What Happened to the Dream of Private Cryptocurrency?

Wars and protests are supposed to be crypto’s big moment, as something that was built on cutting out traditional authorities. So far, cryptocurrencies have played a vital role in crowdfunded aid efforts to Ukraine, with the government buying military and humanitarian equipment using nearly $100 million in crypto donations, while Ukrainians and Russians alike buy up crypto stablecoins to escape monetary volatility. 

But crypto’s contrarian attitude has so far been mixed with sanctions that its gate-keepers—namely, exchanges—have to comply with.

Some observers, including Senator Elizabeth Warren, speculate that Russia may turn to the blockchain to evade sanctions, despite the analysis from the U.S. officials suggesting otherwise. Indeed, cryptocurrency has so far not been an escape from U.S. sanctions. On March 7, Coinbase revealed that it has blocked over 25,000 Russian addresses that it identified as involved in illicit activities over time, which the exchange reportedly flagged through its own "proactive investigations" and shared with the U.S. government to "further support sanctions enforcement." Major cryptocurrency exchanges have so far declined requests from the Ukrainian government to ban all Russian users, which would go beyond the current sanctions, however, Kraken CEO Jesse Powell tweeted that if the exchange was legally required to, it would do so.  

One rebuttal of the argument that crypto can be used to evade sanctions has been that Bitcoin and Ethereum are too transparent. Large injections of funds into the blockchain could be easily observable through blockchain explorers, and they can even be tied back to individuals by using the right tools in most cases. This has led to some commentators saying that if crypto is to live up to its original promise, for good or for ill, then it needs to be more private. 

Enter so-called “privacy coins.” Bitcoin, the world’s largest cryptocurrency that’s highly liquid and easier to cash out, was once associated with the online drug trade because dealers on the dark web accepted the fledgling digital payment option under the promise of anonymity. But as Bitcoin has come to be accepted by a wider population of society and the pseudonymous transactions began to be tied back to individuals behind them, the proportion of illicit activity has dwindled, giving way to privacy coins like Monero and Zcash.

Perhaps fuelled by sanctions news, top privacy coins experienced a price rally this week, with the $10 billion privacy coin market spiking 10 percent in 24 hours before cooling off.

At the heart of the matter is the fact that cryptocurrencies typically let anyone peek into its transaction records through blockchain explorers like Etherscan for Ethereum; it’s easy to look up what pussyriot.eth is up to on the Ethereum network. This level of transparency also means that financial institutions and government agencies can “taint” crypto that’s used in a crime, making it impossible for holders to cash out the proceeds of crime without being detected.

In response to transparency inherent in blockchains, there’s been a wave of coins that deploy some of the most innovative cryptography techniques in the crypto industry. 

First and foremost is Monero, which has been around since 2014 and uses three cryptography techniques to make all transactions private: stealth addresses (automatically-generated one-off address for the receiver in each transaction), ring signatures (a group of signatures involving at least one real person, this time to protect the sender’s identity), and ringCT (just an improved version of ring signatures).

Another privacy coin is Zcash, which relies on a cryptography technique called zk-SNARKs, or Zero-Knowledge Succinct Non-Interactive Argument of Knowledge. Zero-knowledge proofs communicate that something is true without revealing the data that proves it—like verifying you’re over the age of 21 without revealing your age or birthday. In this way, it “shields” the sender, receiver, and the transaction content. But the privacy feature of Zcash is optional, not the default like Monero.

Zcash launched in 2016 and is developed by Electric Coin Co., whose head of growth marketing, Chris Tomeo, told Motherboard they’re betting on the future of privacy coins since “consumer data continues to be misused and exploited, and as lawmakers and policymakers are becoming more educated about how cryptocurrencies work, people are starting to see how important privacy is for personal security, business security and national security.”

Dash, previously called Darkcoin before a name change due to dark web associations, is another privacy coin that launched in 2014. To make transactions private (also optionally, like Zcash), Dash deploys a mixing cryptography technique called CoinJoin to obscure transactions details. It’s found some appeal in inflation-hit Venezuela, after an all-out marketing campaign by Dash that included billboards and giving out phones with pre-installed crypto wallets, and it’s accepted by major real estate agency Re/Max as well as fast-food chicken chain Church’s.

So far, Monero is the clear winner in terms of uptake. 

“When people say ‘privacy coins,’ they almost certainly mean Monero. Monero has more private transactions than all other cryptocurrencies combined. In February 2022, Monero had over 100 times as many transactions that hid the sender, receiver, and amount than Zcash. It’s not even close,” Vikrant Sharma, CEO and founder of CakeWallet, told Motherboard. Cake Wallet has over 250,000 users, according to the platform data, and the users exchange hundreds of millions of dollars in Monero a year within the app.

