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Privacy coins are an important part of the cryptocurrency world. Although transactions between two wallet addresses are recorded on a blockchain and publically accessible, no identifying information – such as a name, address or date of birth – is linked to the public key.

In the early days, this made it very easy for users (not exclusively criminals) to use cryptocurrencies, such as Bitcoin, without having to divulge any private information, either to other parties involved in the transaction or third parties.

Like Napster, the 1968 Paris Riots, and Arrested Development, all good things must come to an end: companies quickly developed solutions that would make cryptocurrency, like fiat money, traceable and accountable to users.

Chief among them is Chainalysis, which works with law enforcement agencies to track transactions and activity across the blockchain.

The New York-based company has developed software tools that enable it to collect blockchain data and statistics ,which it can then analyse and use to draw inferences as to the goods or services being bought, volumes and evidence of trading networks as well as identities of those involved.

In early April, the company, which had previously only monitored Bitcoin, announced that it was expanding its services to include other cryptocurrencies such as Ethereum, Bitcoin Cash and Litecoin, something Crypto Briefing reported on at the time.

Although ever-more sophisticated tools have managed to crack the anonymity surrounding conventional cryptocurrencies, a whole new breed of coins has been developed, the central appeal of which is to make it impossible for third parties to track activity and determine identity across the blockchain.

These ‘privacy coins’, including cryptos such as Monero, Zcash and Dash, use features like ring signatures and stealth wallet addresses that makes it very difficult for third parties to trace activity and transactions across the blockchain.

Since Monero’s release back in 2014, privacy coins have exploded in number, with well over 60 different projects each implementing their own methods to protect users’ identities.

At present, companies such as Chainalysis are stumped as to how they can implement monitoring tools into these blockchains. (Disclaimer: we are working on the assumption that Chainalysis shares information on what coins it can track.)

Partly because of this, and concerned that this could enable criminal activity to continue unabated, there has been talk behind the closed doors of officialdom to severely restrict the supply of private coins.

Big in Japan

Japan is famously crypto-friendly, the country recognised cryptocurrency as a legitimate means of payment way back in 2016 and in the ensuing years has become one of the few countries to have developed a comprehensive legal and regulatory code for the sector.

That said, the Japanese Financial Services Authority (FSA) has reportedly mulled placing strong trade restrictions on private coins.

According to Forbes, a recent meeting between the FSA and industry experts considered prohibiting cryptocurrency exchanges – which when licensed are able to operate legally in the country – from listing or accepting private coins on their platforms.

This appears to be more than just words. In mid-March, Coincheck announced that it would cease trades in Monero, Zcash and Dash.

The exchange, which had been subject to a $500m heist back in January, had received an improvement notice from the FSA and with concerns over the growing popularity of private coins for activities such as money laundering, ordered the exchange to stop trading these assets.

A Prohibition on Anonymity

“There are many legitimate reasons to want privacy in the cryptocurrency space”, said Fernando Gutierrez, the Chief Marketing Officer for Dash.

“There is the obvious consideration about privacy being a human right…but then there is the huge issue of security. Having financial information public or semi-public is extremely dangerous. The only way to provide security for the average user is to allow them to keep some information private.”

Over the past few months, the true scale of how information can be collected and used to manipulate things such as elections has come to light in the recent Facebook-Cambridge Analytica scandal.

Personal information, some taken without consent from as far back as 2014, was collated to build a system that could create an accurate profile of an individual, and used to determine marketing and political campaigns that best resonated with someone’s personal ideologies, preferences, and biases.

The political ramifications have been obvious; but for the cryptocurrency sector, they might just represent the tip of the iceberg.

“In a non-privacy focused blockchain [such as Bitcoin, Ethereum, Litecoin etc], all transactions ever done can be fully traced and analysed,” said Daniel Zakrisson, the co-founder of CoFound.it, a cryptocurrency consultancy platform.

“If cryptocurrencies are used as internet money, deep profiling of everyone using them will be possible – making current discussions about Facebook, Cambridge Analytica and personal data pale in comparison.”

Cryptocurrency, as ‘money for the internet’, has multiple advantages for online payments.

Being decentralised means blockchains are nigh impossible to hack; can still be used to pay for goods and services from across the world; and have features such as auto-fulfilling smart contracts. making transactions faster and more secure for both parties.

That said, blockchains as freely accessible ledgers means that as crypto goes more mainstream, the possibility that users’ payment history and preferences become the subject mass-data collection becomes very real.

And This Is Exactly Why We Need Privacy Coins

Privacy coins, which separate links between users and their transaction history, are therefore a means by which the benefits of decentralised payments can be combined with anonymity.

Election-hacking via data control is no longer the stuff of penny dystopian novels, but a reality that the world is only now becoming increasingly aware of. Wholesale prohibition of private coins by regulators is not only short-sighted but potentially a public threat.

The use of private coins for illegal activity is, of course, something that needs to be addressed; but regulators should evaluate the merits of privacy coins before a ban is implemented.

Though they may not look like it, private coins might be a crucial part of the fight to prevent outcomes as diverse as a rigged election, or an insidious corporate leviathan poaching your data, from ever happening again.