The spotlight is firmly on the future of cryptocurrencies in India these days as the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 comes up for discussion and debate in the winter session of Parliament, starting on November 29. The mention of private cryptocurrencies in the Bill has triggered speculation over their fate and their exact definition.
While you may be familiar with popular cryptocurrencies such as Bitcoin and Ethereum, there are a bunch of cryptos that ensure privacy of transactions – by privacy, we mean anonymity. These cryptos cannot be tracked. The route that any given transaction takes is meant to obfuscate means of tracing the source.
Why are private cryptocurrencies in the line of fire?
For obvious reasons. It is impossible for governments and regulators to keep a tab on transactions done using private cryptocurrencies. Such cryptos have the potential to be exploited for money laundering and terror funding purposes.
No government wants to allow the problem of private cryptos to get out of hand. Japan and South Korea have already banned private coins. A few days ago, Reserve Bank of India (RBI) governor Shaktikanta Das had again warned that cryptocurrencies pose concerns surrounding financial stability.
Kraken, a cryptocurrency exchange in the UK, has intimated its users that the platform will stop trading the privacy coin Monero from Friday. It follows another exchange Bittrex, which stopped trading privacy coins earlier this year. Coinbase, another popular crypto exchange, has held off listing privacy coins, citing regulatory uncertainty.
Cryptocurrencies, at least the popular ones, work on blockchain technology. A blockchain is a decentralised ledger (like a register or a file) of transactions using crypto coins. It isn’t maintained or stored in one place or with any central authority.
Instead, it is spread across a network of computers, known as peer-to-peer networks. The system is used to authenticate all transactions done using crypto coins. The appeal is two-pronged – security of the transaction chain as it cannot be hacked into, and the anonymity it usually provides. There is absolute traceability of transactions, though, with wallet addresses, too.
Private cryptos: Untraceable, camouflaged
The concept isn’t new. Monero, which has been around since 2014, is one of the earliest crypto coins that introduced the concept of private and anonymous transactions using digital currency. It has since been joined by the likes of ZCash, Dash, Verge, Grin, ByteCoin and Firo, to name a few.
These coins use a bunch of techniques to add a layer of anonymity to transactions – such as ring signatures that jumble the sender’s public key with random keys, stealth addresses that hide the original sender’s crypto destination address, and zero-knowledge proofs that don’t require evidence of actual information.
Monero, for instance, initiates a transaction in which the protocol creates a randomised on-time user destination address. This is called a stealth address. You think you have used a similar service on your phone or PC to create a randomised email address to not have to share your real email address. There’s Hide My Email on the Apple iPhone with iOS 15, for instance. The difference is that Monero does it for financial transactions between people. To further anonymise the transactions, there are ring signatures that are blended into the sender’s public key, to make it unrecognisable.
Within the privacy coins space, there are two approaches. “All transactions on the network are private by mandate. There is no way to accidentally send a transparent transaction,” says Monero. Yet, ZCash provides an option. “The owner of an address may choose to disclose z-address and transaction details with trusted third parties – think auditory and compliance needs – through the use of view keys and payment disclosure,” the platform says.
The anonymity is further tightened by the use of a technique called Ring CT, which hides the real transaction values and uses obscure wallet addresses for these transactions. ZCash coin also uses similar techniques to help users with anonymous transactions, the only difference being, it uses a system called “zk-SNARKS” instead of zk-proofs to authenticate transactions without having to convey any information that would otherwise be needed.
Another coin, Super Zero Protocol, takes it a step further with the “Super ZK” method that is claimed to be 20 times faster than ZCash’s method.
Certain coins, such as Grin, also use the method of hiding transactions and complicating the trail by sending it through several peers on different networks, while removing details such as the origin of the transaction and the amount. The Verge coin integrates the TOR, or The Onion Router platform, to hide IP addresses of the sender and the receiver of a transaction.
The risk to the existence of private cryptocurrencies comes from their appeal – ensuring privacy and anonymity. No government would want to risk illegal financial transactions or funding of activities using cryptos, which can’t be traced. Privacy coins attempt to make the trail go cold. No wonder they have kicked up a firestorm.