Last November, the EU’s plans to ban all privacy coins were leaked to the press. The early draft, seen by CoinDesk, would outlaw all “anonymity-enhancing coins.” It has provoked a frenzied debate in parts of the crypto community.
The transparency of blockchain is inherent due to its design, as in the case of a public blockchain, all transactions are recorded in an immutable ledger that is visible to everyone. This is perfect for many use cases but not for others.
One of the early critiques of Bitcoin was that although it was decentralized, its public nature couldn’t offer privacy. Zcash, initially known as Zerocoin, was designed to fix some of the privacy concerns associated with Bitcoin. The project used a form of zero-knowledge proof called zk-SNARKs which allows for transactions to be verified without revealing the recipient, sender, or transaction amount.
Zcash helped create a precedent and a framework. By using zero-knowledge cryptography, they became the first open, permissionless financial system.
Under the leaked EU plans, zcash – and other privacy coins and chains like dash and monero – would be outlawed across the EU’s 27 countries. As the EU economy is worth over $16 trillion and contains almost half a billion people, this would be a huge blow to international anonymity. Before the bill becomes law, the European Council and the bloc’s 705-member Parliament must agree upon it.
“There are legitimate needs for anonymity in finance for users at the retail to [the] institutional level. From privacy/personal safety, all the way to protecting competitors from emulating strategic business transactions,” says Alex Pruden, CEO of Aleo. “A flat ban on all anonymity-enhanced crypto protocols would not effectively stop money laundering, as the majority is still done using physical cash or through the traditional financial system.”
Governments Can Be Selective About Privacy
Central banks and governments aren’t always against blockchain-based privacy, especially when it works for them. The so-called “godfather of privacy” and the creator of the Bitcoin predecessor eCash, David Chaum, has recently been working with the Swiss National Bank on a prototype privacy-protecting CBDC (central bank digital currency).
CBDCs are digital versions of fiat money. They are issued and backed by central banks. The purpose of CBDCs is to function as a payment method. They also intended to function as a store of value, similar to physical cash.
The CBDC will combine privacy, scalability, anti-counterfeiting measures, and quantum-resistant cryptography and is based on Chaum’s blind signature technology. Chaum has said his method could prevent the government from tracing people’s use spending. And also allow law enforcement to track criminal funds.
If Chaum’s technology succeeds, there is a clear reason why governments would adopt it. A digital fiat currency that provides the privacy of cash, but the traceability of bank transfers, works for both parties. Because a centralized authority controls CBDCs, they have mostly been a contentious issue in the crypto community. Many see CBDCs as an additional means for governments to exert control over the financial system. Cryptocurrencies are specifically designed to counteract this.
A privacy-guaranteed CBDC is far more likely to receive a positive reception from those already using a digital currency.
Chaum announced in the partnership with the BIS Innovation Hub Swiss Centre and the Swiss National Bank that they provide a better level of privacy than cash and guarantees the privacy will not be taken away from the end user.
Privacy is Hard Won and Easily Lost.
Unfortunately, Chaum’s constructive partnership with state institutions appears to be the exception, not the rule.
The state-backed assault on privacy comes from many fronts and in many forms. In 2019, the Russian government implemented an authoritarian “Sovereign Internet Law.” Among other things, it requires internet service providers (ISPs) to allow the government to monitor and control internet traffic and to store data on all internet traffic for six months.
China’s Great Firewall creates an intranet (an internal internet) walled off from the open, free web most netizens use today.
The West is not innocent, either. As a result of the Patriot Act and FISA Amendments Act, the United States has the capability to surveil its citizens’ online activities and communications. The legislation also allows the state to collect corresponding metadata. British residents will, by law, have their “internet connection records” stored for up to a year.
We won’t enter into the debate about either legislation here, but the crypto community is understandably hesitant to accept the same creeping standards on its own patch.
We must build technologies that preserve user privacy by design, says Kenny Li, co-founder of Manta Labs. “Lawmakers are now targeting technology developers with misguided legislative and regulatory actions. Open source code and distributed networks make our digital economy more resilient.” Privacy, security, freedom of expression, and access to knowledge, should not be undercut by bad policies, he says.
“The recent infringement of data privacy legislation from federal lawmakers in both the United States and Europe made us realize that creating open-source privacy-enhancing technology was more critical than ever.”
Governments Need To Find A Balance
Intelligent policy-making from governments should recognize where blockchain-based privacy has its uses. This includes healthcare and certain financial requirements like KYC (know your customer.)
“Several new blockchain use cases require privacy to operate,” says Scott Dykstra, co-founder, and CTO of Space and Time. “Today, these activities are managed off-chain by centralized authorities and tied back on-chain to anonymous wallets. Privacy is left entirely in the hands of centralized parties, and the decentralized, trustless, tamperproof nature of the blockchain ecosystem is violated. Some projects are leveraging encryption and ZK proofs to provide a solution where data remains private but verifiable, but these projects are still in development.”
There is no doubt that 2023 will be the most dramatic year for privacy in crypto. Builders, users, and advocates will inevitably have their say, and the prize of a more balanced system is still up for grabs. “There has always been a fine balance between security and privacy,” continues Dykstra. “Privacy coins are simply the latest innovation wrestling with those trade-offs.”
BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.