchain transactions. While privacy coins are officially on the radar of US officials, no further news has cropped up thus far. This comes as no surprise since the government was experiencing a shut down for a good part of December and January.
How Top Privacy Coins are Holding Up
In January of 2019, out of the top ten cryptocurrencies, two of them were privacy coins. (updated November 2018: no privacy coins are in top ten at this time. However, there is talk of #10, ADA (Cardano) adding privacy in the future). Continued developments, improvements, and growth all point to long term usage of these privacy coins.
Let’s take a look at the three privacy coins we introduced earlier in the article, Monero, Dash and Zcash, to get an idea of how they’re surviving the efforts of regulators:
- Monero was one of the top five performers in late January, 2019.
- Issues with illegal mining via mining malware has plagued the Monero ecosystem. The ‘crypto-jacking” of Monero’s software represents one example of how criminals try to use privacy features to their benefit. In response to this problem, Monero has created a website where users can learn how to remove the malware from their systems.
- Mining company Via BTC announced their new mining pool for XMR in September of 2018, even cutting 50% of mining fees through December 28th of the same year.
- XMR core developer Riccardo Spagni (“Fluffypony”) explained how he thinks regulatory arbitrage will come into play. This basically means that crypto companies will increasingly look to finding regulatory loopholes, such as moving their headquarters to more crypto-friendly countries.
Spagni discussed this at a recent finance event in Switzerland, where he also mentioned that, “…it’s going to lead to an interesting brain drain […] some of the smartest people on the planet are working [in crypto] and when they start clustering in places that are more friendly from a regulatory perspective, that’s going to create something very, very interesting.”
In September of 2018, Dash announced it was joining forces with blockchain compliance provider,
A month later, Bitgo added multi-sig wallet support for Dash. Following this was an announcement about the launch of BitGo Trust Company. This startup will offer digital asset custodial services for institutional investors in
Not only does Dash seem to be moving away from being a true privacy coin, some critics think that Dash does not really offer sufficient privacy:
“Dash users must trust the masternodes with their privacy. After all, the mixing masternodes can link the sending and receiving addresses together; they know exactly which coins are going where. If these masternodes are run by spies or share their information with spies (on purpose or by accident), the Dash users gain less than nothing: They don’t have privacy, while revealing that they would have liked to have privacy.” Aaron van Wirdum, Bitcoinmagazine.com
Despite all of this, Dash remains a strong contender among the top cryptocurrencies.
The Winklevoss twins’ cryptocurrency exchange, Gemini, listed Z-cash in of May 2018, giving the privacy coin a boost, as can be seen in the chart below:
It’s unclear why exactly they chose Zcash over other privacy coins, except for the belief that regulators will act more favorably to Zcash. Even more of a mystery is why Gemini would embrace any privacy coin while simultaneously having a firm stance on the regulation of crypto. Their commitment to regulation-heavy crypto was apparent in their recent street advertisement in NYC, which caused a tweetstorm of comments, including this one:
In other recent developments surrounding Zcash:
- A bug that potentially could have allowed attackers to mint infinite Zcash was identified and patched in early February 2019. (Komodo, another privacy coin, has also dealt with similar bugs in their blockchain.) Critics say that Zcash knew about the problem for weeks and didn’t disclose
informationuntil they were able to fix the bug. Others say if they had disclosed it earlier, the chances of malicious attacks due to the bug would have increased.
- In a recent tweet, Zcash updated its users on the progress it made the week of February
8th2019. This included solving the vulnerability. This came in an announcement about its upcoming Privacy Conference and a GDPR compliance update.
- Zcash recently announced their Sapling Upgrade has resulted in multiple services using their shielded addresses due to enhanced speed and efficiency.
All in all, despite regulatory efforts and a reputation for harboring criminal activities, privacy coins are thriving.
Money Laundering Probably Won’t Stop by Banning Privacy Coins (if this were even possible)
Regulations on privacy coins may reduce the use of crypto for money laundering. But a total ban, if that were possible, would still leave already well-established laundering methods.
In a report from the United Nations Office on Drugs and Crime (UNODC), sources concluded that “Globally, it appears that much less than 1% (probably around 0.2%) of the proceeds of crime laundered via the financial system are seized and frozen.”
Applying anti-criminal controls that aren’t working in traditionals systems to cryptocurrencies seems illogical. Not only that, the majority of crypto users are not criminals and they stand to benefit greatly from privacy coin technologies.
Privacy Coins Solve Problems
Privacy coin protocols can help mitigate the security issues that have cropped up since the introduction of bitcoin, such as:
- Bad actors targeting the wealthy for theft
- Making public proprietary business information
- Allowing 3rd parties to have access to your purchase and financial histories
- Mixing users up with criminals, such as when receiving blacklisted coins
The Bitcoin Network is constantly developing and implementing additional privacy layers to deal with the challenges of open ledgers. While governments are busy designing systems to support blockchain based forensics units, privacy coins keep getting stronger and more secure.
The only thing that is certain is that in the next few years, the privacy coin realm will be interesting. Join us at HedgeTrade today to stay up to date with all the latest crypto happenings and news.
Also published on Medium.