Could Recent Scandals spell disaster for Privacy Coins

Money laundering schemes and other financial crimes may have turned public opinion against cryptocurrencies. Initially heralded as a decentralised future, cryptocurrency’s anonymity features are now being looked at in a different light. What will this mean for privacy coins, which completely hide everything from prying eyes?

Anonymity

When cryptocurrency enthusiasts talk about anonymity, they’re probably referring to the fact that ownership of cryptocurrency wallets is not tied to a real-world identity. Except for a random string of letters and numbers known as a wallet address, there are no names, residential addresses or passport numbers involved. Identifying ownership of a wallet is, therefore, no easy task, as it usually depends on whether the owner chooses to reveal their identity.

Unsurprisingly, criminals have taken to cryptocurrencies like a duck to water. Law enforcement agencies around the world have not only been unable to identify wallet owners: they also have no way to compel the information from a central governing authority as they would from financial institutions such as banks. That is because there is no central governing authority and as such, no single point of management for governments around the world to regulate – and control.

Banks are usually subject to a plethora of regulations designed to combat money laundering and other financial crimes. These include Know-Your-Client (KYC) processes, which require their clients to prove that they are who they claim to be. KYC processes may also require banks to co-operate with the authorities in disclosing such information, as they may otherwise face suspension or even revocation of their banking licenses.

With all that said, cryptocurrencies do not entirely guarantee the commission of the “perfect” crime. Law enforcement agencies have not only been able to track the hackers who made off with $500 million from Coincheck earlier this year, but also stopped them from attempting to transfer their ill-gotten gains by contacting the exchanges on which they tried to trade. That is because anonymity does not extend to the contents of the wallet. With a few, select exceptions, the number of cryptocurrencies in a wallet, as well as its transaction records, are public information.

Privacy coins

These exceptions are known as privacy coins. Originally touted as a solution to a problem that had yet to exist, it was believed that the widespread adoption of cryptocurrencies would eventually correspond to large-scale abandonment of anonymity. Real-world identities would be increasingly tied to wallet addresses, and a whole host of attendant problems could logically be anticipated to follow. In fact, websites dedicated to tracking the wealthiest cryptocurrency wallets already exist: the wealthiest address currently holds over $1 billion in Bitcoin.

If the addresses listed were tied to real-world identities, the individuals so named could be reasonably expected to fear for the safety of themselves and their loved ones. In fact, that is already the current status quo. Earlier this year, a Hong Kong cryptocurrency trader was lured into a bogus meeting and robbed of $180,000 in Bitcoin. While unfortunate, that trader should count himself lucky: elsewhere, such encounters take place at gunpoint instead – and for much more substantial sums.

Privacy coins would, therefore, address these real-world threats to person and property. Among the more popular ones are Monero, Zcash, and Dash. While they use a public ledger for transactions, they have their own, unique algorithms for hiding information about senders and receivers.

Dash is a 2014 fork of Bitcoin that divides transactions into smaller denominations and mixes up their origins to make them indistinguishable from others on the network. Monero was created just three months after Dash. It has often been described as the ultimate privacy cryptocurrency: unlike Bitcoin, the Monero blockchain cannot be explored, and transactions cannot be traced. Wallet addresses, amounts and transactions are all hidden from public view. In comparison to the other two, Zcash is not private by default as its encryption process has been reported to be incredibly inefficient. As a result, very few of its users have opted to use its privacy features – and those that do stick out like a sore thumb.

Criminal use

Criminals naturally found that using privacy coins would significantly hamper law enforcement agencies’ efforts to track their money. Last year, Europol warned in a report that privacy coins were “gaining popularity” on darknet marketplaces. They were used to purchase illegal goods and services as “[t]ransactions cannot be attributed to any particular user/address, all coins used in a transaction are ‘hidden’ by default, and transaction histories are kept private.”

The privacy coins explicitly named in the report were Monero and Zcash. That would not be the last time that law enforcement agencies fingered them as being directly associated with criminality, with officials even going so far as to tell Business Insider that “We can see a quite obvious and distinct shift from bitcoin to cryptocurrencies that can provide a higher level of privacy.” 

Disproportionate concern

Nevertheless, the hand-wringing by law enforcement agencies over the potential scale of abuse appears to be reasonably disproportionate about the actual criminal cases. Money laundering via cryptocurrencies does take place, but on a relatively small size in comparison to that of fiat currencies. According to CoinMarketCap, Dash and Zcash are currently the 16th and 17th most traded cryptocurrencies by volume – they are mostly big players in the grand scheme of things. (Monero came in 34th.)

The popularity of these privacy coins is also hampered by revelations that malicious developers distributed malware to mine Monero. Compared to more established cryptocurrencies such as Bitcoin, Monero can be mined with minimal computing power: Android apps and even websites have preyed on unsuspecting users with embedded mining scripts.

For now, privacy coins and their users should not have much to worry about regarding a targeted crackdown. Though the vast majority of users are not criminals, they should be aware that they may be popularly associated with them as more cases continue to come to light. Further, at the rate that technological development is progressing, it should come as no surprise that companies dedicated to uncovering the anonymity behind Bitcoin transactions already exist. It may only be a matter of time before the same tools are applied to altcoins and, in particular, privacy coins.

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