The basic principles of cryptocurrency were based on financial independence, decentralization, and anonymity. However, with regulations being the key to mass adoption, the privacy aspect of the crypto market appears to be in jeopardy.
In 2022, although no particular country has introduced a universal regulatory scheme governing the entire crypto market, most countries have introduced some form of legislation to govern some aspects of the crypto market, such as trading and financial services.
While different countries have established different rules and regulations in accordance with their existing financial laws, a common theme has been the strict implementation of Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
Most crypto exchanges operating under a license obtained from the government body or government-affiliated bodies have discouraged any form of anonymous transactions. Even in countries where there is no particular law on privacy coins, there is a ban on private transactions above a certain threshold.
The US and UK governments have also required regulatory action against the use of currency mixing tools, a service used to hide the origin of a transaction by mixing it with many other transactions.
Coinjoin, a popular cryptocurrency mixing tool, recently announced that it would block illicit transactions amid regulatory heat.
Related: Relevancy of Crypto Mixers Diminishes as Regulators Take Target
The recent delisting of Litecoin (LTC) from several cryptocurrency exchanges in South Korea due to its recent privacy-focused MimbleWimble update is another example of how the privacy aspect of cryptocurrency is the first to fall on the road to privacy. regulatory acceptance. In addition to South Korean exchanges excluding LTC, many global exchanges, including Binance and Gate.IO, have also refused to support transactions using the MimbleWimble update.
Most of the regulations focus on making cryptocurrencies more transparent so that consumers and businesses feel comfortable with them. This may be good news for institutional and corporate investors, but it could be a blow to privacy-focused coins.
At a time when regulatory oversight is at an all-time high, there is a particular threat to privacy coins like Monero (XMR) and ZCash (ZEC), which are already banned from several leading exchanges. However, experts believe that despite the ongoing case against privacy coins, people will continue to use them.
Privacy tokens are a red flag for many regulators, who often prefer blockchain transactions to be auditable, verifiable, and done on a public chain.
Under regulatory scrutiny around the world
Privacy coins hide key identifiers of transactions, such as the sender’s or receiver’s address, a feature that regulators believe could be misused by malefactors. Even some nations like Japan, which was once seen as the leading country in terms of progressive crypto regulations, decided to phase out privacy coins.
Japan banned the use of privacy-focused cryptocurrencies in 2018, after which several cryptocurrency exchanges registered in the country removed privacy coins from their platform. Similarly, South Korea has not only banned privacy coins, but any form of private transaction is prohibited on Korean crypto exchanges.
In the United States, privacy coins remain legal. However, the Secret Service recommended that Congress regulate privacy-enhanced cryptocurrencies.
In August 2020, Australian regulators forced many exchanges to remove privacy coins. The Financial Action Task Force (FATF) has similarly listed the use of privacy coins as a potential red flag for money laundering via virtual assets.
Some cryptocurrency exchanges have also stopped offering privacy coins as a result of the AML guidance. In January 2021, Bittrex, the eighth largest cryptocurrency exchange by volume, announced that it would remove Monero and Zcash from its platform. Kraken, the fourth largest exchange, delisted Monero in the UK in November 2021 following instructions from the UK financial markets regulator.
Ankit Verma, chief investment officer at crypto investment platform Mudrex, told Cointelegraph:
“While some exchanges periodically ban privacy coin trading, most of the larger privacy coins are currently available for trading on major exchanges in different jurisdictions. However, institutional skepticism around the adoption of privacy coins persists. It is difficult to predict the use of privacy coins on a broader scale, mainly due to the strict application of KYC and AML guidelines. We believe that the lack of institutional affinity for privacy coins combined with the fact that they are unregulated further reduces the possibility of widespread adoption of privacy coins.”
Regulatory pressure has reached such a level that even the privacy features of certain cryptocurrencies come under scrutiny, even if crypto itself is not solely focused on privacy. Therefore, experts believe that the real winners will be those that combine the best of privacy and regulatory compliance.
Fennie Wang, CEO of Humanity Cash, a community-based currency development platform, told Cointelegraph:
“The winners will be protocols that balance user privacy and regulatory compliance through a combination of cryptographic techniques and strong policy translation. Decentralized identity primitives along with zero-knowledge proofs, homomorphic encryption, and multipartite calculus will be central to this equation.”
Can Privacy Coins Survive Regulatory Attack?
Privacy coins remain a gray area in several countries where they are not prohibited, but governments have discouraged their use.
Chris Kline, COO of Bitcoin IRA, a provider of crypto retirement plans, believes that privacy coins can co-exist despite the current regulatory downturn. She explained:
“Privacy coins can coexist in a regulatory environment. This coexistence will take place alongside new rules and challenges as the CFTC takes the lead on standards to come.”
Many other experts believe that while privacy coins will find it difficult to gain regulatory approval, regulators will become more sophisticated about privacy coins and include them in their regulatory purview.
Nikos Kostopoulos, a blockchain adviser at the European Union IT infrastructure firm NetCompany, told Cointelegraph:
“While it is anticipated that privacy coins might not have a foothold on regulated cryptocurrency exchanges, privacy coins will not evaporate from market capitalization, but rather find audiences and places where privacy is paramount, while regulators will become more sophisticated in their approach. to privacy currencies, for example, with KYC/AML imposed once there is a fiat or cryptocurrency transaction.”
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Privacy remains a key concern for many in the crypto community, and this concern is amplified when it comes to sensitive information such as financial transactions. This is the reason why privacy coins are so important to preserve and secure the interests of users. They make sure that sensitive user data is not accessible to just anyone and that transactions are done privately. Some privacy coins, such as Zcash and Dash (DASH), allow users to choose whether or not to encrypt their transactions, giving them full control over their data.
Multiple reports have shown that less than 1% of crypto transactions represent criminal activity and cash remains the currency of convenience for criminals. Given all these positive aspects of privacy coins, declaring an outright ban on them could pose a threat to user privacy and ultimately the underlying technology.