Will Governments Determine The Future Of Privacy Coins?

Regulation 4 min, 34 sec READ

by Chris Madill

The US Department of Homeland Security is looking to unravel the secrets of privacy coin transactions - but can regulators kill crypto-privacy ?

As the cryptocurrency space continues to grow, global regulators are ramping up their efforts to understand and monitor the increasing volume of financial exchanges facilitated by cryptocurrency technology. In the early days of the crypto revolution, Bitcoin was considered by many as an untraceable method of exchanging value on the internet, largely because law enforcement and government agencies did not understand the technology, and did not see a pressing need to dedicate resources to examining the crypto ecosystem. Since then, regulators have developed advanced methods of tracking Bitcoin transactions (and those of other cryptocurrencies) by examining the publicly visible ledgers inherent to blockchain technology. Authorities claim to monitor these blockchains with the intention of upholding existing monetary policies, protecting investors, and to ensure crypto-users cannot skirt around rules regarding money laundering or the purchase of illegal goods and services.  

Because of this increased level of scrutiny, crypto-users are now turning to privacy coins —— which are cryptocurrencies designed to be completely anonymous and untraceable — to protect their transaction histories from the prying eyes of government and law enforcement agencies. In many cases, these privacy-concerned users are not necessarily criminals looking to avoid tax obligations, buy illegal goods, or launder dirty money, but rather crypto-enthusiasts who value untraceable transactions as a fundamental cornerstone of the cryptocurrency ideology.

Regulators are well aware of this growing interest in privacy coins and are now taking action in an attempt to monitor privacy coin transactions as well. Up until now, privacy coins have remained defiant against regulatory efforts to track transactions on their networks, leaving regulators with no choice but to substantially ramp up their efforts. 

Regulators Are Turning Up The Heat On Privacy Coins

Privacy coins, such as Monero, Dash and Zcash, are now squarely in the sights of the US Department of Homeland Security (DoHS), according to a recent pre-solicitation document published by the agency in late November. While the pre-solicitation document is only a precursor to the actual development of a regulatory platform, the document does outline a request calling for a platform capable of the forensic analysis of privacy coin blockchains.  

A key feature underlying these newer blockchain platforms that is frequently emphasized is the capability for anonymity and privacy protection. While these features are desirable, there is similarly a compelling interest in tracing and understanding transactions and actions on the blockchain of an illegal nature. To that end, this proposal calls for solutions that enable law enforcement investigations to perform forensic analysis on blockchain transactions.

/ Document: DHS-FY19-SBIR-PreSolicitation, Published by: Department of Homeland Security’s Small Business Innovation Research Program

Presumably, the DoHS will soon be accepting and funding proposals from those who want to try to build a privacy coin forensics platform.

Earlier in the year, privacy coins were also put under examination when the Japanese Financial Services Agency (FSA) cracked down on crypto markets, blanket-banning the trade of any privacy coin on Japanese crypto exchanges. Japan’s FSA has recognized privacy coins as a potential risk to investors, and in the wake of the infamous Coincheck hack — which saw some $500 million worth of funds stolen from the Japanese exchange — the FSA has vowed to mitigate potential risks to investors through hard-and-fast regulation. Because privacy coins are near-impossible to trace or monitor, the FSA’s decision to ban them comes as no surprise. 

Will Regulators Ever Solve The “Threat” of Privacy Coins?

It is clear that regulators are taking a longer look at privacy coins, but this doesn’t mean regulators will ever be able to control the technology. Privacy coins are excellent at hiding the specifics of data stored in their blockchains, and thanks to healthy development communities, these projects are constantly refining their underlying technologies. The upcoming DoHS solicitation will prove to be the biggest test privacy coins have ever faced, but there is no certainty that the blockchains of the world’s best privacy coins can be deconstructed.

What’s more, banning privacy coins from crypto exchanges may make the coins harder to obtain, but will not erase them from existence. Instead, these bans will push the technology deeper into the fringes of the financial world, where resourceful criminals, terrorists, and money launderers will likely still be able to get their hands on the technology, effectively amplifying the nefarious use-cases regulators are trying to eliminate while simultaneously forcing legitimate crypto-users to further develop ways to maintain their own privacy.

There will always be a use-case for privacy coins so long as crypto transactions hold value, many of these use-cases are legitimately justified by our right to privacy as human beings. Because of this fact, it is very unlikely we will ever see governments able to regulate privacy coins, so long as the concepts of freedom and the right to ownership exist in both the crypto-community and society as a whole. Governments may increase the amount of pressure placed on privacy-focused projects, leading to short-term declines in use, but the crypto-community will ultimately have the final say whether privacy-coins continue to serve an essential purpose. In fact, it is possible the more pressure put on crypto-ecosystems by heavy-handed regulators, the more demand there will be for privacy coins, hopefully leading regulators towards thoughtful and inclusive measures for privacy coins and the broader crypto market.