The prices of so-called privacy coins like Monero (XMR), Dash (DASH), Zcash (ZEC), and Haven Protocol have skyrocketed in recent weeks (XHV). As the crisis in Ukraine put enormous regulatory pressure on many other cryptocurrencies and the sector as a whole, one storey that began to take hold in the crypto space was the possibility for such privacy-enhancing assets to give investors a greater level of financial anonymity. Can privacy coins, on the other hand, live up to Bitcoin’s (BTC) original promise?
A great month for privacy-oriented assets
Monero has nearly doubled its market cap in the last month. It increased from $134 on February 24 to over $200 on March 26 after a few small oscillations. ZEC, which climbed from $88 to $202 in the same time span, displayed even more spectacular dynamics. DASH has likewise risen from $83 to $128, albeit at a slower pace. XHV, which has virtually tripled in price from $1.60 to $4.20, appears to be one of the greatest winners.
This fast rise of privacy coins could be due to two major macro-level issues. The first is the regulatory pressure growing up around more “popular” cryptocurrencies as a result of the conflict in Ukraine. And the resulting assumption — however unfounded — that Russian elites can use crypto to evade financial sanctions. Another example is President Joe Biden’s executive order, which, although not directly harming the industry, does provide a roadmap and reports that should eventually lead to a clear regulatory framework for digital assets in the United States.
The latest price spike, according to Justin Ehrenhofer of the Monero community, is due to more family funds and individuals owning Monero as a hedge, and is fueled by recent market and political uncertainty. Ahawk, a member of the Haven Protocol community, linked the price increase to an upcoming integration on THORChain, which he described as one of the most cutting-edge decentralised exchanges (DEXs) in the crypto world. The spike in privacy coin pricing, according to Jack Gavigan, executive director of the Zcash Foundation, could be due to the strong dynamics of Bitcoin’s price.
Privacy without compromises
Anonymity was one of the main promises of Bitcoin and cryptocurrency in general from the start of the movement. However, as the industry matures and integrates with traditional financial markets, institutional investors and regulatory agencies throughout the world have demanded that digital currencies adhere to Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. Users lose their anonymity as a result of this, at least while withdrawing or exchanging funds on complying sites.
Blockchain traceability doesn’t help individuals who want to hide their financial operations, as a number of high-profile enforcement actions in the United States proved.
As a result of these concessions, privacy coins were born. “Bitcoin was never intended to be a private currency.” Ether has never been a closed network. “Tether has never been genuinely secret,” Ahawk said. Explaining why crypto developers are so obsessed with creating “truly private” fungible coins. It’s no wonder that such currencies have seen increased demand in recent years, given corporate and government overreach. According to Ahawk:
“How come your bank account needs a password?” Crypto users are increasingly seeking privacy alternatives for the same reason: you don’t want anyone to be able to examine your whole financial history with a few clicks of a button. It doesn’t mean you’re doing anything bad if you want your money and your decisions to remain private.”
Without privacy, each address and output will have its own history
According to Ehrenhofer, without privacy, each address and output will have its own history. Robbing digital money of its most important feature: fungibility. As he put it:
“This allows for mass surveillance and the application of proprietary risk assessments to everyone’s money. Rendering transparent assets nonfungible in practice.”
In terms of KYC/AML compliance, Gavigan, who prepared the Regulatory & Compliance Brief for Zcash, sees no significant differences between privacy coins and standard bank accounts:
“While the bank may not be able to see where the money came from or what you did with it after you withdrew it, they do know who you are and can judge if your deposits and withdrawals are typical for the type of customer you are.”
Will regulators retaliate?
Regulators and law enforcement officials, on the other hand, are not fans of this need for anonymity. In November 2020, South Korea became the first government to ban anonymity-enhanced currency (AEC). “Several varieties of AEC are rising in prominence,” the US Financial Crimes Enforcement Network (FinCEN) stated a month later. And they use a variety of technologies to make it difficult for investigators to use blockchain data to identify transaction activity”. Over the last several years, some exchange platforms, like BitBay and Bittrex, have delisted privacy coins.
Despite this, not only investors, but also developers, regard AECs as having a promising future in the next years. Combining greater privacy for users and regulatory compliance, according to Ehrenhofer, is not feasible. It’s no coincidence that AECs’ closest analogue is currency, according to privacy coin inventors. Monero’s importance would only grow as KYC/AML rules become more widespread in the cryptocurrency field, Ehrenhofer predicted:
“It’s absurd to expect Monero or Bitcoin to ‘comply’ with anti-money laundering legislation. Instead, regulated organisations like exchanges are being pushed to comply with AML requirements. This is something they can absolutely do.”
Ahawk also sees no need for AEC developers to comply with regulatory demands. “Any alleged conflict is from the desire of some regulators to be able to follow every transaction you make with your cryptocurrency,” he asserts. Adding that providing anonymity to consumers is a top priority for developers.