Privacy Coins Aren’t Made to Protect Digital Assets

5 min read
Privacy Coins

Learn about privacy coins. What they are, how it works, security, and the legal issues.

In its infancy, around a fourth of DeFi users took advantage of blockchain technology to hide illicit transactions. Back then, cryptocurrency exchanges didn’t usually enforce a KYC process, and from this, the use of crypto in money laundering and cybercrime slowly became common. Consequently, this made it incredibly difficult to catch cybercriminals red-handed.

Fortunately, data analytic providers like Chainalysis made it possible to track illicit transactions on decentralised public ledgers. Being on public display, law enforcement agencies can locate wallet addresses suspected of unlawful activity.

Cybercriminals throw their “dirty digital money” about and give it to those who have no idea what they’re getting themselves into. The ones on the receiving end tend to bear the burden of being questioned by authorities while being completely unaware of what is going on.

Hence why there became a need to innovate privacy coins.

Privacy coins mask transactions to make them untraceable by everyone including the users or outsiders. Through them, their users can keep their activities private and away from unwanted attention.

Yet, the lack of regulation and legality of this new emerging tech sparks numerous debates about who will truly benefit from its design.

Are privacy coins going to make crypto safer for you and other users vulnerable to cybercrime?

Or, will it just be another vehicle for criminals to hide and run away with their laundered money?

How Privacy Coins Work#

First, let’s dive deeper into understanding some prime examples of privacy coins and how they work.

Privacy coins, like most cryptocurrencies, are fungible and built on a public blockchain. What sets them apart from Bitcoin and other popular altcoins is privacy coins’ ability to obscure their user’s identities and transactions. If you use privacy coins, your fund transfers will become untraceable. In addition, receiving unwanted illicit transactions will not “stain” your address and digital assets. Many privacy coins advertise their technology to be cost-efficient, faster, and more eco-friendly than their more public counterparts.

Leading the pack, Monero is the most popular privacy-enhanced cryptocurrency on the market, at the time of writing. It has a market cap of over USD 4 billion. To ensure their users’ privacy, Monero uses ring signatures that shuffle addresses with decoys that offset any prying eyes from the actual transaction. Moreover, they also make use of distinct temporary wallet addresses for the senders and recipients to ensure anonymity on every transaction. If that level of privacy doesn’t cut it, as a user, you get to a stealth address that obscures your real public address, making it difficult to retrace previous transactions.

Another popular privacy coin is DASH. In contrast to Monero, DASH is deflationary. They can also make it possible to transact on a public network, have transactions cut up into smaller parts, and obscure them by mixing with other users’ wallets.

Just like Dash is another privacy coin called Zcash. Both give their users the option to transact through public or private networks with a t-address or z-address, respectively. Zcash does this through zk-SNARK, a zero-knowledge proof cryptography mechanism that obscures transaction data and only validates it between sender and recipient.

Privacy Isn’t the Issue#

Nonetheless, the question is, “who is it for?” What purpose do privacy coins serve?

As of now, privacy isn’t a primary concern for the great majority of blockchain and DeFi users. Even though privacy coins help participants retain their anonymity and make them “feel safe”, it may be more important for cryptocurrency users and owners to have something that actually makes them safe. There is a significant difference between hiding your data from the public and protecting your digital assets from the risk of crypto exploits.

The use of privacy coins may be more advantageous for private companies and conglomerates who want to make their transactions a secret from the general public.

Regulation and authorities tend to frown on hiding financial transactions, especially in a relatively new industry.

Critics all over the world are pointing out how privacy coins may be doing more harm than good. Many discussions focus on their potential use in money laundering and how they pose a greater threat than benefit for digital asset owners and investors.

Countries like South Korea and Australia have taken serious action on privacy coins by banning their trade on their crypto exchanges. Japan took a further step by prohibiting them entirely.

Recently, financial markets regulation in the UK advised one of their most prominent crypto exchanges, Kraken, to remove Monero from their offering.

Other countries have taken a more subtle approach such as consolidating crypto exchange “KYC” processes and improving visibility on private networks.

It’s Not Made for Security#

Privacy coins aren’t designed to increase security. They are intended to enhance user anonymity and obscure transactions. Moreover, privacy coins belong to a completely different area of the blockchain and that isn’t digital asset security.

Simply, they aren’t made for security.

There’s a huge difference between protecting your digital assets and protecting your user identity. Both aren’t the same.

You can reduce your crypto market risks by investing in DeFi technology that’s laser-focused on your digital asset’s security such as cover policies, cold wallets, and even just researching more about the crypto industry.

Although hiding your transactions won’t be part of that list.

So, How Can You Secure Your Crypto Assets?#

Being a crypto owner and investor, you can safeguard your digital assets by becoming a parametric cover policyholder.

Parametric covers are not like traditional covers that go through an intensive individual claims assessment. Designed to adapt fast together with the crypto market, parametric covers follow parameters specified in the cover pool’s smart contract to protect risk events, such as crypto exploits and exchange hacks, as opposed to protecting against individual loss.

In short, as a cover policyholder, you can eliminate your risk of getting your claims denied with the objective approach of parametric cover policies.

You can try how easy it is to purchase a cover policy on the Neptune Mutual testnet.