What are privacy coins and how do they differ from Bitcoin?
Cryptocurrencies are typically pseudonymous, but not necessarily private. Bitcoin (BTC) and other assets run on blockchains, with each transaction posted publicly online. During a transaction between two or more parties, assets move to different wallets, each represented by a string of characters.
With these addresses and transactions visible to all, however, a certain level of trackability exists, especially if a wallet transfers funds to an exchange requiring Know Your Customer verification.
Certain crypto assets, which are often referred to as privacy coins, private coins or anonymous coins, attempt to hide information about transactions, giving users more privacy. Why might someone need privacy if they are not doing anything illegal? It could be preference or a view of privacy as a basic human right could be two reasons. Cash is largely private. Every transaction is not recorded somewhere for all to see with the click of a button.
A number of possible methods exist for adding privacy to Bitcoin, including peer-to-peer trading, although multiple crypto assets focus on privacy more directly via their technology. Some familiar privacy assets in the crypto space include Monero (XMR), Zcash (ZEC), Verge (XVG), Beam and Grin. Dash also makes it on the list, as it allows for added anonymity, although the coin is not technically classified as a privacy asset.
One of the industry’s most well-known privacy-focused assets, Monero came on the scene about seven years ago, having spurred numerous headlines in the years since. Monero prides itself on decentralization, touting origins that back such stated values. “It was a fair, pre-announced launch of the CryptoNote reference code,” Monero’s website says. “There was no premine or instamine, and no portion of the block reward goes to development.”
Monero, a coin based on its own proof-of-work blockchain, touts multiple different privacy technology features, per its website, including stealth addresses and RingCT. Added to XMR in 2017, “RingCT, short for Ring Confidential Transactions, is how transaction amounts are hidden in Monero,” Moneropedia, the explanatory section of the asset’s site, explains.
Monero piqued the interest of the United States government in the latter part of 2020. The Internal Revenue Service put out a bounty on the asset’s head, promising as much as $625,000 in exchange for cracking the coin’s privacy tech. Two blockchain analytics outfits, Integra FEC and Chainalysis, took home the prize just a few weeks after the IRS announced the bounty.
Zcash hails as another popular privacy-focused asset in the crypto space. It started in 2016 and was initiated by the Electric Coin Company, which is headed up by cypherpunk Zooko Wilcox. Zcash stems from the same code as Bitcoin, according to the asset’s website. ZEC operates on its own blockchain with PoW mining consensus, separate from Bitcoin.
ZEC allows both private transfers, called shielded transactions, and public transactions. “Zcash gives you the option of confidential transactions and financial privacy through shielded addresses,” Zcash’s website explains, adding: “Zero-knowledge proofs allow transactions to be verified without revealing the sender, receiver or transaction amount. Selective disclosure features within Zcash allow a user to share some transaction details, for purposes of compliance or audit.”
Dash (sort of)
Dash is another well-known cryptocurrency hosting privacy features. The entity managing the coin’s development, the Dash Core Group, however, clarified on several occasions that Dash is not a privacy asset, although it comes with elective characteristics for added anonymity.
“Dash is a payments cryptocurrency with a strong focus on usability, which includes speed, cost, ease of use and user protection through optional privacy,” the group’s chief marketing officer, Fernando Gutierrez, told Cointelegraph previously.
“Dash is not an AEC!” Ryan Taylor, CEO of DashPay, said in a January 2021 tweet referring to anonymity-enhanced cryptocurrencies, or AEC — a term used by U.S. regulating bodies. “As a literal fork of Bitcoin, all Dash transactions are completely transparent,” his tweet added: “All inputs, outputs, addresses, and amounts are recorded on each and every transaction and viewable – by anyone – on its public blockchain.”
XCoin joined the crypto world as a 2014 Bitcoin fork, later rebranding as Darkcoin, and subsequently Dash. The asset is based on its own proof-of-stake blockchain.
The coin lets users transact anonymously, if they so choose, through what is referred to as PrivateSend. “The technology that Dash utilizes in our PrivateSend function is CoinJoin, which is a technique for complicating transactions to the point that they’re more difficult for analytics firms to analyze those,” Gutierrez explained, as previously reported.
A PoW asset running on its own blockchain, Verge exists as yet another cryptocurrency touting privacy capabilities. Verge started with a different name. “Verge Currency was created in 2014 under the name DogeCoinDark,” the asset’s website states, but was later rebranded into Verge Currency.
An open-source asset, Verge enables private transfers through I2P and Tor tech, which conceal transactors’ locations (IP addresses), according to information from BitDegree, as well as previous Cointelegraph reporting.
Verge gained significant price traction in late 2017, hitting highs around $0.31, based on TradingView data. The asset currently trades at roughly $0.023.
Beam and Grin
Grin and Beam burst onto the crypto market in 2019, touting a different technology called Mimblewimble. A type of blockchain technology, the concept of Mimblewimble went public in 2016 as a PoW variation, according to a community submission article from William M. Peaster on Binance Academy.
Grin and Beam launched based on Mimblewimble, although Litecoin (LTC), a long-time prominent asset in the crypto space, has been working on implementing the technology.
“In a MW blockchain, there are no identifiable or reusable addresses, meaning that all transactions look like random data to an outsider,” the Binance Academy article reads. “A Mimblewimble block looks like one large transaction rather than a combination of many,” the article adds, subsequently diving into other aspects of the technology.
Privacy coins and regulation
Government overwatch on privacy coins has grown in recent years, as shown in part by the IRS’ efforts against Monero’s technology. Privacy coin references also surfaced in the U.S. Financial Crimes Enforcement Network’s proposed regulation on self-hosted crypto wallets in December 2020.
“Several types of AEC (e.g., Monero, Zcash, Dash, Komodo, and Beam) are increasing in popularity and employ various technologies that inhibit investigators’ ability both to identify transaction activity using blockchain data,” the December document said referring to anonymity-enhanced cryptocurrencies. Additionally, South Korea outlawed anonymity assets in November 2020.
Some crypto exchanges have delisted the abovementioned assets. In October 2019, OKEx Korea ceased trading on its platform for Monero, Zcash, Super Bitcoin (SBTC), Dash and Horizen (ZEN). BitBay removed Monero near the beginning of 2020. Bittrex removed Zcash, Dash and Monero from its exchange in January 2021. A number of other crypto platforms have also delisted privacy-enhanced assets over the past year or two, including ShapeShift.