Privacy coins face potential ‘extinction’ but will they survive the wrath of financial regulators?

Privacy-protecting crypto tokens and solutions have been attracting serious regulatory scrutiny in recent years, due to their increasing use by bad actors to perpetuate dirty acts like money laundering and terrorist financing. Privacy-enhancing tokens such as Monero (XMR), Dash (DASH), and others are already banned across some jurisdictions and the future looks quite grim for these innovative assets.

What are privacy tokens and how do they work?

In the real world, the importance of financial privacy can not be overemphasized, as evidenced by the passing of several state and federal bills into law, to protect the financial privacy of consumers. 

For instance, the Gramm-Leach-Bliley Act of 1999 upholds consumers’ right to impose limits on how their financial information is transferred between parties during transactions, effectively creating a balance between users’ privacy and how financial institutions share the sensitive information of their customers during a business transaction. 

However, the story is slightly different for the Web3 space since blockchain technology eliminates all forms of third parties during a transaction. Regular cryptocurrencies such as bitcoin (BTC) and ether (ETH) do not protect the privacy of users by default, as their distributed ledgers are public and as such anyone can view the details of transactions passing through them. 

However, to enhance one’s financial privacy when paying with bitcoin (BTC), a user must utilize a tumbler or opt for a privacy-protecting coin instead. 

For the uninitiated, privacy coins are very similar to other cryptocurrencies. dash, monero, and zcash are some of the most popular privacy-protecting cryptoassets. Like any other type of crypto coins, they’re decentralized and run on blockchains. 

However, privacy coins come with encryption methods that are extremely hard to decrypt. The only way to trace transactions made via privacy coins is to decode their encryption system, an operation that has so far proved seemingly impossible even for financial regulators.

There was even a bounty of over $600,000 set aside by the United States Internal Revenue Service (IRS) to reward anyone who could decode Monero (XMR) but no one has been able to do the job successfully. 

Regulators waging war against privacy coins

In recent years, European Union authorities have raised concerns about how crypto payments can be used to finance terrorists, launder money, and facilitate other criminal activities. 

A few months ago, MEPs from the Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties (LIBE) voted in favor of new anti-money laundering rules that will require all crypto transfers in the region to be traced and identified.  

As proposed by the authorities, the identity of each customer executing small transactions worth less than EUR 1,000 (roughly $1,060 ) must be verified. For large transactions, exchanges and Virtual Asset Service Providers (VASPs) are required to know the exact nature and purpose of each large crypto payment they process, in addition to verifying the identity of the sender.

Since privacy token-based transactions can not be properly traced, the focus of regulators has allegedly shifted towards planting a blanket ban on them or at least stripping them of their privacy features.

Regulators, especially those in the EU, are making life difficult for anyone using these privacy coins. The anti-money laundering agency in the region is trying to remove these coins from the market completely if they do not succeed in making them less anonymous.

It’s worth noting that privacy tokens have already been banned in South Korea, and Japan and local crypto exchanges in Australia currently do not support privacy-protecting cryptoassets like monero.

What will happen?

At the moment, these privacy-protecting digital currencies are still operational and even serve as legal tender in some quarters. However, the status and workings of privacy coins may change in the near future.

At the very least, privacy coins will probably keep being legal but will lose their anonymity feature, making them completely “powerless.” Already, EU authorities have intensified plans to limit the use of privacy coins and it’s very likely that other jurisdictions across the world may follow suit soon.

What can we do to retain anonymity?

Even if privacy tokens get outlawed by regulators in the future, there are still measures one can take to enhance privacy and anonymity when transacting on the Web. One such measure is improving our browsing habits and staying off suspicious or malicious websites. 

Another important practice is the use of VPNs (Virtual Private Networks), as they significantly increase our online privacy. For instance, a VPN for PC can encrypt all internet traffic, combating many forms of digital tracking. Furthermore, it hides your computer’s IP address, which usually broadcasts your location and device data to all web entities. 

Even though this part shouldn’t be mentioned, it’s crucial, so we’ll say it anyway. Always use strong and unique passwords and make them different for every website.

Conclusion

Privacy-protecting cryptocurrencies have been under attack for years. Although they’re still weathering the regulatory storm, the new EU bill might change that soon. Moreover, these privacy-enhancing coins might be losing their privacy aspect real soon, especially if the proposed EU bill becomes law.