Guest post by Janya Eighani - Principle Solicitor at Lehman Walsh Lawyer
Is it really a private coin given the fact that blockchain technology is a decentralised system?
What are Privacy Coins?
Cryptocurrency investors are not limited in their choices. There are hundreds of cryptocurrencies and at least 39 of them have a market capitalisation of over US$1billion.
However, not all cryptocurrencies provide the same level of anonymity for those who use them.
Regular cryptocurrencies, such as Bitcoin or Ethereum, provide a certain amount of privacy due to their nature as mechanism of exchange protected by cryptography.
However, despite the ability to use a pseudonym to shield one’s identity, access to a blockchain ledger allows transactions to be viewed publicly. If personal details can be matched to an IP address, use of cryptocurrencies can quickly become observable. Certain businesses, such as Elliptic, operate as analysts of Bitcoin capital flows, demonstrating the relative visibility of Bitcoin payments.
Privacy coins, as their name suggests, offer users the ability to keep their transactions truly incognito. There are a number of privacy coins on the market, such as Monero and Dash, that use various methods allow their owners to remain anonymous. Advanced cryptographic techniques operate to keep the currency untraceable, while transaction locations and amounts can be protected by distributing the transaction between large numbers of data addresses.
How private are they?
Not all privacy coins provide the same level of concealment. Certain currencies, such as Zcash, continue to use blockchain to authenticate their transactions and can still be traced to an IP address. On the other hand, Monero operates by using dealings that are conducted via throwaway accounts, so that although Monero is exchanged via the blockchain, no traceable link is left to find the users. A further level of privacy is provided by the use of ring signatures to hide the amounts used.
Whether true secrecy on the blockchain can be achieved has been questioned. Advances in cryptography and mathematics are touted as providers of greater security and privacy. However, they may yet be accessible. Privacy technology used by Zcash and Monero relies on elaborate digital associations between multiple transaction verifiers. This places dependence on the other links in the verification process. Users of privacy coins may still find themselves unsure about whether their activity remains opaque.
What is the law concerning transactions made using cryptocurrencies?
There is no comprehensive legal regime for digital currencies. Yet despite cryptocurrencies being relatively new to the general public, some attempts have been made by regulatory authorities to track the identities of users. The current legal framework for regular monetary transactions is primarily aimed at anti-money laundering. The US Bank Secrecy Act (1970) requires that all financial institutions are registered and provide identification of their customers and dealings. In 2013 it was noted that these requirements extended to ‘virtual currencies’, including any blockchain transaction.
Driven primarily by concerns over taxation and the use of cryptocurrencies as a tool of criminal activity, potential regulation has had a destabilising effect on the crypto market. The US Government Accountability Office, an investigative body for the US Congress, has written a report in which one of its stated aims is to provide information on the names of account holders and the amounts of cryptocurrency. In Germany, a capital assets tax on cryptocurrency transactions has been proposed, however, it relies on voluntary reporting of income by users themselves.
It is clear that the potential value of privacy coins may be tied to the requirements stipulated in future government regulations of digital transactions. Should the policing of private cryptocurrency users be tightened, privacy coins may well end up losing value.