Can Privacy Coins Survive Regulation?

BitBay’s announcement to stop accepting Monero deposits and halt all XMR trading by February 2020 has drawn attention to privacy coins. The main concern is whether or not they can survive increased regulatory measures that cryptocurrency exchanges face in various countries. Governments and regulators are interested in curbing money laundering, and they believe privacy coins constitute a vulnerability to their money laundering policies. BitBay specifically cited Monero’s anonymity feature as the reason behind the delisting, noting it could facilitate money laundering:

“Monero (XMR) can selectively utilize anonymity features among projects. This feature of XMR is a subject to end of transaction support. The decision was made to block the possibility of money laundering and inflow from external networks.”

Monero Delisted from Other Exchanges

This move comes after South Korean exchanges UpBit and OKEx delisted Monero. OKEx announced it was delisting privacy coins Monero, Dash, and Zcash to keep in line with the Financial Action Task Force’s guidelines for cryptocurrencies (although it later announced it would review the delisting of Dash and Zcash). These types of delisting are not new; in 2018 the same three coins were taken off Coincheck in Japan due to the country’s Financial Services Agency’s policy on anonymous cryptocurrencies.

The fact that governments are increasingly hostile to anonymous transactions is not a secret. Many have been limiting the use of cash as well. Others, like the governments of Iran and China for example, have expressed their interest in building a blockchain-based national currency infrastructure, which would allow them to easily keep tabs on every transaction made with their currencies.

Privacy Coins Could Adapt to Regulation

Regulation is bound to tighten; governments will not walk these policies back. Faced with increased regulation, the communities behind privacy coins can choose to adapt. Dash has announced its plan to integrate AML/KYC solutions in collaboration with Confirm to comply with regulatory requirements. This decision has been greeted by a mixed reaction. Some praise the move while other criticize it.

Praise comes from those who focus on the potential to improve adoption of cryptocurrencies and working for the first time with traditional institutions, while addressing issues of fraud and money laundering. On the other hand, critics focus on how compliance could undermine its already vulnerable – considering master nodes’ control of information – privacy features.

Monero is Unlikely to Conform to Regulatory Standards

Alternatively, privacy coins and the communities behind them can participate in regulatory arbitrage and shift their operations to places that are more welcoming. Monero’s Fluffypony commented earlier this year that something like this would happen, and in fact exchanges like Binance, OKEx, and BitBay have moved their operations to places like Singapore and Malta.

Regulatory Challenges

As regulators and financial watchdogs seek to implement additional regulatory requirements for privacy coins. The challenge will be the evolution of cryptocurrencies. While blockchain forensics and analytics can help identify and track users of currencies on open ledgers, additional protocols like MimbleWimble can increase privacy of coins like Bitcoin and Litecoin.

Additionally, AML measures on traditional financial assets fail to produce significant results. According to a UN study in 2011, less than 1% of illicit financial flows are seized and frozen. Meanwhile privacy in cryptocurrency helps curb other types of crimes like targeting owners of wealth for theft, making private business information public, and allowing third parties access to individual’s financial history.

Privacy is Always Superior

It seems that privacy is always for the law-abiding individual or organization, which constitutes the vast majority of world population. Should a few bad apples prompt this kind of reactionary government policy that curtails freedom? As far as privacy coins are, it seems that they are the canary in the coal mine. They can survive the regulatory onslaught, but market access to them can be curtailed. Therefore, exchanges must understand that keeping them listed is part of a wider struggle for crypto, because governments will eventually turn their attention to the rest of the space.