If you use any public blockchain cryptocurrency like Bitcoin or Ethereum, then maybe you are not as anonymous as you presume yourself to be. Here’s why.
The inception of Privacy Coins
The USP of Bitcoin and other old cryptos during the launch was the anonymity they provide. But are they truly anonymous? A more appropriate word would be “pseudonyms”. The public key of every user is just a pseudonym that will be used on the blockchain. Your public key, your transaction amount, the recipient address and some other details can always be accessed by anyone on the web. Here, you may feel safe because nobody knows that this public key belongs to you, or in short, they cannot establish the relationship between you and your public key. However, the recipient will be aware of this information. Once, someone is able to know that you are the owner of your public key, all your privacy is breached. Now, rather than associating all your publicly available transactions to your public key, they will be associated with you. That’s where your cloak of privacy is busted.
Even your purchase history will become public. How’s that a threat? Governments are not the only one looking for your data, malicious hackers are also present on the web like a hawk waiting for prey.
Now, you may ask – “But isn’t it hard to establish the link between my key and me?”. You may think it’s hard, but the world of the internet never fails to amaze us. We are well aware of the “cookies policy” on every website which they intend to use for providing more personalized advertisements. They track your activity when you visit the websites they are placed on. If you use any website to transact Bitcoin or any other crypto, chances are your information will be tracked, and may leak on the internet. Even if you use programs like CoinJoin, the eavesdropper can easily track the public key back to you with 98% accuracy. The details are described in a research paper by Steven Goldfeder and his team at Princeton University.
What Are The Issues?
Losing your privacy is a big problem – first of all, privacy should be one of the basic human rights of everyone. If the government and eavesdroppers can still spy on you and notice your financial behavior, that does not count as privacy. Most of the people take the breach of their financial privacy as a serious issue. Such breaches can be harmful for the adoption of cryptocurrencies. Because these people will not move to decentralized cryptocurrency if their financial activity is public.
Businesses take privacy way too seriously, they like to trade with smart contracts to deal with their clients and partners. What good would be smart contracts to businesses if they are publicly available? Rather, breach of such data can tip-off the competitors of the ongoing strategies, creating a catastrophe to the long-term business.
That was all from the point of view of users, now let’s think from the perspective of a cryptocurrency. Privacy is an important factor for the fungibility of a cryptocurrency. Fungibility is a concept that a coin’s value should remain the same irrespective of its history or 1 BTC should be 1 BTC no matter what. But with fundamentally transparent coins, everyone can view the transaction history of a coin. Now, based on history, someone can reject from accepting a coin. For example, you can reject a bitcoin if it was involved in a drug deal. This will create a problem of some coins being more valuable than others. If this happens on a mass scale, then it will be a huge problem for the cryptocurrencies.
Fortunate for us, privacy focussed coins solve both of these issues.
Privacy Focussed Coins
Privacy focussed coins are completely untraceable and anonymous owing to its technology. Unlike Bitcoin and others, privacy coins hide the information of the sender and receiver. There is a variety of techniques available to do this. Some of them are
- Stealth Addresses
The most simple technique, it creates a new address every time you transact on their network. There are more advanced versions of this as well.
- Ring Signatures
You need to sign to verify any transaction. Ring signatures combine you with other signers to conceal you as a sender.
An advanced form of cryptography to make your transactions safer.
And other methods like MimbleWimble, Tor, CoinJoin etc.
What Are The Most Popular Privacy-Focused Coins?
One of the most popular and widely used privacy coins. It started as a fork from Bytecoin in 2014 and now makes use of Ring Signatures, Stealth Addresses and a unique splitting mechanism.
Dash provides an option to the user to either keep their transactions private or not. The coin was started as a Litecoin fork. Dash’s modified Proof-of-Stake X11 mining algorithm uses “CoinJoin” for private transactions ensuring your transaction is not viewable.
ZCash also features the option to choose privacy or not. The coin has gained partnerships with JP Morgan, Parity, and StarkWare. It makes use of zK-SNARKs.
Other privacy coins are Bytecoin, Verge, Komodo, Grin and others. You can check the list here.
Where Can You Buy Privacy Coins and Other Coins?
The next question is where can you buy these coins. Privacy coins are not different from other cryptocurrencies in terms of trading. There are many ways to buy cryptocurrencies but the most preferred ways are buying via exchanges and brokerages.
Buying via Exchanges
An exchange is similar to a stock exchange where buyers and sellers trade based on the current market price of stocks. The exchange charges a fee for serving as the middle-man. However, not all exchanges have all the coins and privacy coins like Monero are available on all the major exchanges like Binance, Coinbase, OKEx etc. Relatively newer coins might be hard to find on most exchanges.
Buying via Brokers
In this mode, your funds are transferred via a dealer network in place of a centralized exchange. We refer to this as an over-the-counter (OTC) market. The crypto brokers find people holding large pools of crypto and traders willing to buy it, and pair them up. This provides extensive flexibility and faster settlement periods with respect to exchanges.
Regulation And Privacy Coins
Every coin has two faces, and so does this. While privacy coins may help businesses and users have a more secure online financial presence, they also become the preferred way to transact for malicious users. Practices like money laundering, transactions for terrorism or illegal activities, and tax-invasion, become more prominent on privacy coins. That’s why privacy coins are synonymous to the payment method of the dark web.
Government interferes here and privacy coins have been the top concern of many regulations. 2019 has been said to be the year of regulation for cryptocurrencies, the recent launch of Facebook Libra coin has attracted regulatory traction from various governments. In such times, we can be sure privacy coins will come under consideration as well. But if we look at the history of regulations around cryptocurrencies, then we observe that most of the countries are still struggling with how to classify cryptocurrencies to an asset class. US Congress is still wondering whether to term cryptocurrencies as securities, commodities or an entirely new class of assets.
As of now, Japan is the only nation that has taken serious steps towards prohibiting privacy coins. The government is forcing the crypto exchanges from listing any privacy coins. They are trying to make the conversion of fiat harder into a privacy coin. But it can still be achieved with the help of decentralized exchanges (DEXs).
The US might not have taken privacy coins into consideration but they are not completely undermining it. Here are some of the comments made by officials from the government officials.
“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.”
“[…] How do you allow for freedom while allowing the government to try to do its job to protect to the population and I think that there has to be a balance there and […] I see the government trying to find that balance. I think things like zero-knowledge proof push that balance one way and there may have to be a recalibration of where that line is […]”
—— Brian Quintenz, CFCT Commissioner in a recent show.
As of now, there is not much action taken towards privacy coins in particular because the governments are still busy dealing with cryptocurrencies as a whole. But the amount of anonymity provided by the privacy coins can be treacherous as well. We may need a hybrid solution that has the features of both privacy coins and others.
Will Privacy Coins Survive The Regulation?
As of now, governments have no foolproof methodology to prevent the use of privacy coins. What they can do at most is complexify the process of exchange between fiat and cryptocurrencies harder. But using privacy coins will not become impossible rather work as a tunnel to make black money white.
If we look at history, the US government was skeptical of SSL certification of websites. Years later now, SSL certificate is the safety norm for the websites and every government website has to use the certificate for security purposes.
“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.
With such comments and promises, appears like privacy coins will survive the regulation unharmed. However, something needs to be done with the issues posed by privacy coins making illegal activities easier.