You’re an honest person (right?), so why would you have anything to hide? In fact, there could be many reasons to keep your finances private, but perhaps the biggest one is simply that it’s nobody else’s business.
Here, we’ll examine the top privacy coins you can use to anonymize your transactions. We’ll also look at what governments are doing to discourage their use, if not ban them outright.
What are privacy coins?
First, privacy coins are not the same as privacy blockchains, which are designed primarily to keep smart contract data confidential.
Specifically, privacy coins are cryptocurrencies on blockchains designed from the ground up to hide all transaction details, including the identities of the sender and receiver, the amount transferred and even when it takes place.
Their goal is to make transactions untraceable by any third party who might use blockchain analysis tools.
Popular privacy coins
Any serious discussion of private cryptocurrencies begins with Monero (XMR). It uses the Dual-Key Stealth Address Protocol to generate a new address for every transaction to avoid linking the sender to the receiver. DKSAP uses two pairs of cryptographic keys, a “scan key” pair and a “spend key” pair to compute addresses.
Monero is considered so secure that many exchanges avoid it. Coinbase has refused to list it, and Kraken UK removed it in 2021 rather than risk heat from regulators.
DASH (DASH) includes an optional Darksend mode This is an improved and extended version of CoinJoin, an anonymization service that obscures sources and destinations by combining transactions from different parties into a single transaction. A delay can be added to make tracing even more difficult.
DASH boasts settlement times of one second and extremely low fees, is accepted by 160,000 merchants and services worldwide and supported by an extensive network of crypto ATMs.
Zcash (ZEC) was the first cryptocurrency to use a type of zero-knowledge proof known as Zk-SNARKs. This technology enables parties in a transaction to verify to each other that they have particular information without revealing what it is. Thus, it’s possible to prove a transaction's validity without divulging any identifying information.
Contrary to DASH, ZEC transactions are anonymous by default, although there’s an option to reveal transaction data if required for auditing or regulatory compliance. It was launched in 2016 as a fork of Bitcoin.
Other players in this space include Firo (FIRO), which allows coins to be burned and then redeemed for new ones with no previous transaction history, and Mimblewimble (MWC), which utilizes the anonymizing technology of the same name.
Finally, Tornado Cash (TORN) is a decentralized anonymizing solution built on Ethereum and Binance Smart Chain. Funds sent to it are withdrawn through a new address that can’t be linked to the deposit.
Are they legal?
Yes and no; South Korea and India have passed legislation banning local cryptocurrency exchanges from trading any privacy coins. Most other countries have neither banned nor endorsed them, so exchanges operate in a legal gray area that could change at any time. Several exchanges, including OKEx Korea, BitBay, Bittrex, Coinbase UK and ShapeShift, have opted to play it safe and delist some privacy coins, particularly Monero.
The Financial Action Task Force (FATF) is an international government organization that recommends policies to combat money laundering, terrorism financing and other related “threats to the integrity of the international financial system.” In 2021, it published a document that included new recommendations regarding the use of cryptocurrencies, (“virtual assets”), and regulation of “virtual asset service providers” — exchanges and banks holding crypto for customers.
Significantly, FATF also addresses “anonymity-enhanced currencies”. To comply with its rather vague rules, AEC transactions should include space to include encrypted information about the transacting parties. Zcash has already implemented this.
The United States government has (so far) adopted a different strategy, working to develop tools to expose protected information on private network transactions. In fact, the Internal Revenue Service announced a bounty of up to $625,000, still unclaimed, to anyone who could crack Monero’s privacy scheme.
Under the proposed America Competes Act of 2022, the Treasury Department would gain broader power to regulate and monitor all cryptocurrency activity, which could make some uses of privacy coins illegal. A 2020 report claimed that “several types of AEC… employ various technologies that inhibit investigators’ ability both to identify transaction activity using blockchain data”.
Privacy coin adoption
Ironically, although financial anonymity was a driving force behind early cryptocurrency adoption, privacy coins haven’t proven to be nearly as popular as many predicted. Monero and Zcash market performance has been okay but not great. Even on the darknet, where privacy coins should thrive, Bitcoin is still the overwhelming favorite, according to a 2020 RAND study.
Ultimately, privacy coins may be, for most people, a solution in search of a problem. Bitcoin and Ethereum can be private enough, and the threat of future restrictions makes them more effort than they’re worth.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.