How private are privacy coins? Are they legal? We answer that, and more, in this privacy coins deep dive.
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. Please tread carefully when dealing with privacy coins and ensure that you follow local laws.
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 of the 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 in order 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 in order 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 of 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.
A new FATF draft guidance, which will be promulgated in June 2021 after public consultation, will feature new AML/CFT recommendations for those who deal with enhanced-anonymity currencies (AEC), as FATF calls privacy coins,
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 in order 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 criminals still prefer Bitcoin, despite its lack of privacy features.
Dash is an anonymous cryptocurrency that started out as a fork of Bitcoin in 2014. The pioneering privacy coin was then called XCoin, later changed to DarkCoin, then finally Dash. Dash contains elective anonymity characteristics such as PrivateSend, which uses the CoinJoin strategy to mask real transaction inputs.
The Dash Core Group (DCG), which maintains the cryptocurrency’s development, explains that Dash focuses on usability and user protection. Being a Bitcoin fork means that Dash isn’t natively anonymous. Additionally, DashPay’s CEO, Ryan Taylor, thinks that Dash isn’t an anonymity-enhanced cryptocurrency (AEC).
As a Bitcoin fork, its transaction details such as wallet balances and addresses are publicly available on its blockchain unless a user utilizes the PrivateSend option.
Dash VS Bitcoin
The main difference between Dash and Bitcoin lies in their consensus algorithms. For instance, while both natively run using proof-of-work (PoW), Dash has an extra layer that hosts masternodes that are powered by a proof-of-stake (PoS) mechanism.
Consequently, Dash may be viewed as the best privacy coin in terms of ease-of-use due to its higher transaction speed and low transaction costs. Notably, Dash uses the InstantSend feature, which is a convenient mechanism that enables near-instant transactions.
Bitcoin lags behind in terms of privacy compared to Dash as the latter explicitly allows its users to choose whether or not to open their transactions to public scrutiny.
Dash VS Monero
Although both cryptocurrencies have privacy functionalities, they have fundamental differences in their design. Dash utilizes a two-tier system that merges PoW with PoS. Furthermore, its anonymity feature is optional through the PrivateSend function.
On the other hand, transactions on the Monero network are natively anonymous. Note that Dash uses CoinJoin while Monero employs an array of privacy-enhancing strategies, including ring signatures, RingCT, etc., making it more untraceable than Dash.
Monero trumps Dash when it comes to privacy, but DASH is a lot faster and cheaper to use than XRM.
Dash Vs Zcash
Dash uses the X11 hashing algorithm while Zcash employs the zk-SNARKs mechanism and the Equihash algorithm. They share some similarities, which include being Bitcoin forks, a block size limit of 2MB and a block confirmation time of 2.5 minutes.
When it comes to privacy, Zcash beats Dash since Dash’s transactions can be traced when one has access to masternodes.
Monero (XMR) is considered by many to be the best anonymous cryptocurrency in the market as it uses a powerful suite of privacy features such as RingCT, stealth addresses and Ring signatures to promote comprehensive anonymity.
In fact, Monero’s privacy is so exceptional that the United States Internal Revenue Service (IRS) had to put a bounty of roughly $625K for anyone who could crack its anonymity technology. However, a Chainalysis employee has claimed that “Monero is smart[ly] invented,” but not flawless.
Monero Vs Bitcoin
Apart from operating on the PoW consensus algorithm, the two have vast differences since Bitcoin is merely a pseudonymous cryptocurrency while Monero is one of the most private coins in existence.
On mining, Bitcoin mostly requires ASICs (application-specific integrated circuits) while Monero discourages the use of ASICs, which leave miners with CPU mining as the only option. Additionally, the leading cryptocurrency uses the SHA-256 hashing algorithm, while the XMR-powered protocol employs RandomX.
Furthermore, the Bitcoin network has a fixed block size, while Monero incorporates a flexible block size, which is best for occasional rises in transaction volumes. Despite all that, more criminals still prefer BTC over XMR, as Bitcoin is easier to exchange and offers more crypto-to-fiat off ramps, according to one study.
Launched in 2016, Zcash is another top privacy coin that shares the same root as Dash, which is a fork of Bitcoin. Headed by the Electric Coin Company, the crypto uses the energy-intensive PoW mechanism to confirm transactions.
Zcash also offers the choice to hide transactions via privacy and untraceability mechanisms called shielded transactions and zk-SNARKS.
Zcash VS Monero
Firstly, Zcash uses the zk-SNARKs feature, while Monero combines stealth addresses, ring confidential transactions and ring transactions. Zcash promotes optional privacy while any transaction conducted on Monero is anonymous by default.
On Zcash, users get to enjoy the flexibility of choosing which transactions they want to cloak, and which ones they want to make public.
Monero developers, on the other hand, believe that making privacy optional would weaken the private network’s anonymity set.
Zcash VS Bitcoin
Zcash is a clone of Bitcoin but with additional features such as optional privacy. Another difference between Zcash and Bitcoin is evident in the distribution of mining rewards.
For example, while Bitcoin miners take home all the rewards, Zcash used to take a different approach. To explain, 10% percent of mining incentives used to go to the Electric Coin Company and was shared among the firm’s shareholders, which is meant to fund future developments. However, a November 2020 halving got rid of the “Founders Reward.” Now, miners receive 80% of the block rewards, with the remaining 20% given to the new Major Grants Funds, ECC and the Zcash Foundation.
Beam is a private cryptocurrency that uses a novel anonymity blockchain called Mimblewimble. Apart from privacy, the technology enhances the scalability of PoW protocols by offering compact data solutions that are faster to download, as well as easier to verify and synchronize.
Beam also provides untraceable transactions through non-identifiable addresses. Beam also masks its network traffic using the Dandelion mechanism. From a distance, small transactions that make up a single block are presented as a single large transaction.
Launched in January 2019, Grin, which shares the same Mimblewimble blockchain as Beam, is among the top privacy coins that are censorship-resistant and scalable. Grin sets itself apart by being independent of its anonymous founder. As such, developer incentives come mainly from donations.
Notably, the platform has an exciting albeit controversial rule on mining; miners receive the same rate of rewards indefinitely, which implies that a miner that joins the network in December 2030 will receive the same amount of rewards per block as the first miner in January 2019.
The network uses a uniform transaction standard called Slatepack to enhance developer and user experiences and provide privacy, security, compatibility, and enhanced file handling.
At its core, cryptography is a set of practices and techniques designed to allow secure communication amidst the presence of outsiders. Therefore, privacy cryptocurrencies are a central part of the crypto ecosystem, despite the fact that their untraceable nature arouses controversies regarding criminal dealings.
Unfortunately, even after reports suggest that only a tiny percentage of crypto is used in money laundering, terrorism funding and other illicit activities, governments across the globe continue to give them the cold shoulder.
While Monero remains to have the strongest privacy features in place, Zcash and Dash provide the option of conducting public transactions. Beam and Grin are best-suited for users who value scalability just as much as privacy.