Privacy is a big concern in centralized and decentralized finance. Naturally, people don’t want other people viewing and analyzing their banking history and personal finance records. Banks are aware of this fact, and they only surrender people’s banking data when confronted by court orders. The same privacy is a necessity that crypto pseudo-anonymity addresses.
One of the biggest challenges facing bitcoins is the perceived criminality associated with its pseudo-anonymous nature. It’s pretty easy for entities to track the entire transaction history of cryptocurrency users.
Pseudo-anonymity shouldn’t necessarily be associated with criminality. Even though Bitcoin doesn’t completely hide your identity by default, it’s opt-in, full-anonymity features are morally sound. Cash can also be completely anonymous, and the illegal use of currencies, crypto or fiat, is an indictment to the users, not the currencies.
Some of the opt-in identity-masking features in the crypto ecosystem offers privacy wallets and exchange wallets. Privacy wallets are software installed on web services, mobile phones, and customized hardware. They are permissionless, and users have exclusive access to their private keys.
Before the December 2020 Financial Crimes Enforcement Network, most popular privacy wallets were really private. The legal establishment isn’t all too comfortable with privacy wallets, and it’s subjecting them to these new regulations.
In this article, we discuss the challenges facing cryptocurrency users who try to conceal their transaction histories. On robust, globally-dispersed, public ledgers, are privacy wallets really private in 2021?
How is Blockchain Transparency Bad for Privacy?
Would you print out all of your financial records and publish them on the internet for anyone and everyone to see? Well, you’d regret it later, even if you have no shame or need for any privacy.
The friend who’s repaying your debt wouldn’t want people to know you helped post their bail. Your friends would start wondering why their spouses send you money all the time. That utility company that overcharges you would get negative PR because analysts are always scouring the internet for such data. Worst of all, your mom would be embarrassed because she tells people you work at some fancy law firm, but she’s lying and supports you with her life savings.
Your records should be kept private because exposing them reveals private data about people who transact with you. Revealing your identity on blockchain technology surmounts to publishing all of your banking histories on the most popular publications in the world.
At this point, blockchain transparency seems like a double-edged sword, right? Well, privacy coins preserve transparency while masking your identity. People can see the deals, but they don’t need to know who was behind them.
The Advantages of Privacy Wallets
Every blockchain user has an address, and blockchain addresses are the sole user-identification sources of data. You must reveal your public keys to the users with whom you are transacting for authentication of transactions, but public keys are pseudo-anonymous.
Privacy wallets conceal your identity by mixing up your bitcoin addresses with every transaction. These wallets allow you to own and transact cryptocurrencies without requiring any identification details like:
- Name.
- Email address.
- Phone numbers.
- Zip code.
- ID verification.
They are also non-custodial, which means you have exclusive access to your private keys. You can engage in permissionless, peer-to-peer transactions, and these wallets further enhance your privacy via premium features.
These wallets conceal your bitcoin address by giving you multiple wallets with many unique bitcoin addresses. Therefore, you can randomize your spending by sending and receiving digital currencies via separate addresses generated by your privacy wallets.
Another way you could be identified is via your IP address. If you are always using the same gadget browser that you use for Facebook and Twitter, your identity can be revealed in no time. Privacy wallets come preinstalled with VPNs and Tor browsers to mask your IP address every time you are transacting.
Reliable privacy wallets also convert cryptocurrencies into privacy coins. Features such as True Random Number Generators secure your signatures. Some even feature controversial coin-laundering services, making it impossible to track how bitcoins are spent and the relationship between coin users.
Implications of the Proposed Financial Crimes Enforcement Network on Privacy Wallets
These regulations are already infamously referred to as know-your-customer requirements, and they outrightly encroach on and impede user-privacy. These proposed laws demand privacy wallets to do the exact opposite of what they promise.
For instance, decentralized exchanges will be required to take your personal information whenever your transactions hit $10,000 in a day. The laws prescriptively require exchanges to store that data for authorities to retrieve upon demand.
It gets worse. Users must tie their identities to their private wallets whenever sending more than $3,000 in a single transaction. Worst of all, you can’t transact with other private wallet owners without explaining personal details to your exchange service.
The Fundamental Flow with Ignorant Regulations
The SEC is entangled in civil lawsuits with crypto exchanges for categorizing them as securities exchanges instead of commodities exchanges. Regulators continued demonstrating their ignorance of user-protection by proposing Financial Crimes Enforcement Network to infringe on privacy wallets.
Blockchain technology can be useful, but proposed regulations transform the tech into a dreadful web of embarrassment. These laws would diminish anonymity and discourage the ownership of private wallets.
Cryptocurrencies record transactions publicly, and revealing user identities would infringe on privacy protections over lifetime transaction histories. The more would kill cryptocurrency adoption and curtail the privacy rights of the millions of digital coin users.
Parting Shot
Will privacy wallets be really private in 2021? Well, if proposed laws are anything to go by, these wallets will lose all the privacy they offer. However, it’s improbable that the proposals will be adopted into law as they are. Major exchanges like Coinbase are appealing for more time to call for reviews.
If regulators are adamant, the matter may end up in court. Civilian litigation over the matter can help streamline glaring privacy issues while addressing national security concerns.
In the meanwhile, it is too early to tell. We can contribute to the unfolding debates and voice our opinions. Feel free to comment your thoughts on these proposed know-your-customer policies in the comments section.
