Privacy cryptocurrencies, such as Zcash or Monero are cryptocurrencies that got designed for total privacy and untraceability for transacting. They were created by passionate believers in financial privacy, which is an integral part of a free society. They also fear a future where all transactions are digitalized and private financial information is easily accessible.
The U.S. Treasury Department banned customers from the U.S. from Tornado Cash on August 8, 2022. This decentralized mixer protocol allows private transactions on Ethereum. It also raises questions about privacy protocols and privacy cryptocurrency in general. This guide will address the issues surrounding privacy cryptocurrency and how they work.
How does privacy cryptocurrency work?
Privacy cryptocurrencies are very similar to cryptos like Bitcoin if you take away privacy-preserving technology. They are based on blockchains, which are decentralized ledgers. They are also maintained by an anonymous network of validators. Privacy cryptocurrencies are distinguished from other cryptocurrencies by their advanced privacy methods. Zcash (the largest privacy cryptocurrency by market capitalization) and Monero (the second largest) are the two most popular.
Dash was originally a privacy-focused cryptocurrency called “Darkcoin” but it was rebranded in 2015 to concentrate on digital payments. Ryan Taylor, the CEO of Dash, says that Dash is not a privacy cryptocurrency.
Monero is the only private cryptocurrency that is default private. You can’t disable its privacy functions like Zcash. Monero uses unique stealth addresses to hide transaction data. “ring signatures”, which combine genuine transactions with “decoy” transactions, make it difficult for users to determine which transaction is genuine. “ringCT” hides the amount Monero has sent in a transaction.
Zcash, a privacy cryptocurrency, also allows transparent transactions. Private transactions use zero-knowledge proofs. This is a mathematical calculation that indicates to the network that something’s definitely true, such as the validity of a transfer. It does not publish additional information about the transaction like the addresses or the transaction amounts.
Read more: What Is The Crypto? How It Works?
Is bitcoin a privacy cryptocurrency or not?
You may have heard that bitcoin has many advantages. This is why the majority of bitcoin’s early years were spent on dark web marketplaces to facilitate criminals using it as a payment method.
The reality is the exact opposite. The Bitcoin blockchain is open to all, so you can see every transaction made by any address on the network from any location on any public blockchain explorer.
Like most blockchain networks, the Bitcoin protocol does not maintain anonymity. It preserves pseudonymity instead. Unless someone claims ownership of an address (which looks like a string numbering letters and numbers), you cannot tell who it belongs to.
Chainalysis, one of the leading blockchain analytics companies, has created tools that can significantly narrow down your search. These tools help law enforcement agencies and companies trace criminals by looking for connections in transactions.
Taproot, Bitcoin’s protocol, has received a recent upgrade that allows complex smart contract transactions to appear like regular transactions. Taproot’s effects will be limited until the majority of developers adopt it and integrate it into their applications.
A mixer or tumbler can be used to enhance the privacy of Bitcoin transactions. The mixing service will split the bitcoin transaction amount into random portions and combine your bitcoin transaction with other users who are using the mixer to send their bitcoin.
Once the service has been sufficiently tumbled, it will send out a suitable amount of random bitcryptocurrencies directly to your intended recipient. It is hard to determine who sent which bitcoin because your bitcoin is mixed with all the others.
Is it legal to privacy cryptocurrencies?
Regulators around the globe have been closely monitoring privacy cryptocurrencies to combat black markets that are fuelled by privacy cryptocurrencies. South Korea and Australia have prohibited exchanges from offering privacy cryptocurrency, while Japan has completely banned them.
Users of privacy cryptocurrencies may find it difficult to comply with anti-money laundering regulations’ tightening of “know you customer” laws.
Are Privacy cryptocurrencies really private?
It is hard to classify privacy cryptocurrencies as truly private, given the fact that new analytical tools are constantly being developed and computers may eventually be powerful enough to crack current encryption methods.
Monero transactions are being investigated by law enforcement agencies to find criminals using the network. The IRS offered $625,000 to anyone who could hack the network in September 2020. CipherTrace, a company that claims to have cracked the network has filed a patent. However, Monero’s community disputes its claims.