The world of cryptocurrencies is evolving at a breakneck speed. Newer coins and tokens with additional features keep getting introduced every now and then. However, not all are able to leave an impact. Privacy coins are one such type that has so far seen less-than-expected adoption.
Privacy coins were introduced to keep user transactions anonymous leaving no trace of how the money moved through the network. This makes tracking transactions difficult and can be used to keep financial activities under cover.
But what’s so different about privacy coins? Many people believe that most cryptocurrencies offer a great deal of anonymity and privacy. While this is true to some extent, it is not all that hard to reveal a user’s identity.
Keeping this in mind, many cryptocurrency traders felt the need for a coin that completely shields a person’s identity. This is where privacy coins came into the picture.
What are privacy coins?
A privacy coin does exactly what its name suggests. It obfuscates a user’s identity and other transactional information that can be used to identify them. Thus, such coins provide a level of privacy that other cryptocurrencies don’t.
Privacy coins employ various methods to do this, such as hiding the wallet’s address and mixing multiple transactions using a coin mixer.
Monero and Zcash are among the largest privacy coins in terms of market capitalisation. But Zcash allows users to turn the privacy feature on or off as per need. Dash is another coin that started off as a privacy coin but was later rebranded.
Many other privacy coins use a coin mixer. The mixer combines your funds with the funds of numerous other remitters and then sends them to the receiver. So, if anyone were to look into the transaction, they would see money being sent to the coin mixer and not to the intended receiver. And, if anyone were to look into the receiver’s transactions, they would see crypto being received from the mixer, not from you.
Who uses privacy coins?
There is a consensus among critics that privacy coins are used for criminal activities. There is significant data to back this as well. Monero, for instance, was used for 44 percent of the ransom attacks in 2018. With the anonymity privacy coins provide, they are also a very popular transaction tool on the dark Web.
Why are privacy coins not widely accepted yet?
One of the biggest hurdles that are currently preventing the broader adoption of privacy coins is its legality. The risks associated with using these coins for financial frauds have led to restrictions on their use in many countries. Several countries like South Korea and Australia have imposed restrictions on exchanges to allow trading of privacy coins. Others like Japan have an outright ban on them while the US has neither endorsed nor banned privacy coins, putting them in a grey area.
However, most countries are tightening their KYC norms for privacy coins under their prevailing anti-money laundering laws.
Another key reason for its limited use is lack of ease in usage. It is believed to be relatively technically challenging for users to transact in them daily. Also, the costs involved in getting the added privacy feature are high.