Regulations and Exchange delistings put private Cryptocurrencies' future up in the air
The principles of digital currencies were based on financial independence, decentralization and anonymity. With regulations being the key factor to mass adoption, however, the privacy aspect of the Crypto Market seems to be vulnerable.
In 2022, even though no country came up with a universal regulatory outline to govern the full cryptocurrency market operations, most countries introduced some form of legislation to govern a few aspects of the cryptocurrency market such as trading and financial services.
Although different countries have set unique rules and regulations in line with their existing financial laws, a common theme has been the strict application of Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
The majority of Cryptocurrency Exchanges operating with a license/approval from the regulatory bodies have discouraged any form of anonymous/ambiguous transactions. Even in countries where there is no direct legislation on privacy coins, there is an outright ban on private transactions over a certain threshold.
The United States and the United Kingdom governing bodies have also demanded legal action against the use of coin mixing tools, a service used to obscure the origin of a transaction by mixing it with other multiple transactions. Coinjoin, a popular cryptocurrency mixing tool, recently announced that it would ban illicit transactions amid regulatory backlash.
The recent delisting of Litecoin (LTC) by several cryptocurrency exchanges in South Korea due to its recent privacy-focused upgrade is another example of how the privacy aspect of the cryptocurrency is the first to fall on the road to legal acceptance. Apart from South Korean exchanges delisting LTC, several global exchanges including Binance Exchange and Gate.IO also declined to support transactions using the privacy-focused upgrade.
Most legislations focus on making cryptocurrencies more transparent so that consumers and businesses feel at ease while trading and investing. This might be good news for institutional and corporate investors, but it could be a setback for privacy-focused coins.
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At a time when legal oversight is at its highest, there is a special threat to privacy coins such as Monero (XMR) and ZCash (ZEC), which are already blocked on several leading exchanges. However, experts are of the view that despite the ongoing case against privacy coins, people will continue to buy and sell them.
Privacy tokens are a red flag for many regulatory bodies, who often prefer blockchain transactions to be auditable, verifiable and take place on a public chain.
Under Regulatory scrutiny around the world
Privacy coins obscure the key identifiers of transactions such as the address of the sender or receiver, a feature that regulators believe could be misused by miscreants. Even some countries like Japan, which was once seen as the leading country in terms of progressive crypto regulations, decided to part ways with privacy coins. It blocked the use of privacy-focused cryptocurrencies in 2018, which was followed by delisting on the platform by several registered cryptocurrency exchanges in the country. Similarly, South Korea has not just banned private coins, but any form of private transactions is also prohibited on Korean Cryptocurrency Exchanges.
In the United States, privacy coins have not been banned. However, the Secret Service recommended that Congress regulates privacy-focused cryptocurrencies.
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In August 2020, Australian regulatory bodies mandated many cryptocurrency exchanges to delist privacy coins. The Financial Action Task Force (FATF) has similarly listed the use of privacy coins as a major flag bearer for money laundering through digital assets.
As a precaution, some cryptocurrency exchanges have also stopped offering privacy coins as a result of AML guidance. In January 2021, Bittrex, the eighth largest cryptocurrency exchange by volume, decided that it would drop Monero and Zcash from its platform. Kraken Digital Asset Exchange, the fourth largest exchange, delisted Monero in the United Kingdom in November 2021 following guidance from the United Kingdom’s financial markets regulator.
Crypto investment platform Mudrex’s Chief Investment Officer (CI0), Ankit Verma told Cointelegraph:
“While some exchanges periodically prohibit trading privacy coins, most of the largest privacy coins are currently available for trading across major exchanges in different jurisdictions. Yet, the institutional scepticism around the adoption of privacy coins persists. It is difficult to predict the usage of privacy coins on a wider scale primarily because of the strict enforcement of KYC and AML guidelines. Our belief is the absence of institutional affinity for privacy coins combined with the fact they are unregulated further dampens the possibility of widespread adoption of privacy coins.”
The regulatory burden has mounted to such a level that even privacy features of particular cryptocurrencies have come under scrutiny, even if the particular cryptocurrency is not solely focused on privacy. Thus, crypto experts believe that the real winners will be those who hold and use the best privacy and regulatory compliance.
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Fennie Wang, CEO at Humanity Cash, a community-based currency development platform, told Cointelegraph:
“The winners will be protocols that balance between user privacy and regulatory compliance using a combination of cryptographic techniques and sound policy translation. Decentralized identity primitives alongside zero-knowledge Proofs, homomorphic encryption and multi-party computation will be central to this equation.”
Can privacy coins survive the regulatory onslaught?
Trading privacy coins is still ambiguous in several countries where they are not outrightly banned but regulatory bodies have discouraged their use.
Chris Kline, chief operating officer at Bitcoin IRA, a crypto retirement plan provider, believes privacy coins can co-exist despite the current regulatory downturn. She explained:
“Privacy coins can co-exist in a regulatory environment. This coexistence will take place alongside new rules and challenges as the CFTC takes the lead on standards ahead.”
Many other experts believe that, while privacy coins will find it hard to get regulatory approval, regulatory bodies will become more sophisticated toward privacy coins and bring them under their regulatory purview.
Nikos Kostopoulos, a blockchain adviser at European Union IT infrastructure firm NetCompany, told Cointelegraph:
“While it is foreseen that privacy coins might not have a position in regulated cryptocurrency exchanges, the privacy coins will not be evaporated from the market cap, but rather will find audiences and venues where privacy is fundamental while regulators will become more sophisticated towards their approach to privacy coins — for example with imposed KYC/AML once there is a transaction with fiat currencies or cryptocurrencies.”
Privacy is still a key concern factor for many in the Cryptocurrency community, and this concern is amplified when it comes to financial markets. This is why privacy coins are so important for preserving and securing users’ interests. They ensure that the sensitive user data is not accessible to just anybody and that transactions are conducted privately. Some privacy coins such as Zcash and Dash (DASH) allow users to choose whether or not to encrypt their transactions, giving them complete control over the transaction data.
Multiple reports have showcased that less than 1% of cryptocurrency transactions account for criminal activity and cash remains the currency of convenience for offenders. With all these positives of privacy coins, an outright ban on them might cause a threat to user privacy and, ultimately, the underlying technology.
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