The last few weeks saw a massive increase in the prices of so-called privacy coins, namely Monero (XMR), pinch (PINCH), Zcash (ZEC) and Haven Protocol (XHV). As many other cryptocurrencies and the industry in general faced immense regulatory pressure amid the war in Ukraine, one narrative that began to take hold in the crypto space was the potential for such privacy-enhancing assets to provide investors with a higher level of financial anonymity. But can privacy coins meet Bitcoin’s (BTC) original promise?
A good month for privacy-focused assets
Over the last month, Monero has almost doubled its count. With some minor swings, it rose from $134 on February 24 to over $200 on March 26. ZEC showed even more impressive dynamics rising from $88 to $202 during the same period. DASH also made a rally, albeit a bit more modest, from $83 to $128. One of the biggest gainers seemed to be XHV, which nearly tripled in price from $1.60 to $4.20.
Two main factors at the macro level could underpin this surge in privacy coins. The first is the regulatory pressure building up around more “mainstream” cryptocurrencies due to the war in Ukraine and the resulting suspicion: as foolish as it is — that Russian elites can use cryptocurrencies to circumvent financial sanctions placed on them. Another is the executive order of the President of the United States, Joe Biden, which, in fact, does not bring any harm at all to the industry with their roadmap or reports that should eventually lead to a clear regulatory framework for digital assets in the US.
Speaking with Cointelegraph, Justin Ehrenhofer of the Monero community suggested that the recent price increase came from more family funds and individuals holding Monero as a hedge and was fueled by recent market and political turmoil. Haven Protocol community member Ahawk linked the XHV price surge to an upcoming integration into THORChain, which he called one of the most advanced decentralized exchanges (DEXs) in all of cryptocurrency. Jack Gavigan, CEO of the Zcash Foundation, said that the rise in privacy coin prices could be a result of Bitcoin’s strong price dynamics.
privacy without compromise
At the beginning of the cryptocurrency movement, anonymity was one of the main promises of Bitcoin and cryptocurrencies in general. But, along with the maturing of the industry and the gradual merger with traditional financial markets, digital currencies have faced demand from both institutional investors and regulators around the world to meet Know Your Customer standards. (KYC) and Anti-Money Laundering (AML). This strips users of anonymity, at least at the point of withdrawal/exchange operations on supported platforms.
As a series of high-profile enforcement actions in the US have shown, blockchain traceability also does not help those who they want to hide their financial operations.
Privacy coins emerged as a reaction to these commitments. “Bitcoin has never been private. Ether has never been private. Tether has never been private,” Ahawk told Cointelegraph, explaining the persistent push by crypto developers to create “truly private” fungible cryptocurrencies. Given the trends toward corporate and government overreach, it’s no surprise that such coins have enjoyed increased demand in recent years. Ahawk added:
“Why do you need a password for your bank account? For the same reason, cryptocurrency users need more and more privacy options: you don’t want anyone to be able to see your entire financial history with the click of a few buttons. Just because you want your money and financial decisions to be private doesn’t mean you’re doing something wrong.”
Ehrenhofer said that without privacy, every address and exit has unique stories associated with it, missing the key feature of digital money: fungibility. He commented:
“This opens the door to mass surveillance and the assigning of property risk scores to everyone’s money, which in turn makes transparent assets non-fungible in practice.”
Gavigan, who wrote the Regulatory and Compliance Report for Zcash, sees no major difference between privacy coins and traditional bank accounts in terms of KYC/AML compliance:
“While the bank may not be able to see where you got the cash from or what you spent it on after you withdraw it, they still know who you are and can assess whether your deposits/withdrawals are normal for the type of customer. are.”
Will regulators back down?
This appetite for anonymity, however, does not find many supporters among regulators and law enforcement. South Korea was the first country to ban anonymity enhanced coins (AEC) immediately in November 2020. A month later, the US Financial Crimes Enforcement Network (FinCEN) mentioned that “various types of AECs are increasing in popularity and employ various technologies that inhibit investigators’ ability to identify transaction activity using blockchain data.” Some exchange platforms like BitBay and Bittrex they have been deleting privacy coins in recent years.
Despite that, it is not only investors but also developers who see a bright future for AECs in the coming years. Ehrenhofer believes that there is nothing impossible about combining improved privacy for users with regulatory compliance. It is no coincidence that privacy coin developers cite cash as the closest equivalent of AECs. As KYC/AML requirements become more common in the cryptocurrency space, Monero’s importance will only increase, Ehrenhofer assured:
“No one is reasonably asking Monero or Bitcoin to ‘comply’ with AML regulations, that doesn’t make sense. Instead, the push is for regulated entities such as exchanges to follow these AML regulations. Surely they can already do this.”
Ahawk also sees no reason to satisfy regulators’ demands on AEC developers. “Any alleged tension is due to the fact that some regulators want to be able to track every transaction you make with your crypto,” he states, adding that it is mission number one for developers to provide privacy to their users. “Private cryptocurrencies actually make it easier to comply with regulations in your jurisdiction. But the most important thing is what they ‘don’t do’: provide a public ledger for anyone in the world to track their every financial transaction, down to the penny.”
Gavigan also noted that, in some respects, privacy coins make it easier for their owners to comply. For one thing, regulated entities can attach the required “Travel Rule” information to a protected Zcash transaction using the encrypted memo field, which is not possible with Bitcoin.
Privacy protocols should continue what they’re already doing, Ahawk said, which is creating secure protections for everyday users and making sure they can comply with regulations in their respective jurisdictions. He stated that “it is the job of law enforcement to track down criminals, not cryptocurrency developers.”
The mechanisms for that already exist, Ehrenhofer noted. Regulated exchanges already collect information about user transactions, deposits, and withdrawals. He added:
“The United States should encourage cooperative and regulated exchanges to list Monero so that investigators can receive more information about suspicious transactions through Suspicious Activity Reports and FX Transaction Logs.”
The question is whether these exchanges would collaborate with both regulators and developers.