All you need to know about privacy coins

All you need to know about privacy coins

Bitcoin came into being as an alternative to the state-controlled monetary system that issues fiat currencies. Given its pseudonymous nature, a lot of crypto skeptics are of the opinion that cryptocurrencies fail to provide basic privacy features to their traders. This notion is particularly prevalent in nations with stringent policies toward crypto. Visit buy cryptocurrencies

You wouldnt be surprised to know that Bitcoin has relatively less privacy when seen in comparison to fiat currencies. This is because Bitcoin operates on a public blockchain that implies that any person with the right resources could carry out a chain analysis and find out the true identity that lies behind a public address.

Several tokens today are driven by privacy in the crypto market and thus, it is hard to assess which one is the right choice for us. At this point, it is essential to point out that privacy coins have become a matter of concern for many global anti-money laundering (AML) regulators. This is so because carrying out money laundering and using the platform for terror funding is quite possible when dealing with privacy coins. It is also a reason why many exchanges have delisted privacy coins.

What is a privacy coin?
Privacy coins are essentially cryptocurrencies that fuel anonymous blockchain transactions by not revealing the origin and destination of the buyer or the sender. The techniques could include hiding a users total wallet balance and address or jumbling up several transactions together to dodge chain analysis. To keep the system transparent, Bitcoin and other regular cryptos have public addresses and anyone can view the transactions that take place. Thus tracking someones deposits or withdrawals could be fairly easy.

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On the other hand, privacy coins are not just anonymous, theyre also untraceable. While anonymity only keeps the real identity out of the picture, untraceability practically makes blockchain analysis to trace the origin impossible.

What strategies do privacy coins use?
To maintain anonymity and traceability, privacy coins use several methods to remain private. Some of the commonly used ways are stealth addresses, ring signatures, CoinJoin, and zk-SNARKs.
1.The sender should generate a new address for every transaction they make so that it cannot be associated with the receiver. These are known as stealth addresses. Monero (XMR) is a popular privacy coin that makes use of dual-key stealth address protocol (DKSAP).
2.CoinJoin merges various transactions carried out by different people into a single transaction and then rolls them out to the investors via new addresses.
3.Zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) let cryptocurrency owners validate a transaction without giving away key information like identity or account balance details.

Is Bitcoin a privacy coin?
It is possible that you may have come across people claiming that anonymity is one of Bitcoins key plus points. Thus, it spent its formative years driving dark web marketplaces and was a mode of payment for a lot of criminals. However, this theory is far removed from reality. Bitcoin operates on a public blockchain and hence, all transactions are recorded publicly. These can be accessed by literally anyone.
The protocol of most cryptocurrencies including Bitcoin is not about maintaining anonymity. Instead, what it does is it keeps pseudonymity intact. For one to be able to tell who owns an address, an investor has to publicly claim ownership, or else, there is no way really to tell who is behind the address made of a string of letters and numbers.

Is this even legal?
The answer to the question of legality falls in the gray area. Whether privacy coins are legal or not is something that is subject to individual jurisdictions. South Korea for example does not allow trading privacy coins on any of the nations crypto exchanges in order to keep a check on money laundering. While some jurisdictions allow trading privacy coins, not one of them has publicly backed them, strategically making the most of the ambiguity that lies in the nations laws. The United States government is working towards creating tools that uncover the transactions done on private networks.

However, it is worth noting that privacy coins do not always imply illegal or malicious transactions. It is possible that certain users just want to exercise their right to privacy when carrying out financial transactions. That said, there are now numerous government agencies that are looking to put a stop to untraceable digital currencies.

How global regulatory bodies like the Financial Action Task Force (FATF) would respond to minimize the risks associated with privacy coins is something that would be interesting to note. Though privacy coins are not technically banned, nations, as well as crypto exchanges, are having a hard time keeping up with information-related regulations such as the FATF Travel Rule.

Why are they delisted on some exchange platforms?
Privacy coins may get delisted on the basis of a countrys take on AML/CFT obligations and the way they regulate the same. Though privacy-driven crypto transactions could be saved from the watchful eyes of regulators, untraceable cryptocurrencies on centralized exchanges fall within the watch of the financial supervisors.

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If a cryptocurrency has been banned by a regulator, the exchange must stop trading activities at once or face the fear of being shut down forever. Crypto marketplaces may opt to stop trading in these situations and others could remove the coin from the platform. Given that privacy coins had to face recently, several exchanges delisted them from their platform to avoid regulatory complications.

The FATF Standards Recommendation 16 Travel Rule is a big reason why privacy coins have been delisted. The requirement demands that national regulators ensure that all exchanges or virtual asset service providers (VASPs) exchange user-identification details with one another when transferring funds. Compliance of the requirement is ensured by demanding VASPs to be in line with the obligation when seeking an operating license or registration.

Future Outlook on Privacy Coins

At the heart of it, cryptography is a combination of several techniques and practices that ensures secure communication in public. Thus, privacy cryptocurrencies are key to the crypto world even though their anonymous and untraceable nature raises suspicion. It is disheartening that even after there being several reports that have time and again shown that a small percentage of crypto is being used for illicit or malicious acts, privacy coins are still not embraced by the system.