Privacy Cryptocurrencies

-- By RaulMazzarella; 11 Oct 2019

The need for privacy in the online financial system

The creation, adoption, and use of the internet has modified the financial sector in a great way in the last few decades. Nowadays, a considerable amount of financial transactions is made in a digital fashion and everything indicates that this trend will keep growing. These kinds of transactions, have to be made through centralized systems that the banks control, so it is almost impossible to escape from them if you want to perform an online transaction. Of course, cash is always an alternative, but it is not convenient to travel with a big bag filled with cash, especially if the transaction is international.

Moreover, some central banks are evaluating the idea of issuing a digital currency fully controlled by the relevant government or the relevant bank, eliminating cash altogether. Of course, this idea of a centralized digital currency would have great benefits for users, such as fast and secure (or at least insured) transactions. For the States, this would be an ideal system as, within the boundaries of their laws, they would be completely aware of every transaction that all the users of the system make, they would have easier control of money laundering, bribery, terrorism financing and they would be able to conduct investigations of all kinds really fast. However, this new financial system comes paying a great price: privacy for the users of the system. Furthermore, there is always the risk that, with this kind of power, the privacy laws would not be respected by the States or the private institutions that control this system.

The universal declaration of human rights of the United Nations and the United States Constitution proclaims the right to privacy as a human right, and in the quest of this right, some alternatives have emerged as an answer to the control of the banks' centralized systems or a hypothetical cashless future.

The alternatives

In general, cryptocurrencies are an internet-based medium of exchange which uses cryptographical functions to provide financial transactions. These new kinds of currencies, most of the time, use blockchain technology and proof of work mechanisms to gain decentralization, transparency and immutability. They also share two additional characteristics: (1) they are open source; and (2) they are censorship-resistant. This means that States can prohibit the use of the crypto asset itself, but they cannot stop the transactions unless they gain control of 51% of the network, which is, in most cases, extremely costly.

Notwithstanding the controversy around cryptocurrencies (and especially around price manipulation), the technology behind some of them could have a great impact on privacy in the financial sector.

Monero, Zcash and Verge

Non-fully private cryptocurrencies, such as Bitcoin, are pseudo-anonymous (no individual person can be linked with a specific wallet or transaction per se). However, most of the time, they have public blockchains, that, in simple terms, are public ledgers where the information about wallets and transactions is stored. With this information, companies like Chainalysis manage to identify wallets that are connected to malicious or criminal activity, such as Darknet transactions, linking such transactions to real identities.

To the contrary, privacy cryptocurrencies use the same blockchain technology, but try to go one step further, concealing information about senders and receivers during transactions through a variety of methods. The most famous of these coins is Monero, which uses ring signatures, ring confidential transactions, and stealth addresses to obfuscate the origins, amounts, and destinations of all transactions, providing all the benefits of a decentralized cryptocurrency, without any of the typical privacy concessions. On the same note, Zcash shielded addresses (that include their associated balances) are not visible on the decentralized blockchain that it uses. Finally, Verge uses multiple anonymity-centric networks such as TOR and I2P. The IP addresses of the users are fully obfuscated and transactions are completely untraceable in the decentralized blockchain that it uses.

Effectively, the use of this kind of cryptocurrencies nowadays may be the only way to “escape”, for legitimate reasons, the financial system control ensuring full privacy to any user than want to make an online transaction. Furthermore, if the “cashless” future is true, this kind of cryptocurrencies may become the only way to protect this human right to its full extent within the financial system.

However, due to its intrinsic characteristics, private cryptocurrencies have been subject to controversies for their relation to ransomware attacks, hacks, money laundering, bribery and terrorism financing. For these reasons, some cryptocurrency exchanges are delisting this type of coins and even some countries like Japan and France are banning these kinds of crypto assets entirely.

Notwithstanding that these accusations may be true and that they need proper review and care, we cannot forget that criminals use every new technology in their favor. Shockingly, criminals use cars, mobile phones and the internet itself. Additionally, we have to take into account that some researchers have calculated that the U.S. Dollar is used 800 times more than Bitcoin (the main and biggest cryptocurrency) in money laundering activities.

At the end of the day, everything comes to a political question. What kind of financial system do we want? A financial system fully controlled by banks and governments choosing complete security over the privacy of its users or a financial system that chooses the privacy of its users over complete security? Is there a real middle ground between these two alternatives?

Conclusion

This paper discussed privacy concerns in the financial system, analyzing its current status, the potential future of the same, and the options for privacy that currently exist. There are people that have begun to apply solutions to these concerns within the boundaries of the technology that we have today. Maybe, society can reach a reasonable agreement that respects privacy and security within the system, maybe the utilization of this technology could be justified. In any case, it is worth to analyze this kind of technology and its relation to the human right to privacy.