Although Monero’s the king of privacy coins—it’s now a popular choice in the online drug trade—it’s still a far cry from cryptocurrencies like Bitcoin and Ethereum in terms of daily transactions, according to data from BitInfoCharts. These days, Ethereum records more than 1 million daily transactions, Bitcoin records around 300,000, with Monero coming in at 25,000.

By now you may be wondering: Can Russians—or another sanctioned state—escape sanctions by using privacy coins? Not according to experts Motherboard spoke with. 

“No amount of privacy can protect Russia from the devastating impact of sanctions, which have already cut them off from the Western economy no matter what currency they try to use,” Jake Chervinsky, Head of Policy at crypto industry lobby group Blockchain Association, told Motherboard. 

The Russian cryptocurrency market doesn’t have enough liquidity to facilitate sanctions evasion at a massive scale, Chervinsky said, “let alone the portion of the market for assets with strong privacy features. If Russia tried to purchase a meaningful amount of any such asset, the entire world would see that immediately,” he said.

Although transactions in privacy coins are cryptographically shielded from curious observers (and so there’s no equivalent of Ethereum’s Etherscan for Monero), it’s still possible to track the aggregate trading volume of all transactions. Monero has recorded only $112.5 million in trading volume over the past 24 hours, according to CoinGecko, with liquidity—or available cash for conversion—barely sufficient even for one Russian oligarch’s assets.

"While some illicit actors including ransomware groups use privacy coins in an attempt to obfuscate their transactions, they haven’t been adopted to the extent that one may expect. One reason is they aren’t as liquid as Bitcoin and other cryptocurrencies. Especially now that many exchanges have delisted privacy coins given regulatory guidance, they’re becoming increasingly impractical,” Gurvais Grigg, Global Public Sector Chief Technology Officer at blockchain analytics firm Chainalysis, told Motherboard.

“Cryptocurrency is only useful if you can buy and sell goods and services or cash out into fiat, and that is much more difficult with privacy coins," he added.

Despite the limited uptake and legitimate uses by individuals concerned about privacy, Monero is particularly popular for ransomware and criminal transactions on the dark web. That has irked U.S. regulators, leading government agencies to spend $8.5 million on contracts with blockchain analytics firm CipherTrace—recently acquired by MasterCard—trying to crack privacy coins and their blockchain record of transactions.

“Organizations like CipherTrace only exist because of the fatal privacy flaws in transparent cryptocurrencies,” Seth for Privacy, a pseudonymous Monero community organizer,  told Motherboard. “They have shown a clear ability to trace transparent cryptocurrencies like Bitcoin and cryptocurrencies that only offer opt-in privacy like Zcash quite easily and effectively.” When it comes to Monero, however, Seth expressed doubt that firms’ tracking capabilities are as formidable as they claim.

CiperTrace declined Motherboard's request for comment.

Privacy isn’t a lost cause for major cryptocurrencies despite their inherently transparent design, however. 

Users that want privacy for good or bad reasons turn to the so-called privacy mixers like Tornado.Cash, which processes hundreds of millions of dollars every day, according to data from Dune Analytics. Launched in August 2019, Tornado.Cash uses zero-knowledge proofs—similar to Zcash—on the Ethereum network. Users can send 1, 10 or 100 ETH to the mixer protocol and expect to receive the funds on another Ethereum address that only they will know. 

But these transactions risk getting de-mixed by persistent analytics firms loaded with funding and technical capability, as was recently the case with the highly private Wasabi Bitcoin wallet in a blockbuster investigation by journalist Laura Shin exposing the likely culprit behind one of crypto’s biggest whodunits.

Crypto privacy projects like Secret Network, Thorchain, have begun integrating with Monero for use of the asset on their platforms, Sharma of CakeWallet explained, adding that outside of Monero, some projects are also slowly moving in the direction of privacy. Litecoin, which launched in 2011 and is currently the 21st largest cryptocurrency by market cap, has plans to add an optional feature called MWEB to better hide some transaction data, while Zcash is making it easier to automatically send funds into a shielded pool—part of the chain that’s optionally private.

Although the U.S. government and cryptocurrency experts alike say privacy coins–or any type of cryptocurrency–can’t be realistically used for sanctions evasion, the idea that Russia can use privacy coins resonates with the privacy coin community, who see privacy coins as being similar to other privacy-preserving tech like Tor or Signal that helps “good” guys and “bad” guys equally, because if they’re going to work, they have to.

“[When cryptocurrencies like Monero] can be used for preserving wealth during dangerous border crossings, fleeing authoritarian regimes, or funding political dissidents in oppressive countries, they can also be used for evading sanctions or breaking current laws,” Seth said, speaking in a personal capacity, though adding that he believes these views are widely shared by the Monero community.

“This is the stark reality of technology, and also applies to smartphones, internet access, and cash, all of which are used far more often for ‘nefarious’ things than cryptocurrencies today,” he added.