Privacy coins: what are they and are they legal?

Sushree Behera

26 October 2022

Did you know that over 20,000 digital currencies are available to trade globally? Some of them are “privacy currencies”. They are specifically programmed and created with privacy protection as their objective.

There are so many factors to know about privacy coins. In this article, we will discuss how privacy coins work, and their legitimacy in the market and legal aspects.

Table of Contents

What exactly are privacy coins?

In the form of their working, privacy coins function in the same manner the other cryptocurrencies do. They use the same form of a public blockchain. Moreover, they record their trading activities in the same way. Also, they have a wallet to store the cryptocurrencies just like other forms of cryptocurrencies do.

Then what sets them apart? Now imagine you get a form of cryptocurrency that can do all these functions but adds forms and layers of security added in them. Nobody can find out who is doing the transactions. The identity of the wallet holder, even when the ledger of the trading is published, remains hidden. Not just that, the amount in the wallet is confidential as well.

An ordinary cryptocurrency is a pretty lapse in security and can be tracked very easily. This is because these cryptocurrencies like Bitcoin or Ethereum are transferred from wallet to wallet. Hence, the balances in both the sender’s and receiver’s wallets are visible and accessible. At the same time, these privacy coins are coded in a way to carefully maneuver away from this information being made public.

Privacy coins: how do they work

Normal cryptocurrencies and privacy coins are much similar. If you remove the tools and maneuvers they use to anonymize your identity and wallet balance, they are pretty much the same as normal cryptocurrencies. But let’s understand how privacy coins work through the following steps:

the management and control of privacy coins are in the hands of an anonymous group of validators or people. The ones that hold the largest share in the market are Zcash and Monero;

there are two types of privacy coins, one that is private by default and the second where you can turn on or off the privacy functions of the coin. Monero is one of those very few by default privacy coins;

Monero uses a piece of old decoy information to hide the trading data that happened and replaces the real one-time stealth information you have added. This also keeps the balance sent in the transaction confidential;

Zcash is a privacy coin that allows you to choose to be anonymous or make the information public. But because it possesses the technology to make your information private, it is still a private coin;

private transactions from this coin using zero-knowledge proofs. Zero-knowledge proofs are calculated signals or messages ping to the server network that the transaction is legitimate. Thet do not ask for further information or publish the further information anywhere. This information includes the addresses of buyers and sellers, wallet information, balance amounts, etc.

There was a privacy coin named Darkcoin which started way back but changed its name and renamed itself to Dash in 2015 and chose to refocus on digital payments.

Privacy coins: are they legal?

Due to the kind of functioning, a big number of regulators and authorities around the globe have taken privacy coins in check and under high scrutiny.

This is an attempt to stop the black markets of cryptocurrency. Japan is a country that completely banned the idea and existence of privacy coins, and their market is completely transparent.

There are countries like Australia and South Korea where the market is translucent, and they have forbidden their exchanges from offering these types of coins. The legalization of privacy coins is pretty much a gray area.

Many regulators, authorities, and organizations work against money laundering. With the help of these privacy coins, it becomes very easy to launder money. This, because there is nobody to tell you your information and details; even the details of your wallet stay confidential.

But these regulators are making it very hard for people to using them. There are laws like FATF Travel Rule and AMLD-5 Directive, which the EU imposes.

The top 3 high-performing privacy cryptos

The top 3 high-performing privacy cryptos, which hold the most shares in the market, are as follows:

Monero: It is a default privacy coin. It means you can switch it to the public even if you want to. It is currently at the top, but they keep switching places. Monero uses old information and switches them with new one so that they remain anonymous;
Zcash: Zcash is a privacy coin that can switch to the public. You also have the option to go anonymous. That way, your identity, as well as your wallet score, is safe. It uses zero-knowledge proofs;
Mina: It is one of the top 3 high-performing privacy coins and Mina Protocol utilizes it to facilitate internet transactions. You can trade this coin just like any other normal bitcoin. But like others, it will also secure your information. Mina is like the local currency of Mina Blockchain.

Are privacy coins going to last in the crypto market?

We explained to you what these privacy coins mean and how they function. Their functioning is very anonymous and shady. The transactions need to be public so that we can track it, and money laundering isn’t possible. A new era is rising, which will destroy the encryption made by privacy coins.

Law Enforcement Agencies are already working on this and will soon be able to. So privacy coins are not really private as well because all that information, if not today, tomorrow will be accessible and public. Keep in mind that this article is not to give you financial advice; when you invest, you risk your own capital. Do thorough research before making financial decisions.