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Can Bitcoin satisfy both privacy-sensitive regulators and users?

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For users who value financial privacy, cryptocurrencies have always been extremely relevant alternatives. Cryptocurrencies like Bitcoin have their origin story deep-rooted in this core ideal, clubbed with a general mistrust of institutions that wield a lot of power. Thus, the decentralized and trustless system on which all other cryptos are based on was born.

Privacy features aren’t enablers of crime

Right at the outset, it should be noted that crypto’s emphasis on privacy has resulted in Bitcoin’s vilification – deeming it the currency of drug dealers and bad actors. However, such an attitude towards crypto has changed significantly over the past few years as cryptocurrencies like Bitcoin have seen growing adoption, with BTC even deemed as the best performing asset of the past decade by mainstream media houses.

While Bitcoin does offer greater privacy, this doesn’t necessarily mean that it guarantees anonymity. Over the years, the rise of privacy-centric cryptocurrencies like Monero and Zcash has allowed users to access privacy features Bitcoin could never offer. While there continue to be cases of bad actors exploiting such features as a means to their nefarious ends, the presence of such elements is neither unique nor exclusive to cryptocurrencies and digital assets.

What’s more interesting is the fact that basic privacy features now tend to warrant immediate suspicion from governments, regulators, and the general public.

At the start of the year, when Chainalysis published its 2020 Crypto Crime report, it was noted that scams were the most ‘popular,’ with a lot of users losing their money not because of privacy, but because of a lack of adequate regulations.

In fact, in a recent interview with Stephan Livera, Rafael Yakobi – Managing Attorney at The Crypto Lawyers, had noted how the industry is now geared towards falling levels of privacy, one of the after-effects of greater regulatory scrutiny over digital assets. He pointed out,

“So the result of this is that consumers suffer because of the lack of competition. And they also suffer because their privacy suffers as a result of just the particular kind of, I don’t know if you could call it regulatory capture, but the particular kind of, capture that has happened.”

However, despite evidence suggesting otherwise, the notion that one’s financial data can benefit from privacy measures still raises eyebrows. In other words, privacy still implies nefarious association.

Can Bitcoin be the right balance?

Bitcoin’s privacy features aren’t as advanced as that of many privacy coins like Monero and Zcash. Privacy protocols in the latter two coins are able to provide a greater degree of anonymity to its users, in comparison to the world’s largest crypto – Bitcoin.

In fact, a recent report had tried to understand the security measures implemented by privacy coins like Monero and Zcash, while studying how robust they are. In the case of Monero, it was found that it has been able to uphold the desired level of traceability, unlike many of its competitors, namely Zcash, which suffered from poor protocol implementation from its user base, the report noted.

“Monero promotes unlinkability by generating a one-time use address for every transaction output. Monero promotes untraceability by requiring each input in a transaction to be combined with some decoy chaff inputs called mixins.”

This degree of anonymity is not something Bitcoin can offer. While layer two solutions like Lightning Network and Taproot & Schnorr have tried to enhance the king coin’s privacy features, its developmental woes continue to hinder it.

While this can be looked at as a pain point for Bitcoin, the lack of complete anonymity within the Bitcoin Network may ease apprehensions regulators have over the digital asset. At the moment, Bitcoin continues to be the preferred currency on the dark web and implementations that take Bitcoin closer to the privacy coin ecosystem may raise more red flags for regulators across the globe.

The report also noted the difference between Bitcoin and other privacy coins available in the market, adding,

“The anatomy of a shielded transaction varies from that of a normal Bitcoin transaction. Under Bitcoin, each transaction is validated via linking the sender and receiver addresses, as well as the input and output values on the blockchain. zk-SNARKs allow nodes to validate transactions without actually revealing any information about the addresses or values involved.”

The fact that Bitcoin’s privacy features aren’t as ideal and as absolute in relative terms to coins like Monero may end up being a blessing for the coin. As the world transitions from heavily-surveilled traditional forms of fiat currency, Bitcoin may just end up being the middle ground for regulators and users.

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Jude Gerald Lopez is a full time News Editor at AMBCrypto covering the US and Indian market. He is a post-graduate in English literature with around 4 years of teaching experience in Indian literature.
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