With the rise of privacy-centric cryptocurrencies, regulators and lawmakers are expressing concerns due to their potential use in illegal transactions and activities. The push for transparency and recently established regulations pose challenges for those gravitating toward the anonymity these digital currencies offer.
The advantages of privacy-focused digital money for lawbreakers have been acknowledged by governments and regulatory bodies globally. Regulatory oversight aims to enhance virtual currency transparency, ensuring the protection of compliant citizens while holding violators accountable. In regions where regulators or legislation are skeptical of privacy tokens, multiple service providers have curtailed their privacy offerings or restricted user access.
While not eradicated, privacy-oriented cryptocurrencies have seen limited availability across numerous areas. As we look ahead to November 2024, the enduring impacts of regulatory measures on these digital coins remain indistinct.
To grasp the trajectory of privacy-centric cryptocurrencies, one must first understand their purpose. Though often claiming anonymity, cryptocurrencies operate as public currencies with transaction records accessible on public ledgers. When exchanges are used to convert cryptocurrency to fiat, transactions can be traced back to the addresses and their owners.
Techniques are employed by privacy-focused coins to mask transactions and make identities difficult to uncover.
This heightened privacy appeals to individuals who wish to obscure their financial transactions for various reasons. From purchasing a surprise gift for a loved one to engaging in significant illegal activities, the motivations for concealment are diverse.
As of 2024, within the European Union, revised rules have been enacted that restrict crypto-asset service providers from listing, storing, selling, or facilitating transactions of privacy-enhancing cryptocurrencies or tokens. Nonetheless, peer-to-peer privacy token transactions and self-custody remain legal.
These rules have complicated the use of privacy tokens along established channels provided by service providers, compelling users to conduct transactions directly with one another. Additionally, converting these tokens into cash is challenging unless converted first into non-privacy coins, which leaves a trail.
In 2023, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) released a proposal concerning the reporting obligations related to convertible virtual currency (CVC) mixing. This practice obscures the origins and destinations of transactions using multiple addresses and signatures. FinCEN’s proposed rule would necessitate financial service providers to report suspected mixing within 30 days of detection.
While this rule would further complicate illegal activities using privacy tokens, there could be unintended repercussions for those with legitimate intentions.
Fast Fact
Post-EU and U.S. regulatory changes, privacy-centric cryptocurrencies have been largely delisted from centralized and regulated exchanges.
In April 2024, the arrests of Samouri Wallet creators, Keonne Rodrigues and William Hill, marked a turning point for many users of privacy coins. Due to fears of regulatory consequences, numerous mixing services ceased operations or restricted U.S. user access. Notably, Wasabi Wallet temporarily blocked U.S. users until its parent company, zkSNACKs, withdrew the coinjoin coordinator services, reverting it to a regular Bitcoin wallet and restoring U.S. access.
Privacy-oriented cryptocurrencies are blockchain tokens endowed with enhanced privacy features to thwart transaction tracking. By 2023 and 2024, actions by regulators — prohibiting privacy coins on exchanges or inciting concerns over potential money laundering charges — compelled numerous privacy token projects to reassess their services.
Whether privacy-focused cryptocurrencies have been excessively impacted remains uncertain, as trading volumes for Monero and Zcash have maintained relative stability since mid-2022. However, it often takes time for market truths to surface. With favorable and adverse outcomes for these coins, it might take years to observe their ultimate destiny.
Potential Benefits of Regulation
Discussions abound on the positive consequences of regulations on privacy-centric cryptocurrencies. Monero, a prominent privacy coin, originally utilized the CryptoNight Proof of Work protocol before transitioning to RandomX in 2019, employing “ring signatures” to obscure the public ledger. This design created a 1-in-16 chance to pinpoint transaction entry and exit points.
In April 2024, developers announced plans, through a blog post, to eliminate ring signatures and replace them with full-chain membership proofs. This upgrade is anticipated to escalate address-guessing chances to 1 in 100 million. Developers assert that this change aims to thwart emerging Monero chain threats and statistical analyses, deterring efforts by other parties to trace users.
Among the upsides of heightened regulatory enforcement on cryptocurrency are the responsibilities imposed on service providers for their platforms. Users and investors now enjoy enhanced protection from deceitful practices due to these regulations. Furthermore, numerous individuals have faced prosecution for fraudulent activities or infringements of laws safeguarding consumer and investor interests.
In 2024, several new opportunities for investors to engage with cryptocurrencies without high risks received approval. Despite active law enforcement and regulatory efforts, trading volumes and prices surged throughout the year. Even privacy-centric cryptocurrencies proved resilient, maintaining stable market values and trading volumes as per cryptocurrency standards.
Popular Privacy Coins and Safeguards
There are numerous privacy-centric cryptocurrencies available. Monero and Worldcoin are particularly renowned, with market caps approximately at $3 billion and $1.2 billion, respectively. Despite Worldcoin’s higher trading volume, Monero holds a greater market valuation.
Monero, Worldcoin, Zcash, MimbleWimbleCoin, and Oasis are among the recognized privacy coins, though many others exist.
Every cryptocurrency carries risks like theft via hacks, malware, ransomware, private key loss, wallet password misplacement, and market volatility. While no cryptocurrency can be deemed the “safest,” there are measures to secure holdings. For example, storing only spendable crypto in a hot wallet while safeguarding the rest in a cold wallet, along with creating secure backups of keys and passwords, is advisable.