It has finally happened. The war on privacy coins has begun.
For years, it’s been clear that a war on privacy coins was on the horizon. But it was always hard to say when it would officially begin.
However, as I told Insiders, paying attention to the language that regulators use in reference to crypto would give us important insight because once they officially link crypto to the ‘war on terror,’ that’s when we know the war on privacy coins has begun.
And now we have it.
In this year’s Annual International Conference on Counterterrorism, United States Treasury Undersecretary, Sigal Mandelker, proclaimed that crypto is the “next frontier” in the war on terror.
This statement has come in conjunction with a number of exchanges nervously and unnecessarily delisting top privacy coins in response to the Financial Action Task Force’s (FATF) new rules.
We’ve all suspected that this day would come, but how the crypto community responds might be very different than regulators expect.
Read on to find out what happened and how privacy coins are responding…
The war on terrorism turns to crypto
So for nearly two decades now, politicians have been on a crusade to eliminate financial privacy globally.
They started with the banking system. Rule after rule, regulators chipped away at banking privacy in various ways until the banks themselves were pressured into spying on their depositors and reporting any so-called ‘suspicious’ activity to the government.
Anyone who has tried to open a bank account in Panama, my home country, knows how ridiculous banking KYC/AML has become.
Then regulators turned their sights on cash.
Suddenly, politicians started talking about how dangerous cash was because it could be used by terrorists to operate outside of the banking system.
Soon, new restrictions were imposed on the amounts of cash that could be withdrawn from bank accounts. Large bills like the 500 euro note were taken out of circulation.
Now, according to US Undersecretary Mandelker:
“While most terrorist groups still primarily rely on the traditional financial system and cash to transfer funds, without the appropriate strong safeguards cryptocurrencies could become the next frontier.”
In making her case, Mandelker cited the fact that HAMAS solicited bitcoin donations via social media earlier this year and received $5,000 worth of the cryptocurrency.
“While this may not seem like a lot of money… As we know, the cost of carrying out a terrorist attack can be very low. But the human costs to victims is always extraordinarily high.”
Now, anyone who knows anything about global politics knows that Mandelker’s statements are ridiculous.
HAMAS receives billions of dollars a year from multiple state actors. In fact, last month, the government of Iran announced that it would be increasing its support to HAMAS to $30 million a month.
US regulators don’t see crypto as a threat because of $5,000 in crypto donations. This is an outright lie. And that is why they’ve resorted to making an emotional case. By pulling on heartstrings and mentioning “victims” they’re trying to rally public sentiment toward their cause.
Though not solely in response to Mandelker’s statement, we’re already seeing the repercussions of this and other regulatory activity on privacy coins…
Exchanges delist privacy coins
In the past few weeks, a handful of crypto exchanges around the world have unnecessarily delisted some of the top privacy coins, including Monero, Dash, Zcash and Horizen. The exchanges have cited the need to comply with the (FATF) new travel rules.
If you’re not already familiar with the FATF’s travel rules, these are new guidelines that require all “virtual asset service providers (VASP)” to record, hold and pass on their customers’ data on to other VASPs when making transactions.
This includes information such as the sender’s name, account number, and physical address. As well as the beneficiary’s name and account number.
Now, the first thing to note here is that the FATF does not have regulatory oversight over crypto exchanges. They are not legally required to follow the FATF’s guidelines.
But as we’re seeing more and more in the ‘war on terror’, government intimidation can be just as effective as actual legislation.
The second thing to note is that it has not yet been established whether or not privacy coins are out of compliance with the FATF’s guidelines. In fact, the Zcash team wrote an excellent blog post explaining why the use of its token complies with FATF guidelines.
Third, it’s possible to use third-party tools like mixers and tumblers to achieve the same level of privacy with Bitcoin and other tokens as you can with many of the privacy coins. It’s a little more work, perhaps, but the result is the same.
Nonetheless, these exchanges found it easier to just delist any potentially “risky” privacy coins rather than figure out how to really adhere to the new requirements.
From the exchanges’ perspective, this path makes business sense. Privacy coins make up a small percentage of their overall transactions.
All they really care about are the major coins, like Bitcoin and Ethereum, which probably make up 90% or more of their trading volume.
So why not just sacrifice a few small privacy coins to keep regulators happy?
The privacy coin comeback
In response to these delistings, representatives from many projects have insisted that they are already compliant or could easily be.
According to Ryan Taylor, the CEO of Dash Core Group Inc. “Dash is identical to Bitcoin and is 100% capable of meeting the requirements.”
And as mentioned above, Jack Gavigan, from the team behind Zcash argues that Zcash is in fact already “more compatible with FATF recommendations than most other cryptocurrencies out there.”
Developers at Monero and Horizen have also followed suit, suggesting how their tokens can be compliant with the FATF guidelines.
Fortunately, so far we’ve only seen a handful of small exchanges delist privacy coins, with larger exchanges like Binance firmly standing behind privacy coins.
“Do you think privacy is a fundamental right?” stated Binance CEO Zhao Changpeng as he announced that the Malta-based exchange would continue supporting privacy coins.
Do you think privacy is a fundamental right? https://t.co/TZaVT5Uis4— CZ Binance (@cz_binance) September 17, 2019
And after implementing superficial compliance measures, Dash was relisted by the exchange eToroX and it is likely that the other coins may follow suit.
While there have not been severe casualties yet, the war on crypto and privacy coins is far from over.
What does this mean for Crypto Law Insiders?
For now, it seems clear that most privacy coins are inclined to find solutions to work with exchanges and regulators to meet compliance requirements.
If regulators push too hard, however, that’s when things could get very interesting.
If, for example, Monero were pushed out of mainstream exchanges entirely, the coin would have one of two options: completely strip away its privacy features or turn its back on established exchanges.
After meeting Fluffy Pony (one of the key developers in Monero) in person, I’m quite sure that removing privacy is not an option for their team.
Instead, if pushed far enough, it’s easy to envision Monero turning itself into an ‘anti-establishment coin’ and spurning mainstream exchanges altogether.
While this might hurt liquidity initially, this would place the coin firmly outside of the government’s purview.
So for right now, regulators walk a thin line. They want to push just enough to get the transparency they want, without pushing too far and losing control altogether.
Let’s see how they manage that balance.