Bitcoin and other digital currencies were initially viewed as the refuge of the trendsetting avant-garde, mostly tech-savvy investors betting on the potential rise of the potent power of blockchain technology. Additionally, the early supporters appreciated the anonymity and privacy that cryptocurrencies offered, seeing in it an antidote to the surveillance and control of traditional banking methods. However, most of the mainstream digital currencies such as Bitcoin and Ether have not been able to live up to this high expectation of anonymity, as researchers continue to find ways to trace transactions back to their originators.
This has led to the rise of privacy coins – cryptocurrencies that take the promise of anonymity several notches higher. They have become an essential part of the crypto world, offering solutions that prevent transaction tracking, ensuring maximum privacy and anonymity for users.
##Privacy Coins Explained
Privacy coins primarily focus on keeping transactions anonymous and untraceable. They use varying cryptographic methods to hide both transaction amounts and the participants involved. Some of the best-known privacy coins include Monero (XMR), Zcash (ZEC), Dash (DASH), and Verge (XVG).
Monero, arguably the most popular privacy coin, uses a technology known as RingCT that hides the origin, destination, and transaction amount. Zcash, on the other hand, uses zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge), a form of zero-knowledge cryptography that ensures transaction validity without revealing any additional information. Dash uses PrivateSend – a coin mixing service based on CoinJoin, while Verge relies on TOR and I2P networks to protect user identities.
##The Pursuit of Anonymity
The pursuit of anonymity in the crypto world is driven by several factors. One, particularly for citizens living under authoritarian regimes, is the desire to evade government surveillance and censorship. Privacy coins provide this group with a way to transact freely and privately. Another group is motivated by the need to protect their financial information from criminals and hackers – a significant concern posed by traditional banking methods.
However, the question of anonymity has become a double-edged sword for privacy coins. On one hand, these digital currencies provide an escape from the prying eyes of both government and non-government actors. On the other hand, they’ve become a preferred choice for individuals with malicious intent, such as money launderers, tax evaders, and cybercriminals. This latter negative aspect has led to increased scrutiny from regulatory agencies and governments, creating a challenging environment for privacy coins.
##Regulatory Hurdles
It’s been a tough couple of years for privacy coins on the regulatory front. In 2020, several exchanges, including Bittrex, ShapeShift, and BitBay, announced that they would be delisting privacy coins, citing regulatory pressure as the main reason.
South Korea took a definitive step by banning all privacy coins in November 2020, as part of its efforts to comply with the Financial Action Task Force (FATF) recommendations. In Japan, the Financial Services Agency (FSA) discouraged trading of privacy coins, leading to their delisting from several Japanese exchanges.
The US hasn’t specifically outlawed privacy coins, but the IRS has its eye on them. In September 2020, the IRS issued a request for proposals for tools that can track transactions of privacy coins, notably Monero.
##The Future of Privacy Coins
Despite the regulatory challenges, privacy coins continue to attract interest. Monero and Zcash, particularly, have shown resilience in the face of adversity and have garnered immense respect in the larger cryptocurrency community. While there’s no denying that the path is treacherous, the pursuit of anonymity will likely only gain more momentum.
The future of privacy coins hinges on their ability to navigate these regulatory hurdles while providing the desired anonymity for users. This is no easy task – but when did changing the world ever come easy?
Sources:
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2. Kappos, G., Yousaf, H., Maller, M., & Meiklejohn, S. (2018). An Empirical Analysis of Anonymity in Zcash.
3. Möser, M., Eyal, I., & Sirer, E.G. (2018). Bitcoin Transactions aren’t as Anonymous as Everyone Hoped.
4. Choi, S., Li, G., & Tople, S. (2019). Onion Routing for Cryptocurrencies: Analysis of the Zcash Protocol
5. Christen, Chris. (2021). Bittrex announces delisting of Privacy Coins following regulatory concerns.
6. Ledger Insights. (2020). South Korea bans privacy coins over money laundering concerns.
7. IRS. (2020). Privacy Coin Tracking RFP.
8. CoinGecko (2021). Privacy Coins Market Performance.
