Privacy coins are the crypto industries response to blockchain analysis, and government attempts at regulation. Those who promote them see transparency as a threat to privacy and security. Privacy coins are designed to give users complete anonymity when conducting transactions.
Unlike with BTC or ETH, these cryptocurrencies use stealth addresses and ring signatures to hide senders and receivers’ identities. They also offer tumbling services that can obfuscate the tracing methods used by blockchain analysis companies to identify and analyse transactions.
Famous examples include Monero, Zcash and Dash. Monero alone is currently worth over $1 billion and is by far the most proven and trusted privacy coin on the market today.
Privacy coin proponents argue that big technology companies such as Google, Facebook and Amazon have exploited user data. The only way to prevent this – they claim – is to provide users with absolute anonymity.
Whilst this is a strong argument, it remains to be seen whether it is realistic or not. Indeed, no one wants globally visible public records of all transactions. Financial privacy is essential for human dignity, personal safety and the efficient operation of the free market.
Nobody wants their neighbours knowing how much they earn, and what they spend it on. Nobody wants thieves to access your identity, and a free market cannot run if every actor can track all costs and sales.
However, equally, nobody wants to live in a world free of accountability that total anonymity risks providing. The law is there for a reason and to be in favour of absolute anonymity risks empowering those who want to break it.
Comparison with offshore in tradfi & gaming
In many ways the development of this tension between transparency and privacy in crypto mirrors what has happened in traditional finance and gambling.
Both have onshore regulation controlled by central bodies with rules that apply within and across major nations in relation to conduct, AML and taxation.
In both cases a shadow framework has emerged offshore, competing with the onshore version in terms of levels of taxation or scrutiny. Despite tough talk, there isn’t the political will or even a practical solution to harmonise on and offshore. Most of the world’s biggest private companies happily play the system, and leaks such as the Panama Papers or FinCen show the extent of wealth hidden offshore.
That tension is replicated in crypto, and as more institutional money flows into the sector, there will be a growing demand for both sides of the virtual coin – transparency and privacy.
In relation to open, permissionless blockchains, the most likely conclusion is a compromise between these two positions. This compromise is called pseudonymity. Pseudonymity places data back in the user’s hands, granting a level of privacy whilst maintaining a level of accountability needed for society to function.
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