Even though cryptocurrency is all about anonymity, in most cases, it is far from the truth. All blockchain transactions are recorded on a blockchain and thus, can be viewed by anyone. And if one really wants, linking an identity to a crypto address is also possible. The oldest and, probably, the most prominent example of how it can be done happened in 2011 when the FBI shut down a famous darknet marketplace Silk Road and seized over 144,000 Bitcoins.
A former prosecutor and investor at a venture-capital firm Andreessen Horowitz Kathryn Haun said that blockchain is “digital breadcrumbs. There’s a trail law enforcement can follow rather nicely”.
Her statement follows another case when the Colonial Pipeline computer systems were shut down in a ransom attack. The attackers requested a ransom of 75 Bitcoins. The FBI could track and recover 63.7 BTC. Ms. Haun added later that “the ransom was tracked and recouped so easily and fast because attackers used cryptocurrency. If it were done via a bank account, it would take months or years to get records from a bank, especially if a bank is abroad”.
So, crypto is not as private as most people believe. But can it be told about any cryptocurrency out there? Definitely not.
There are multiple cryptocurrencies that claim to be 100% private. It means that transactions within the networks cannot be tracked or wallet addresses are changed in a way to make it impossible to link them to people. Among many privacy coins, Monero and ZCash are the most popular ones.
Cryptocurrency, especially private coins, has a complicated history. They have been used for many illegal activities regulators say. But interestingly, the most recent data indicates that Bitcoin is still the asset of choice for asset laundering.
But we all understand why regulators don’t have anything against Bitcoin - in the Bitcoin blockchain, transactions can be tracked.
Now, let’s return to privacy coins.
Monero, the major private crypto coin based on market capitalization, is not supported on many exchanges.
New events such as the ban on Tornado Cash and the arrest of its developer raised more concerns about the future of private coins. For now, some countries, such as Australia and South Korea, prohibit exchanges to support swaps with private coins. In Japan, privacy coins are illegal.
The tightening of crypto regulation and implementation of stricter requirements for KYC/AML procedures may make it increasingly difficult for exchanges to offer swaps in private coins. Exchanges will have to comply with the regulation, and, for example, Monero was created to circumvent any KYC procedures.
All these details make people think about whether privacy coins have any future indeed, and whether it isn’t too risky to invest in these coins.
Yes, they do. Even though they may face significant difficulties to evolve.
Let me explain though. Now, after the case of Tornado Cash, the U.S. Treasury Department made it clear that an effort to anonymize your transactions can be regarded as violating sanctions against trading with the enemy.
Even though privacy coins weren’t mentioned anywhere, it is clear that they won’t be welcomed (they aren’t welcomed by regulators even now), and the next step may be made against them. What step can it be? Well, any, including the possibility of announcing them illegal, just like it happened with Tornado Cash.
Why is this step not made yet?
I believe the main reason is the fact that privacy coins are not very comfortable to use for now. The liquidity level is low, the demand is also not high compared to the main cryptocurrencies. They aren’t making waves for now. While Tornado Cash did so, and the number of deposits and withdrawals was growing.
Source: Dune Analytics
As soon as privacy coins start growing in popularity, regulators are going to do something about it.
This is one of the main reasons why if you consider investing in a privacy coin, be ready for consequences. You may not be able to withdraw the coin or swap it for another one in the future. It is quite possible that you may even be accused of financing terrorism or whatever and go to jail if somebody finds out that you’re holding a privacy coin.
Another difficulty is the use of privacy coins.
However, I believe that privacy coins are the future of the financial system. Not the good old Bitcoin and even not Ethereum. Ethereum will be used to host multiple dApps, and so on. But privacy coins will rule the world of finance.
Now, we aren’t ready yet to enjoy all the benefits they offer. But with the adoption of Web 3.0 and thus, the arrival of a really decentralized web, things may change. In the end, anonymity is one of the priorities that cryptocurrency gives.