What Are Privacy Coins?
A selling point for cryptocurrencies is the ability to transact anonymously without the need to reveal your identity. The fact that they are based on open, decentralized networks contributed to that, since the consequences of falling on the wrong side of authoritarian regimes were all too apparent.
However, as regulators grew concerned about the space, financial institutions were asked to take measures to identify criminals through AML and KYC rules, and people began to question how anonymous crypto transactions were. It turns out that some cryptocurrencies, such as Bitcoin, offer less privacy than fiat currencies in some aspects since they are based on public networks. Thus, anyone with enough resources to do chain analysis can potentially uncover the real identity of the owner behind a public address.
Over the years, privacy concerns have prompted the birth of many privacy coins. However, these digital currencies are increasingly in the crosshairs of global anti-money laundering (AML) regulators due to their ability to facilitate money laundering (ML) and terrorism funding (TF), leading for them to be delisted in many regulatory compliant exchanges.
What Are Privacy Coins?
Privacy coins are a class of digital currencies that power private and anonymous blockchain transactions by obscuring their origin and destination. Some of the tactics used to achieve this include hiding a user’s real wallet balance and address and mixing multiple transactions with each other to elude chain analysis. This is different from coins like Bitcoin, which in the spirit of transparency, allows anyone to view public addresses and transactions in their network, making it relatively simple to track someone’s deposits and withdrawals.
Privacy coins handle two different aspects: anonymity and untraceability. The former hides the identity of a person behind a transaction, while the latter makes it virtually impossible for third parties to follow the trail of transactions using services such as blockchain analysis.
Techniques Used by Privacy Coins
To preserve anonymity and untraceability effectively, privacy coins employ various techniques. These include stealth addresses, ring signatures, CoinJoin, and zk-SNARKs.
Stealth addresses require the sender to generate a new address for every transaction sent to avoid being linked to a receiver. Monero (XMR), one of the top privacy coins, uses a version of stealth address known as dual-key stealth address protocol (DKSAP).
CoinJoin is a reputable coin mixer that merges transactions from various individuals into a single transaction and then disburses them to their respective users using new addresses. Zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) are used to allow crypto holders to prove a transaction’s validity without divulging critical identifying information, such as the parties involved and their account balances.
Are Private Coins Legal?
The answer is yes and no. The legality of privacy coins depends on individual jurisdictions. For example, in some nations like South Korea, the government prohibits trading private coins on the crypto exchanges based in the country to curb money laundering.
But it does not mean jurisdictions that have not banned the use of private coins endorse them either; their operation leverages a gray area in a country’s laws. The United States government is seeking to develop tools that remove the cloak on transactions conducted on private networks.
It is worth noting that private transactions using privacy coins do not necessarily promote malicious activities such as money laundering and terrorism financing. In some instances, some users simply value their financial privacy and wish to exercise their fundamental rights. The number of government agencies clamping down on untraceable digital currencies is steadily rising. Interestingly, many well-known individuals like Edward Snowden, Naval Ravikant, and Elon Musk continue to advocate for privacy-focused apps.
Global regulators such as Financial Action Task Force (FATF) are against privacy coins in general. While they have not advocated for the complete ban on privacy coins yet, regulatory rules like the FATF Travel Rule are making it hard for these coins to exist on the market.
Delisting of Privacy Coins
Given the impact that rules within given jurisdictions have on privacy coins, how a nation can encourage or discourage access and trading of these digital assets is evident. It all comes down to AML/CFT obligations and how the nation regulates private transactions in response. While privacy-focused cryptocurrency transactions can elude regulators, financial watchdogs have dominion over centralized exchanges over untraceable cryptocurrency.
Therefore, once a regulator bans a given cryptocurrency within their borders, an exchange needs to halt trading as soon as possible or risk being shut down. In such cases, some crypto marketplaces may choose to halt trading while others would completely pull the digital asset off from their platform.
Over the past few years, privacy coins have faced increased scrutiny from regulators, which has compelled some exchanges to delist these untraceable cryptocurrencies to avoid regulatory complications. Some of the coins that have suffered include Dash, Monero, and Zcash, being delisted from leading exchanges such as Bittrex, CoinCheck, and Coinbase UK, respectively.
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