Privacy Coins: What are they, and is there a future?

• Privacy Coins have advanced privacy-enhancing features designed to boost anonymity and reduce traceability.
• It does it by hiding the user’s real wallet balance and address by hiding it amongst multiple transactions to elude chain analysis.
• Monero, DASH are some of the popular privacy coins.

Blockchain technology ushered in a new era of financial transparency. But one thing that is often held against them is that the information of the sender and receiver is readily available. Bitcoin, one of the world’s leading and most popular cryptocurrencies, was quickly used as an alternative to the monetary system of government-controlled national currencies. But, due to its transactions and wallet holders being readily recorded and available, the market participants felt there was a need for another system to keep their transactions’ privacy intact.

Thus came the concept of Privacy Coins, which had advanced privacy-enhancing features designed to boost anonymity and reduce traceability.

What Are Privacy Coins?

Privacy coins, such as Monero, DASH, etc., are private cryptos– one that obscures the origin and its destination. It does it by hiding the user’s real wallet balance and address by hiding it amongst multiple transactions to elude chain analysis.

Bitcoin and other non-privacy blockchains allow anyone to view public addresses and transactions in their network. However, privacy coins handle two different aspects: anonymity and untraceability. Anonymity hides the identity behind a transaction, while privacy coins make it virtually impossible for third parties to follow the trail of transactions using services such as blockchain analysis.

Image: Monero is a popular privacy coin that is traded on various crypto exchanges. Credit: UnSplash

How does Privacy Coins operate?

Privacy coins work on the principle that the sender’s and receiver’s identities must be concealed. Hence, they employ different methods to hide their users’ identities and transaction histories. Here are some of the most common strategies:

Stealth addresses enable them to create new addresses each time a user receives a crypto. Some privacy coins, such as Monero, utilize this method by generating a public address. A private spend key is usually given to the sender, while the receiver receives a private view key to display incoming transactions.

Ring Signatures: The mixing of transactions is used by CoinJoin, and the process involves amalgamating all transactions into one and then disbursing them to their various users using new addresses.

Privacy Coin: A Double-Edged Sword

The burgeoning of Privacy Coins has led to a dilemma as to which one to choose. Also, such privacy coins have invited the wrath of global anti-money laundering (AML) regulators who contend that the mechanism can be used to circumvent laws and will give rise to money laundering (ML) and terrorism funding (TF), which will be difficult to control or monitor. Many privacy coins have been delisted from exchanges, and authorities have repeatedly warned users to be extra careful while dealing with them and ensure that they follow local laws.

In technical terms, private coins are a class of crypto coins which private individuals can use to enact anonymous blockchain transactions. The process uses technology which obscures the origin and destination of the transactions. It also conceals the user’s real wallet balance and address by amalgamating it into multiple transactions, making it difficult to trace any particular transaction.

Cryptocurrencies are largely decentralized, meaning there is a digital trace between the sender and the receiver. This very little wriggle room for any individual to manipulate or defraud someone, as any small change gets recorded in thousands of nodes simultaneously. On the other hand, the privacy coin’s main objective is to remain anonymous and untraceable as it hides the sender and receiver.

Do privacy coins have a future?

Well, there is no straight answer to this question. It all depends on the which country’s jurisdiction you come from. For example, some nations like South Korea have banned any transaction of privacy coins or nay tokens which use similar technology. India is another country where the government has not prohibited privacy coins but believes that it helps in money laundering and terror funding. On the other hand, in the U.S., authorities have developed tools to make it impossible to conceal the identity of the users of private coins.

The proponents of Private Coins argue that every individual has a right to privacy, and any effort to curtain the operation of private coins will ultimately become a disadvantage for the common man.  Some of the big names in the industry, such as Elon Musk and Edward Snowden, are proponents of using private coins.

It will be interesting to note how the world regulatory bodies, such as the Financial Action Task Force (FATF) view private coins. Privacy coins have not been banned, but their operation space is continuously being narrowed and throttled by authorities. The FATD is bringing even tougher laws pertaining to enhanced-anonymity currencies (AEC), as FATF calls privacy coins. This has led to the delisting of some Privacy Coins from exchanges.

Conclusion

While the advent of blockchain technology brought about unprecedented financial transparency, it exposed a drawback – the readily available information of senders and receivers. Bitcoin, a pioneer in the cryptocurrency space, prompted a demand for increased transaction privacy. This led to the emergence of Privacy Coins like Monero and DASH, designed to enhance anonymity and reduce traceability.

Privacy Coins conceal users’ identities and transaction histories through stealth addresses and ring signatures. However, the rise of Privacy Coins has sparked a dilemma, with global anti-money laundering regulators raising concerns about their potential misuse for illegal activities.

But when the question arises about investing in them, it depends on how much market analysis you have done. Thus, market research becomes pivotal to ensure that you don’t lose a lot of money while investing in a token. Any investment without proper market research could result in heavy financial losses.