by Jake Wengroff
Private cryptocurrency, also known as privacy coins, is a class of cryptocurrencies that offer anonymous blockchain transactions. In order to obscure the origin and destination of cryptocurrency transactions, some techniques used in trading cryptocurrency assets include hiding a user’s real wallet balance and address, and mixing multiple transactions with each other to elude chain analysis.
Bitcoin and other non-private blockchains, on the other hand, offer transparency by allowing anyone to perform chain analysis and view public addresses and transactions in their network. In this way, it is possible to track someone’s deposits and withdrawals of bitcoin and other non-private cryptocurrencies.
However, private cryptocurrency offers both anonymity and untraceability. Anonymity hides the identity behind a transaction, while untraceability makes it virtually impossible for third parties to follow the trail of transactions using services such as blockchain analysis.
Strategies Used by Private Cryptocurrency
To effectively preserve anonymity and untraceability, private cryptocurrency employs a variety of different strategies, the most popular of which include stealth addresses, ring signatures, CoinJoin, and zk-SNARKs.
- In order to avoid being linked to a receiver, stealth addresses are used by senders to generate a new address for every transaction. Monero (XMR), one of the more well-known privacy coins, uses a version of stealth address called the dual-key stealth address protocol (DKSAP).
- Ring signatures combine a sender with other signers in a ring to hide the identity of the sender. The higher the number of additional parties in the ring, the harder it is for someone to connect the sender with the transaction.
- CoinJoin is known as a coin mixer that merges transactions from various individuals into a single transaction, and then disburses them to their respective users using new addresses.
- Zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) allow cryptocurrency holders to prove a transaction’s validity without divulging critical identifying information, such as that of the parties involved in the transaction, or the account balances.
Legal Status of Private Cryptocurrency
The legal status of private crypto assets depends on individual jurisdictions. For example, the South Korean government prohibits trading privacy coins on the country’s crypto exchanges in order to curb money laundering. The government of the United States has taken a strong hand with respect to private crypto, developing tools to remove the secrecy of transactions conducted through private networks. However, jurisdictions that have not banned privacy coins have not necessarily endorsed them, either. As such, there is much gray area, and investors may not have any recourse should there be fraud or compromise.
Anonymous financial transactions usually mean that money laundering or other illegal activity is going on. However, private cryptocurrency is not necessarily used by such individuals. Some users simply value their financial privacy and are exercising their fundamental rights, yet the number of governments making attempts to monitor or shut down untraceable digital currencies is steadily rising.
Adding Title to Crypto for Legitimate Transactions
Security continues to be an ongoing issue for cryptocurrency because, as a bearer asset, whoever holds the private key to a crypto asset is considered the owner. As such, it is extremely difficult to demonstrate proof of ownership should a private key be lost or stolen.
At first glance, proof of ownership might not make sense in a discussion about the anonymity and untraceability of private cryptocurrency. But just because these coins may offer more anonymity, it does not make them any less vulnerable to loss by hacking or fraud. Recovering public cryptocurrencies that have been lost in this way is already difficult, and these challenges are only exacerbated by private cryptocurrencies. This is because the bread crumbs left behind by a transaction that can be used to help demonstrate proof of ownership are even harder to track down.
Indeed, the industry is in need of infrastructure to verify the rightful ownership of cryptographic assets. TransitNet is currently developing the industry’s first offchain title registry of record for digital wallets. This will create an additional layer of protection and record-keeping for cryptocurrency assets.
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
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