Are Zcash, Monero et al. on collision course with KYC-AML laws?

Cryptocurrencies, after a decade-long existence, seem to have cemented themselves in the world’s collective consciousness as a legitimate form of currency. While cryptos like Bitcoin have peddled a variety of narratives and perhaps works best as a store of value, many altcoins have emerged to lay claim to niche use cases. The emergence of privacy coins like Zcash and Monero is an example of such a trend.

On the latest episode of the Wolf of All Streets podcast, BullyESQ, Co-founder of Alpha Marketplace and Arrow Privacy Coin, highlighted how privacy coins have precipitated fundamental shifts in the crypto-industry, expanding on how their progress affects present-day AML regulations.

He pointed out that in the case of shielded transactions such as the ones enabled by zk-SNARKs, the form of zero-knowledge cryptography which Zcash is based on, there are quite a few challenges for users and exchanges when its comes to AML compliance and KYC-related regulations. He noted,

“I think exchanges were nervous about the shielded nature of the Z addresses because they didn’t want to inadvertently run afoul of these KYC rules…They were probably nervous about that. So I think it was a combination of the computationally intensive nature of the zk-SNARKs and then sort of enforcement issues related to exchange listings.”

BullyESQ also noted that while shielded transactions are frowned upon from a regulatory perspective as they add a level of anonymity that can enable fraudulent activity, a revolutionary implementation in Zcash as well as in Arrow is the ‘view key.’

“So if you’re in control of the wallet address of a particular wallet for Zcash, and for Arrow, you can view the transactional details related to even shielded transactions. So it’s almost like a master key to be able to view the transactional details.”

This implementation enables the shielded transaction to exist solely between the individual. He elaborated,

” So the idea is when an Arrow or a Zcash shielded transaction goes from the exchange to a private wallet, the exchange would put something in the memo field indicating where it went and where it was going. Just so if they needed to show the regulator where those transactions originated from that detail would be included in the memo field.

According to the Alpha Marketplace co-founder, these implementations ensure that even in the case of privacy-oriented cryptocurrencies, the value they bring is not at the cost of non-compliance to existing KYC-AML regulations.

Earlier in the year, crypto-analytics firm CipherTrace had named privacy coins as entities that present regulations are still not adequate enough to handle when it comes to crypto-enabled money laundering practices. The report had noted,

“Specifically, the money laundering risks of crypto-to-crypto exchanges, privacy coins, and anonymizing services are not well addressed by lawmakers attempting to regulate blockchain technology assets based on the physics of fiat currency.”

Interestingly, BullyESQ also highlighted that other privacy coins that do not have the aforementioned features related to shielded transactions may invite greater ‘regulatory pressure’ in the coming days.