Privacy coins are becoming increasingly popular; Will regulatory pressure stop their incredible run?
The values of so-called privacy coins, such as Monero (XMR), Dash (DASH), Zcash (ZEC), and Haven Protocol, have skyrocketed in recent weeks (XHV). As many other cryptocurrencies and the industry as a whole faced enormous regulatory pressure due to the regulatory pressure of the Ukraine conflict, one narrative that began to take hold in the crypto space was the potential of such privacy-enhancing assets to provide investors with a greater level of financial anonymity.
Can privacy coins, however, live up to Bitcoin’s (BTC) original promise?
A fantastic month for assets with a focus on privacy.
Monero’s total capitalization has nearly doubled in the last month. With some slight fluctuations, it climbed from $134 on February 24 to more than $200 on March 26. ZEC displayed even more amazing dynamics, rising from $88 to $202 during the same time span. DASH also had a rise, albeit a more moderate one, from $83 to $128. XHV appeared to be one of the greatest winners, with its price nearly tripling from $1.60 to $4.20.
Two major macro-level variables may be driving the fast rise of privacy coins. The first is the regulatory pressure growing around more “popular” cryptocurrencies as a result of the crisis in Ukraine and the resulting — unfounded — belief that Russian elites can use crypto to avoid financial penalties imposed on them. Another factor is the United States President Joe Biden’s executive order, which, in fact, does not cause any outright harm to the industry with its roadmap or reports that should eventually lead to a clear regulatory framework for digital assets in the United States.
According to Justin Ehrenhofer of the Monero community, the recent price spike has resulted from more family funds and individuals owning Monero as a hedge, and has been fueled by recent market and political uncertainty. Ahawk, a member of the Haven Protocol community, linked the price increase to a planned integration on THORChain, which he described as one of the most cutting-edge decentralized exchanges (DEXs) in all of crypto.According to Jack Gavigan, executive director of the Zcash Foundation, the spike in the pricing of privacy coins could be due to the strong dynamics of the Bitcoin price.
Anonymity was one of the primary promises of Bitcoin and cryptocurrency in general from the start of the cryptocurrency revolution. However, as the industry matures and eventually merges with traditional financial markets, digital currencies have experienced pressure from both institutional investors and regulatory agencies around the world to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. This deprives users of their anonymity, at least when doing withdrawal/exchange activities on compliant sites.
As a succession of high-profile enforcement actions in the United States have revealed, blockchain traceability also does not assist those who desire to conceal their financial operations.
As a result of these compromises, privacy coins were created. “Bitcoin was never private.” Ether has never been a private network. “Tether has never been private,” Ahawk said, emphasizing crypto developers’ relentless pursuit of “truly secret,” fungible currency. Given the proclivity for corporate and government overreach, it’s not surprising that such currencies have seen increased demand in recent years. Ahawk continued, saying:
“What is the point of having a password for your bank account?” For the same reason, cryptocurrency users are increasingly looking for privacy options: you don’t want anyone to be able to see your complete financial history with the press of a few buttons. Just because you want your money and financial decisions to be kept private doesn’t mean you’re doing something bad.”
According to Ehrenhofer, without privacy, each address and output has a unique history linked with it, removing digital money’s main feature: fungibility. He stated, “
“This allows for mass surveillance and the assigning of proprietary risk scores to everyone’s money, making transparent assets nonfungible in practice.”
In terms of KYC/AML compliance, Gavigan, who prepared the Regulatory & Compliance Brief for Zcash, sees no significant difference between privacy coins and standard bank accounts:
“While the bank cannot see where you received the money or what you spent it on after you remove it, they do know who you are and can assess whether your deposits/withdrawals are normal for the type of customer you are.”
Will regulators retaliate?
This desire for anonymity, however, is not shared by regulators and law enforcement. In November 2020, South Korea became the first government to abolish anonymity-enhanced currency (AEC). A month later, the United States Financial Crimes Enforcement Network (FinCEN) stated that “many forms of AEC are growing in popularity and utilise various features that hinder investigators’ ability to both identify transaction activity using blockchain data.” Some exchange platforms, including as BitBay and Bittrex, have delisted privacy coins in recent years.
Despite this, not only investors, but also developers, predict a promising future for AECs in the next years. Ehrenhofer argues that integrating greater user privacy with regulatory compliance is not impossible. It’s no coincidence that privacy coin inventors mention cash as the closest comparable to AECs. As KYC/AML regulations become more frequent in the cryptocurrency world, Ehrenhofer predicts that Monero’s importance will only grow:
“No one can legitimately expect Monero or Bitcoin to ‘comply’ with anti-money laundering legislation — that makes no sense.” Instead, the emphasis is on regulated firms such as exchanges adhering to AML requirements. They clearly have the ability to do so.”
See also: What is Blockchain Scalability?
Ahawk also sees no reason to accommodate regulators’ demands on AEC developers. “Any so-called friction is due to the fact that some regulators want to be able to follow every transaction you make with your crypto,” he asserts, adding that providing privacy for consumers is a top priority for developers. “Private cryptocurrencies make it simple to comply with legislation in their jurisdiction.” But what’s more essential is what they ‘don’t do,’ which is give a public ledger where everyone in the world can follow your every financial transaction, down to the penny.”
Gavigan has observed that privacy coins make it easier for their owners to comply in several ways. For example, regulated organizations can use the encrypted note field to attach the required “Travel Rule” information to a shielded Zcash transaction, something Bitcoin does not allow.
What comes next?
Ahawk believes that privacy standards should continue to do what they are doing now, which is to provide secure protections for daily users while also ensuring that they can comply with rules in their various locations. He claimed that “it is the role of law enforcement, not cryptocurrency innovators, to track down criminals.”
Ehrenhofer pointed out that the methods for doing so already exist. Licensed exchanges currently collect data on user trades, deposits, and withdrawals. He continued, saying:
“The US should encourage cooperative, regulated exchanges to list Monero so that investigators can receive more information about suspected transactions via Suspicious Activity Reports and Currency Transaction Records.”
The question is whether these discussions will result in collaboration between regulators and developers.
The values of privacy coins, such as Monero (XMR), Dash (DASH), Zcash (ZEC), and Haven Protocol (XHV) have skyrocketed in recent weeks. Can privacy coins live up to Bitcoin’s original promise? Two major macro-level variables may be driving their rapid rise. Anonymity was one of the primary promises of Bitcoin and cryptocurrency in general. Digital currencies have experienced pressure to comply with KYC and AML regulations.
In November 2020, South Korea became the first government to abolish anonymity-enhanced currency (AEC). Some exchange platforms, including as BitBay and Bittrex, have delisted privacy coins. Ehrenhofer argues that integrating greater user privacy with regulatory compliance is not impossible. Cryptocurrencies like Zcash and Monero make it easier for owners to comply with laws in their jurisdictions. But they don’t give a public ledger where “everyone in the world can follow your every financial transaction, down to the penny,” Ehrenhofer argues.
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