Recent weeks saw a massive surge of the so-called privacy coins’ prices — namely Monero (XMR), Dash (DASH), Zcash (ZEC) and Haven Protocol (XHV). As many other cryptocurrencies and the industry at large faced immense regulatory pressure amid the war in Ukraine, one narrative that began taking hold in the crypto space was the potential of such privacy-enhancing assets to provide investors a greater level of financial anonymity. But, can privacy coins deliver on Bitcoin’s (BTC) original promise?
A good month for privacy-focused assets
Over the past month, Monero has almost doubled its tally. With some minor oscillations, it rose from $134 on Feb. 24 to over $200 on March 26. ZEC showed even more impressive dynamics that hiked from $88 to $202 over the same period. DASH also pulled off a rally, if a bit more modest, from $83 to $128. One of the biggest winners appeared to be XHV, which has almost tripled its price from $1.60 to $4.20.
Two main macro-level factors could underpin this sudden rise of privacy coins. The first one is the regulatory pressure building up around more “mainstream” cryptocurrencies due to the war in Ukraine and the resulting suspicion — as unsound as it is — that Russian elites can use crypto to circumvent the financial sanctions imposed on them. Another one is the executive order by United States President Joe Biden, which, in fact, doesn’t bring any outright harm to the industry with its roadmap or reports that should eventually lead to a clear regulatory framework for digital assets in the U.S.
Speaking to Cointelegraph, Justin Ehrenhofer from the Monero community suggested that the recent price surge has come from more family funds and individuals holding Monero as a hedge and was spurred by recent market and political turmoil. A member of the Haven Protocol community, Ahawk, tied XHV’s price spike to an upcoming integration on THORChain, which he called one of the most cutting-edge decentralized exchanges (DEXs) in all of crypto. Jack Gavigan, executive director of the Zcash Foundation, said that the surge of privacy coins’ prices could be the result of Bitcoin price’s strong dynamics.
Privacy without compromises
At the outset of the cryptocurrency movement, anonymity was one of the core promises of Bitcoin and crypto at large. But, alongside industry maturing and gradually merging with the traditional financial markets, digital currencies have faced a demand from both institutional investors and regulatory bodies everywhere to comply with the Know Your Customer (KYC) and Anti-Money Laundering (AML) standards. This strips users of anonymity, at least at the point of withdrawal/exchange operations on compliant platforms.
As a series of high-profile enforcement actions in the U.S. demonstrated, blockchain traceability also doesn’t help those who wish to hide their financial operations.
Privacy coins came about as a reaction to these compromises. “Bitcoin has never been private. Ether has never been private. Tether has never been private,” Ahawk noted to Cointelegraph, explaining crypto developers’ persistent drive to create “truly private,” fungible cryptocurrencies. Given the tendencies toward corporate and government overreach, it’s no surprise that such currencies have enjoyed heightened demand in recent years. Ahawk added:
“Why do you need a password for your bank account? For the same reason crypto users increasingly need privacy options: You don’t want anyone to be able to see your entire financial history with the click of a few buttons. Just because you want your money and financial decisions to be private doesn’t mean you’re doing anything wrong.”
Ehrenhofer said that without privacy, each address and output have unique histories associated with them, losing digital money’s key feature: fungibility. He commented:
“This opens the door to mass surveillance and the assignment of proprietary risk scores to everyone’s money, which in turn makes transparent assets nonfungible in practice.”
Gavigan, who himself wrote the Regulatory & Compliance Brief for Zcash, doesn’t see any major difference between privacy coins and traditional bank accounts in terms of KYC/AML compliance:
“While the bank may not be able to see where you got the cash from or what you spend it on after you withdraw it, they still know who you are, and they can assess whether your deposits/withdrawals are normal for the type of customer you are.”
Will regulators push back?
This appetite for anonymity, however, doesn’t find many supporters among regulators and law enforcement. South Korea was the first country to outlaw anonymity-enhanced currencies (AEC) straight away in November 2020. A month later, the U.S. Financial Crimes Enforcement Network (FinCEN)
Read More: Privacy coins are surging. Will regulatory pressure stall their stellar run?