Can Privacy Coins Survive Regulatory Scrutiny?
PowerKee’s Bastion of Privacy #4
2020 is almost wrapped up. It has been a year of breathtaking price movements in the cryptocurrency markets but it has also been a year with several important regulatory developments.
Moving into 2021, it is important to understand the current state of regulation pertaining to privacy coins. We detail the major privacy coin regulations and how regulatory authorities have perceived these cryptocurrencies.
We also have an update on PowerKee. The PowerKee team has been working relentlessly to build a future where privacy is easy and we are excited to update readers on our technical progress and give details regarding an upcoming exchange listing.
Privacy is holiday-agnostic and so is PowerKee. As everything slows for Christmas and year-end, the PowerKee team will continue to work relentlessly towards building the future of internet privacy.
Everything is on track. The PowerKee team is currently polishing some functional tests for the network and is also finalizing features for the PowerKee block explorer.
The first exchange listing for the PowerKee token – KEE – will take place in early January. While KEE was originally lined up to list in 2020, the listing has been postponed to early January on the recommendation of PowerKee advisors and exchanges.
Exchanges and advisors have cautioned that trading volume can drop up to 70% from Christmas until the 5th of January. In addition to suppressed volume, cryptocurrency user engagement declines over the holiday season. With a later listing, KEE will be poised for an active and successful exchange listing.
Privacy Coins and Regulation
The regulatory scrutiny on cryptocurrencies is heating up heading into 2021. We have briefly talked about Treasury Secretary Mnuchin's rush to regulate self-custody cryptocurrency wallets. Also, the STABLE Act, while not privacy-focused per se, showed us how little understanding some US lawmakers have about the space.
The bill would require stablecoin issuers to obtain a federal banking charter and FDIC insurance. At worst, it may make running an Ethereum node illegal. To some extent, the bill aims to shift the balance of power to central bank digital currencies (CBDC) from private stablecoin issuers.
The regulatory landscape for privacy coins is not much better. ShapeShift, the US-based crypto exchange with self-custody, has recently delisted Zcash, Monero, and Dash due to regulatory concerns.
In South Korea, the country's Financial Services Commission recently announced that it would ban privacy coins due to a high risk of money laundering. The new rule will come into effect in March 2021, making it impossible for any domestic exchange to offer trading in Zcash, Monero, and other privacy coins.
Japan banned privacy coins last year. The Finance Committee of France's National Assembly proposed a ban in 2019 and there are new AML regulations in the Netherlands. All developments have been painting a relatively bleak regulatory picture.
For now, the regulators seem to ignore the difference between privacy-by-default cryptocurrencies like Monero, and privacy-by-choice projects like Zcash and Dash. While 100% of XMR transactions are obscured by default, that number is around 5% for Zcash. Most Zcash transactions are, in fact, public transactions, transferred over transparent pools.
Regulators are also not paying too much attention to the data. Earlier this year, a report by the Rand Corporation, a non-profit consulting firm and think tank, shone some spotlight on the use of cryptocurrencies for illegal activities.
The report notes that "while privacy coins may intuitively appear likely to be preferred by malicious actors due to their purported anonymity-preserving features, there is little evidence to substantiate this claim." It used the Rand Dark Web Observatory (DWO) to scan the eight largest dark markets and scrape a whole range of interesting information.
There's an argument that Bitcoin and Ethereum could offer sufficient privacy features to make niche privacy-focused blockchains borderline irrelevant. This is the case made by Multicoin Capital in their "Privacy Is a Feature, Not a Product" essay.
Bitcoiners can take advantage of the "lost in the crowd" privacy design by using CoinJoin through Wasabi Wallet or Samourai Wallet. CoinJoin is a trustless method for combining multiple Bitcoin payments that breaks the direct link between sender and receiver.
We have recently seen a significant increase in CoinJoin transaction volumes, according to Max Hillebrand at Wasabi Wallet. In May alone, 70,000 BTC was anonymised through this practice.
The Taproot upgrade on the Bitcoin protocol will also improve privacy through the introduction of Schnorr signatures. When implemented, Schnorr will batch transaction signatures, so multi-sig and single-sig transactions look the same.
For Ethereum, "mixers" like Tornado Cash are comparable to CoinJoin, while Aztec protocol offers a smart contract solution to the problem. There is also the potential to provide greater privacy as a Layer-2 solution. However, Bitcoin and Ethereum still make extreme technical demands of users who wish to maintain anonymity.
It will be interesting to see if 2021 will be the year when the regulators take a more in-depth look at the underlying dynamics of privacy coins and begin to distinguish between Monero and Zcash in their approach. While the evidence shows that not all privacy coins are private-by-default, regulators have not yet taken this into account.
PowerKee is a cryptocurrency network that makes privacy easy. Users can transact cheaply and instantly while maintaining anonymity. The PowerKee protocol uses a mixture of zero-knowledge proofs and coin mixing to provide strong privacy assurances to its users.