What does 2019 (otherwise known as the “Year of Regulation” in the crypto world) mean for privacy coins? Will they get hit hard by regulations or will they become the only way for cryptocurrency owners to have truly anonymous transactions far from the government’s reach?
In this article we’re going to understand both sides, why regulators are prohibiting cryptocurrency exchanges from listing privacy coins and why this action could provoke a surge in their price.
Why privacy coins?
First, we need to make a correction here: we’re talking about “privacy-focused coins,” because these cryptocurrencies are designed to eliminate the links between users and their transaction history. Why? For the complete privacy of people who don’t want to have a public ledger of their everyday transactions. That’s why we are calling them privacy coins.
Let’s take Bitcoin as an example. Is it a privacy coin? No, even though it claims to be anonymous like all cryptocurrencies. Bitcoin transactions are recorded on a public ledger. Not private; public. That’s how blockchain technology works. Even if there is no direct link between the user’s identity and a Bitcoin address, it is definitely possible to trace all the details of the transactions of an address, such as the amounts and locations of the BTC coins.
Companies are already developing solutions that are making cryptocurrency traceable. Actually, the most advanced of them, Chainalysis, is working with law enforcement agencies to track transactions and activities across the blockchain through data and statistics. They already announced that their software is successfully monitoring Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. This means that all of these coins failed in their privacy promise. Using any of them makes it possible for others to see details of your financial transactions without your permission. Privacy coins are looking to improve legacy protocols, like Bitcoin’s, by redesigning themselves into a new structure that makes transactions and identities untraceable by whatever means.
https://twitter.com/chainalysis
“In a non-privacy focused blockchain, all transactions ever done can be fully traced and analyzed.
If cryptocurrencies are used as internet money, deep profiling of everyone using them will be possible — making current discussions about Facebook, Cambridge Analytica, and personal data pale in comparison.” — Daniel Zakrisson, Co-Founder of CoFound.it, a cryptocurrency consultancy platform.
What makes privacy coins better?
Privacy coins use features like masternode technology, ring signatures, and stealth wallet addresses to make it very difficult for third parties to trace transactions across their blockchain. That’s right. Their transactions are still recorded on the blockchain and publically accessible, but no identifying information is linked to the user’s address.
- Monero uses the Proof-of-Work protocol and ring signatures, which are making it impossible to detect the source and endpoints of a transaction.
- Zcash has two transaction options: it can be sent anonymously, like Monero mentioned above, or transparently, like Bitcoin.
- Dash has an optional feature, PrivateSend, that can be utilized for transactions that users would like to keep hidden from its public blockchain.
- PivX is a proof-of-stake fork from Dash that’s expanding even further, building zDEX, an on-chain marketplace for privacy coins on its network.
- TELE, on the other hand, is built on both Dash and PivX, pushing their innovations even further into a peer-to-peer network to create a hybrid privacy coin based on a Proof-of-Stake protocol with masternode capabilities. This combination of features is unique among privacy coins:
- Obfuscation — anonymized transactions using coin-mixing technology;
- SwiftTX — fast transactions featuring guaranteed zero confirmation transactions
- Masternode technology — secures the network and provides consensus-based voting.
All of these features are available for any user in the TELE Wallet. On top of that, TELE is developing a Trend-Setter platform, an affiliate reward platform for various industries, and an Android phone that allows encrypted interactions through their blockchain.
It’s clear that technological advancements have already been made in the privacy coins space. The question that remains now is whether the government can keep up with them and manage to stop the revolution that’s already happening.
Regulations for privacy coins?
Regulation in crypto is inevitable and imminent. Nobody can argue with it. Although, will privacy coins get hit as hard as all the other ICO coins by these upcoming regulations?
Governments are mostly focused on making cryptocurrency transactions accountable and transparent in order to protect investors and make sure the exchanges don’t become breeding grounds for criminals. That’s why many regulatory requirements are including anti-money laundering (AML) and know your customer (KYC) rules. And it seems that privacy coins are breaking both.
https://stanford-jblp.pubpub.org/pub/ico-comparative-reg
Let’s take a look at what authorities from around the world have to say about this:
- “It is critical that the United States continues to work internationally to improve controls related to digital currency. We should also consider additional legislative or regulatory actions to address potential challenges related to anonymity-enhanced cryptocurrencies, services intended to obscure transactions on blockchains.” — Robert Novy to the House Subcommittee on Terrorism and Illicit Finance.
- US Treasury Secretary Steven Mnuchin said he wants to make sure that cryptocurrencies do not fall into the hands of “bad guys.”
- Deputy Assistant Director of Office of Investigations at the US Secret Service Robert Novy recommended that privacy-focused cryptocurrencies should be regulated to prevent fraud.
- Japan’s Financial Services Agency (FSA) is considering prohibiting cryptocurrency exchanges from listing or accepting private coins on their platforms. Cryptocurrency exchanges are able to function as legal businesses in Japan, due to their government recognition of digital assets as currencies. Coincheck, a local exchange, already announced that it would cease trades in Monero, Zcash, and Dash. However, the same exchange had been subject to a $500 million heist before that, which makes us think that the regulatory pressure was heavy on them.
Could regulatory actions spread even more?
In regions like Japan, where clear laws are in place, maybe yes. For the rest of the world, however, probably not.
For most of these representatives, the regulation of privacy coins is not a top priority yet. They are still discussing how to classify cryptocurrencies as an asset class. The US Congress is still preoccupied on whether to classify them as securities, commodities, or an entirely new assets class. They are still having a hard time handling the very concept of cryptocurrency. Moving on to privacy coins would be an entirely new debate. And even if they wanted to bring them down, do they have the resources to do so?
The only place where authorities can impose their force is by making the conversion to fiat harder. That’s why in Japan they are not going after the owners, they are going after the exchanges. However, we already have DEXs where you can convert them to Bitcoin or any other “legal” coin, adding just one more “hop” in the process. It still might be a bit of a problem for larger sums of money, but now you are able to just send them into a “tumbler” and have it come out clean. They are just making the process more complex, not impossible.
At the same time, delisting them decreases supply, and given how the demand is continuously growing, the price would boost exponentially. The harsher they regulate, the higher the price will rise. It would also incentivize the community to work on safe trading solutions outside exchanges. Governments can’t win at this.
Where are the privacy coins headed?
The US government was once opposed to the invention of SSL for its potential to aid criminals on the Internet. Now, not only have SSL certificates become nearly ubiquitous across the web, but all US government websites are required to use it.
“Increased scrutiny may make them (cryptocurrencies) a riskier investment for more traditional traders/investors, but privacy-focused coins will always have use cases in places with restrictions on personal freedom.” — Sheffield Clark, CEO of Coinsource, an operator of Bitcoin ATMs.
There will always be people who want to obscure where their funds go, whether it is for their own nefarious purpose or to just enforce their own rights to privacy. Privacy is a genuine use and the decentralized nature of these particular coins, like TELE, Monero, or Zcash means that it will be very hard for authorities to actually shut them down entirely. Out of all the different types of cryptocurrencies, privacy coins seem to be the most likely to actually survive the regulation storm that’s about to come this year.