With governments around the world launching efforts to crack down on cryptocurrency and trace their transactions, many crypto enthusiasts have expressed a need for greater privacy features. As such, several new “privacy coins” have hit the market, offering true anonymity.
The most notable government action against cryptocurrency occurred this past september, when China issued a ban on ICOs and moved to shut down exchanges operating in the country. As a result of China’s actions, the bitcoin price crashed by $1000.
Since the Chinese exchanges have gone offline, the use of peer-to-peer exchange LocalBitcoins spiked dramatically in the country, with trading volume skyrocketing.
However, the people on LocalBitcoins are still using bitcoin, which does not have true anonymity. Even though the government can’t shut down a peer-to-peer exchange, it can still theoretically trace bitcoin transactions themselves back to users via the blockchain’s public ledger, which records every bitcoin payment sent and received.
So how do crypto users protect their financial privacy in the face of growing government snooping? Reuben Yap, privacy expert and team member of Zcoin — an anonymous cryptocurrency — says the answer is a privacy coin.
What Are Privacy Coins and How Are They Different From Bitcoin?
Privacy coins, such as Zcoin and Monero, utilize the blockchain to enable peer-to-peer payments, but don’t broadcast the transaction details — unlike Bitcoin.
This feature, known as a “zero-knowledge proof,” brings cryptocurrency back to its original intent, according to privacy coin supporters.
When Bitcoin first emerged in 2008, its stated goal was to remove financial intermediaries, allowing individuals to be in full control of their money. Furthermore, the pseudonymity of Bitcoin — using an alphanumeric “address” instead of a username or bank account — allowed users to conduct their finances without giving financial firms their personal information.
According to Yap, Bitcoin has strayed from this vision over the years. Instead of protecting privacy and maintaining decentralization.
Yap said, Bitcoin now seeks “to be a global currency where decentralization and privacy are not key features and it’s more about increasing adoption, compliance with regulatory bodies and transaction performance.”
And so, Yap continued, privacy coins like Zcoin bring users back to that original idea: privacy and freedom.
“One might argue that Zcoin is what Bitcoin’s original vision should have been,” Yap said, “Decentralized and privacy centric.”
Hurdles to Success
Though they may sound good, privacy-centric cryptocurrencies will have a long way to go if they want to bring in a lot of users.
The biggest obstacle privacy coins face is the network effect maintained by the current major cryptocurrencies: Bitcoin, Litecoin and Ethereum. Even if people do care about maintaining privacy on the blockchain, they’ll use Bitcoin simply because everyone else does. They’d rather lobby for changes to Bitcoin than adopt a new currency altogether.
Cryptocurrencies in general, not just privacy coins, also face heavy criticism from governments on legal grounds. According to them, cryptocurrencies like Bitcoin that conceal users’ identities enables them to get away with committing financial crimes like money laundering and terrorist financing.
These accusations against Bitcoin have influenced the mainstream perception of cryptocurrency, even though the claims are likely false.
“There’s been [sic] several studies that indicate that the vast majority of Bitcoin transactions are not involved in crime,” said Yap.
So if Bitcoin faces such persistent attacks, a currency even more anonymous would have it even harder.
Still, Yap remains unphased. “At the end of the day, privacy is a tool that can be used for both good or evil,” he said.
“The same goes with privacy coins such as Zcoin. You can be simply just an individual who wants to protect his financial privacy.”
And, at the end of the day, Zcoin and other privacy coins demonstrate the true achievement of cryptocurrency. Finally, currencies are able to compete with one another, creating a market for money in which currencies constantly improve. You can’t find that in the fiat world.
What do you think of privacy coins? Share your thoughts in the comments below.
Images via Getty Images, TheNorthEastToday