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Thursday, October 5, 2023
What Are Privacy Coins?
#CybSec
Bitcoin was introduced as an alternative monetary system to government-controlled national currencies.
Unfortunately, due to its pseudonymous nature, some crypto advocates believe it lacks the necessary privacy features to protect its users sufficiently, especially in authoritarian states that either prohibit or suppress the use of cryptocurrencies.
In fact, Bitcoin offers less privacy than fiat currencies in some aspects since it is a public blockchain, which means anyone who has enough resources to do chain analysis could potentially uncover the real identity behind a public address.
Somewhat controversial privacy coins like Monero and Dash rose to prominence to address this issue by giving users the ability to send and receive value anonymously. Many more privacy coins have since sprouted in their path.
Today, we have so many privacy-focused coins in the crypto market that it’s becoming hard to choose which ones would suit our needs. It must be said that privacy coins 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) and have been delisted by many exchanges as a result.
This article will review the top privacy coins and talk about their distinguishing features.
What Are Privacy Coins?
Privacy coins are a class of cryptocurrencies that power private and anonymous blockchain transactions by obscuring their origin and destination. Some techniques used include hiding a user’s real wallet balance and address, and mixing multiple transactions with each other to elude chain analysis.
In the spirit of transparency, Bitcoin and other non-privacy blockchains allow anyone to view public addresses and transactions in their network, which makes it relatively simple to track someone's deposits and withdrawals.
However, privacy coins handle two different aspects; anonymity and untraceability. Anonymity hides the identity behind a transaction, while untraceability makes it virtually impossible for third-parties to follow the trail of transactions using services such as blockchain analysis.
Strategies Used By Privacy Coins.
To effectively preserve anonymity and untraceability, privacy coins employ a variety of different strategies, the most popular of which include stealth addresses, ring signatures, CoinJoin and zk-SNARKs.
Stealth addresses require a 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 called the dual-key stealth address protocol (DKSAP).
CoinJoin is known as a 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) allow cryptocurrency holders to prove a transaction's validity without divulging critical identifying information such as the parties involved and the account balances.
Are Private Coins Legal?
Yes, and no. The legality of privacy coins depends on individual jurisdictions. For example, in South Korea, the government prohibits trading privacy coins on the country's crypto exchanges to curb money laundering.
However, jurisdictions that haven't banned private coins haven't endorsed them either, which means their operation leverages a grey area in a country's laws.
For instance, the United States government has taken a different route, seeking to develop tools to remove the cloak on transactions conducted on private networks.
Private transactions do not necessarily promote malicious activities such as money laundering and terrorism financing. Some users simply value their financial privacy and are exercising their fundamental rights, yet the number of government agencies clamping down on untraceable digital currencies is steadily rising. Interestingly, many well-known individuals like Naval Ravikant, Elon Musk and Edward Snowden continue to advocate for privacy-focused apps.
It is important to watch what actions and guidance global regulators like the Financial Action Task Force (FATF) bring to privacy coins. While privacy coins are not banned as yet, they are making things difficult for both countries and exchanges that are subject to information-sharing requirements due to regulations like the FATF Travel Rule.
Why Are Private Coins Delisted On Some Exchanges?
The delisting of privacy coins is tied to a country’s views or AML/CFT obligations and how it regulates private transactions in response. While privacy-focused cryptocurrency transactions can elude regulators, financial watchdogs have dominion over centralized exchanges.
When a regulator bans a particular cryptocurrency within its 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 off the coin from their platform.
Privacy coins are facing increased scrutiny from regulators in the last couple of months, which have compelled some exchanges to delist them to avoid regulatory complications.
In light of this event, top privacy coins like Dash (DASH), Monero (XMR) and Zcash (ZEC) have been delisted by multiple leading trading platforms including Bittrex, CoinCheck, Coinbase UK and ShapeShift (while conversely, Gemini actually added Zcash in September 2020).
The reason behind the delistings was the FATF Standards’ Recommendation 16 Travel Rule requirement, which places tremendous pressure on country regulators to ensure their exchanges, or virtual asset service providers (VASPs), share user-identifying information with each other when transmitting funds. A regulator forces compliance by requiring their VASPs to meet this obligation when applying for an operating license or registration.
Despite all these measures, some reports indicate that still prefers Bitcoin, despite its lack of privacy features.
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