Despite the fact that we refer to them as privacy coins, these private cryptocurrencies can still reveal personal details about your transactions. Nonetheless privacy coins are getting more attention in recent months. First and foremost because people are discovering that Bitcoin isn’t that private after all, and secondly because governments and law enforcement are snooping around on the blockchain. As a result there has been a lot of talk about privacy coins, but these digital currencies aren’t always as private as one might think.
Bitcoin lost its privacy
Bitcoin was once considered a very private way to send money across the world. But over the past two years this has been changing. This is the result of governments and law enforcement enforcing regulations. In addition they have been learning a lot more about the technology. Because the governments is forcing cryptocurrency exchanges to collect user data, transactions can now be connected to individuals.
The FBI, Homeland Security and national police forces have been investing millions of dollars in tracking people behind bitcoin transactions. As a result they’ve been able to arrest drug dealers and other illegal business on the dark web. In October South Korean law enforcement dismantled an online network of pedophiles, thanks to the traceability of bitcoin.
So, let’s just be clear that the ability to trace transactions isn’t always a bad thing. However, we don’t need Uncle Sam to track every transaction we do. Even if they say they don’t, they still can. That’s the type of privacy invasive sh*t that makes people embrace privacy coins.
Embracing your privacy
When you go shopping with your creditcard, Visa or Mastercard will record all your transactions. The moment you want to buy something ‘off the record’, you can use cash. In several European countries, including The Netherlands, the government is making cash transactions above a certain amount illegal. They do this to combat money-laundering, but as a result banks and governments will get more control over money flows.
Quite frankly it’s not much different when you talk about cryptocurrencies. Making a transaction in bitcoin could connect that transaction to a certain business or individual. It requires more research, but it can be done. However, privacy coins have been created to camouflage the origin of a transaction. It’s no wonder that privacy coins are increasingly popular on the dark web.
Crypto privacy is flawed
One of the biggest talking points in crypto is privacy itself. How private are transactions? Can law enforcement trace these transactions? One of the latest major discussions is about a privacy technology called MimbleWimble. Yes, based on the spell from Harry Potter that prevents someone from telling your secrets.
The technology is already in use by privacy coins Grin and Beam. When the Litecoin Foundation announced its plans to adopt MimbleWimble, researchers put the technology under a magnifying glass. MW puts all transactions in a block into one pile, but this doesn’t happen immediately. As a result privacy researcher Ivan Bogaty showed that it was possible to trace 96 percent of all transactions.
Charlie Lee from the Litecoin Foundation said he was aware of the limitations of MimbleWimble, while Grin and Beam developers said similar things. The Beam team added that they are adding decoy transactions into their system as well, making tracing more difficult. Of course this means that more activity on these blockchains would provide more anonymity, but it also means that privacy is not always guaranteed.
Even Monero and Zcash aren’t perfect
Monero and Zcash are the most notable privacy coins on the market. However, a researcher from Stanford University managed to identify a payee and locate the computer’s IP address that holds the private key. Both Monero and Zcash have fixed the vulnerability with a client update, but it just shows that even privacy coins aren’t completely private.
Nonetheless South Korean exchanges removed Monero, Horizen, Dash and Zcash, because these privacy coins aren’t complying to regulations. However, these exchanges do acquire consumer information. The problem probably is that transactions are camouflages by privacy technology.
Interestingly enough, Zcash claims to be fully compliant with anti-money laundering standards, including the recommendations of the Financial Action Task Force, the EU’s Fifth Money-Laundering Directive and U.S. Anti-Money Laundering regulations. Particularly Zcash refers to the ability to add a memo to a transaction, which allows for information about the originator and beneficiary.
Could it be that Bitcoin is giving the government too much information? The true Battle for Privacy has just begun. Governments are closing in on cryptocurrencies, and crypto development teams are adding new features to their coins to stay ahead. Even Bitcoin is considering adding privacy functionalities. At the same time governments and banks are unlikely to give up on their control easily, and therefore we can expect this conversation to be one of the biggest talking points in years to come.
Also published on Medium.