What is the future for privacy coins?

A leaked EU proposal to restrict privacy enhancing coins could be a serious worry for this crypto niche.

With regulators seemingly on the warpath against any form of monetary privacy, things do not look good for privacy projects. TornadoCash is one example of harsh law enforcement whereby a developer for the project has ended up facing jail time just for writing some of the code.

Why privacy-enhancing coins?

The blockchain is by definition completely public and transparent. Every transaction that is made is stored forever and anybody can see which wallet it is sent from and which wallet received it.

However, in spite of the advantages of transparency, these come with the disadvantage that every single transaction made by someone can be transparently viewed – no matter how private or potentially embarrassing it might be.

Those viewing your transactions could be anyone, including your boss who knows your salary history to the exact dollar – pretty disadvantageous for your next salary negotiation.

Or how about nefarious actors? Fraudsters, thieves and any other criminals would be able to see how much you are worth and if it’s worthwhile kidnapping you in order to extract your private keys to the wallets you own.

The long and short of it is that blockchain technology is not going to be used if this means that people’s financial history is made public. Therefore, this is where privacy-enhancing coins come in.

There are various ways in which these work. Some utilise mixers that jumble transactions in order to conceal the wallet identities of the senders and receivers.

Cryptographic technologies such as zero-knowledge proofs, homomorphic encryption, and multiparty computation are used to obfuscate the data and make it impossible for any third party to unravel.

Why the EU would want to ban privacy-enhancing coins

Privacy-enhancing technology is extremely complex and it could easily be imagined that regulators just wouldn’t have the technical know-how with which to grasp and fully understand everything, let alone be able to competently lay out regulations that can keep up with such a fast-moving technological space.

The EU view will likely be that privacy-enhancing coins will make it far more difficult to uncover their potential use for money laundering and other illegal activities.

The leaked EU proposal

The part of the leaked draft that is causing some consternation in crypto circles is the following:

“Credit institutions, financial institutions, and crypto-asset service providers shall be prohibited from keeping …anonymity-enhancing coins”

This is suggesting that centralised exchanges etc. will not be able to list privacy-enhancing coins. The leaked draft also includes that no transaction over 1000 EUR can remain private. KYC would even be required for amounts under 1000 EUR.

This would appear to open the door to a complete restriction on user privacy, and would potentially leave their details open to being doxxed.

Dusk Network – privacy with full regulatory compliance

The goal for Dusk Network is user privacy for transactions while simultaneously remaining compliant with regulations. Dusk highlights that “privacy is an inalienable right, formally enshrined in the Charter of Fundamental Rights here in the EU”. 

Dusk also posits that in order to comply with EU GDPR rules, all user data stored on the blockchain must have a proper level of privacy built in, which Dusk provides.

The Dusk zero-knowledge proof technology builds in compliance at the core level. The protocol is being developed with KYC for DeFi as an absolute requirement, meaning that users remain compliant as they transact. For example, if the user tries to transact, knowingly or unknowingly, with persons in a sanctioned country, the code will not allow the transaction.

Dusk Network is well aware that the regulatory environment is constantly shifting, and for that reason it is constantly monitoring the situation. However, it believes that it has the solution to the problem as explained in a Dusk blog post on the matter:

“Auditors are able to ensure that what is happening on our network complies to the regulations, in addition to compliance being built in from the core. If you’re not allowed to turn left, there is simply no option to turn left. You don’t need to monitor that people aren’t turning left, as it were. 

Institutions are able to use our technology without fears of being penalized as we are compliant with the rules, and users are able to have a system that gives them control over their assets, the chance to use them outside of the crypto sandbox, without having to air their dirty laundry for all to see.”

Dusk Network is optimistic for a privacy future that includes regulated DeFi. It also holds the belief that traditional finance needs to merge with blockchain and decentralisation in order to bring a better, faster and more innovative system that can adapt to the modern world that we live in.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.