Privacy Cryptocurrencies

-- By RaulMazzarella; 4 Jan 2020

Privacy in the online financial system

The right to privacy has been recognized as a human right in several constitutions and statutes around the world, among other reasons, because of its importance as a form of respect to the individual and its relation with freedom of speech. The protection of the right to privacy within the internet is of the greatest importance, especially after the famous Snowden’s global surveillance disclosures. In this context, privacy cryptocurrencies appear as an alternative to protect this right specifically within the online financial sector but with several problems to be addressed on the way to this goal.

Nowadays, a considerable amount of financial transactions is made in a digital fashion and everything indicates that this trend will keep growing. Usually, these kinds of transactions have to be made through the banks' centralized systems, so it is almost impossible to escape from them if you want to perform an online operation. 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 bank, eliminating cash altogether. This idea would have benefits for the users, such as fast and secure transactions and States would have easier control of money laundering, bribery and terrorism financing. However, this financial system comes paying a great price: privacy for the users of the system, and here is exactly where this technology enters the game.

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.

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, which are public ledgers where the information about wallets and transactions is stored. With this information, it is possible to link 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 technical methods. The most famous of these coins are Monero, Zcash and Verge.

The law in most places, including the U.S. doesn’t prohibit the use of cryptocurrencies and neither privacy cryptocurrencies and, in some jurisdictions, they follow collectibles rules for tax and other purposes, just like it happens with the ethanol tax credit.

Effectively, the use of this kind of cryptocurrencies nowadays may be the only way to completely “escape”, the financial system control ensuring full and complete privacy to any user than want to make an online transaction.

The issues

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. Moreover, this is one of the easiest ways to achieve financial secrecy and licensed tax evasion by the world’s rich, which is a big economic issue for States that are always trying to collect the maximum amount of taxes permitted by law.

Taking these factors into consideration, the cure may be worst than the disease. The risk of letting unregulated and uncontrollable digital assets take control of the financial system is too high to be allowed, reason why my view is that this kind of assets should be regulated and controlled in the only instance that is possible: within the cryptocurrency exchanges at the moment of its conversion to a traceable cryptocurrency or fiat (regular) money. The users of these assets should justify a general reason for its use just to discard the abovementioned risks as much as possible, following the anti-money laundering/combating the financing of terrorism (AML/CFT) standards and regulations. Of course, this will limit the privacy that these crypto-assets intend to have, but I believe this is the only reasonable way to keep them under control. Therefore, I believe that complete privacy within the financial sector is impossible to achieve to its full extent due to the risks associated with this specific sector.

Now, on the other hand, 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 in money laundering activities, which reminds us that it is extremely difficult to have complete control over financial activities in general.

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, but with severe issues on the way to achieve this.

As a matter of public policy, governments should implement the strictest privacy laws to ensure that the “standard” online financial system protects this important right. In the way to accomplish this, the academy and the general population should help letting the governments know of their interest in this human right.

Regarding privacy cryptocurrencies, they should be regulated within the context of the cryptocurrency exchanges, applying to them AML/CFT policies, but trying to preserve the privacy of the users as much as reasonably possible, to avoid the risks associated with them.

I believe that it is impossible and dangerous to achieve complete privacy within the online financial system for the reasons stated, but we, as a society, should do everything at our disposal to reasonably protect the privacy of the users of the same.

I made a couple of suggestions: (1) that private cryptocurrencies are neither more opaque nor more dangerous to the world financial system than other collectibles of inherently limited quantity, which finance and tax law seem to be able to deal with; (2) that other regulatory schemes are analytically closely-related, and that you might want to look at the administration of the ethanol tax credit; and (3) that all the cryptocurrency privacy in the world doesn't amount to anything compared to the forms in which the world's wealthy really do their hiding and transaction-obscuring. Each of these resulted not in learning for you, but merely some shout-out in the next draft. This was unfortunate. Those were illustrations of points to think about, not tokens to be cashed in by reference.