What’s Going On with Privacy Coins? And What Does It Mean for Dusk?
By Jade Doherty

Dec 01, 2022 - Amsterdam

There’s never a dull day in crypto! From the implosion of centralized exchanges to the ever-shifting regulatory environment, it can be hard to keep up with what’s happening. In this article, we want to discuss the leaked proposal to restrict privacy-enhancing coins in the EU. This is speculative right now as it has not been officially proposed or passed, but we wanted to talk about what over-regulation could mean, and how this strengthens Dusk’s head start when it comes to compliant privacy and #RegDeFi.

A few months ago regulators began to pay more attention to privacy-enhancing projects, with one of the most notable being the arrest of the TornadoCash founders, deleting the Github profiles of TornadoCash developers, and more. The recent events with FTX have only increased the pressure on regulators to react and regulate cryptocurrency.

We will of course keep you informed as and when more concrete information becomes available, but for now let’s look at what privacy-enhancing coins are, why governments/jurisdictions may want to ban them, and what this could mean for Dusk.

What are privacy-enhancing coins?

One of the key features of blockchain technology is its total transparency. Everything is visible and public. If you know someone’s wallet address you can track every single transaction that wallet has ever made. You can see every token they’ve ever bought and sold from that wallet as well as every single time they’ve sent or received assets. Every single transaction: e-v-e-r-y-t-h-i-n-g. While this transparency has some advantages (i.e. in many ways it keeps people in check), it also prevents any serious real-world adoption. Imagine if every time you paid for something by card, the seller could see every transaction that you ever made with that bank account. You buy a snack, and suddenly everyone can see that you paid for a very embarrassing medical procedure last year.

Not great..

Or, imagine if anyone who had your bank account details - let’s say your employer in order to pay you - could see everything that has ever gone through your bank account. Your employer could see your entire salary history or even calculate your cost of living and use this in salary negotiations. Or worse, consider your personal safety! Imagine if thieves and criminals could see every transaction you’ve ever made! They could see how much money you have, that you just bought an expensive TV, and that you have never made a purchase for home security. How unsafe would you feel if everyone knew everything about you financially?

When people talk about privacy in relation to blockchain and crypto it’s often from the perspective of people using crypto to do bad things. But the opposite is also true. Perhaps even more so. Having everything public would lead to people being targeted due to their financial history being so readily available. This is why we are so focused on privacy and compliance. Regulated DeFi and the system we’re building would give us the best of both worlds. Privacy, transparency, decentralization, and to actually leave the crypto sandbox and become part of how we “do” finance.

In short, your bank account being an open book is bad news. But, that would be the situation if blockchain technology went mainstream as it is right now.

In short, while everything being visible on the blockchain has many benefits, it’s also highly impractical when it comes to real-world usage. No one is going to want to use this technology if it means that their financial history is public knowledge. Let’s be clear: none of this means they have something to hide or are doing anything wrong. Privacy is a right, it protects us from wrongdoings rather than being an indication of bad intentions.

Privacy-enhancing coins are focused on fixing this. They aim to, well, provide privacy. There are a number of ways they approach such a task. From mixers/tumblers that conceal senders and recipients of funds, to cryptographic technologies such as zero-knowledge proofs, homomorphic encryption, or multiparty computation, which obfuscate the data, and make it impossible to decode.

Privacy-enhancing protocols allow users to transact privately, without disclosing publicly their identity nor sharing their entire history with the world.

Why would the EU want to ban privacy-enhancing coins?

It must be hard being a regulatory body when it comes to crypto. This technology is new, and moves quickly, not to mention it’s global, hard to grasp, and many regulatory bodies lack the technical personnel to deeply engage with it.

While there is a very strong argument for why users wouldn’t want all of their financial transactions to be public knowledge, there are also arguments against privacy-enhancing technology. Especially because they have the power to conceal illegal activities.

So many hacks end with “...and the hacker is sending money to Tornado Cash”, and the trail goes cold. Is everyone who uses Tornado Cash a hacker? No. Do hackers like to use it? Yes. Much like how not all who use cash are buying drugs, but all drug purchases are made in cash.

The argument being proposed is that privacy-enhancing protocols aid money laundering and other illegal activities.

What do we know about the proposal?

Part of the leaked draft says “Credit institutions, financial institutions, and crypto-asset service providers shall be prohibited from keeping …anonymity-enhancing coins” suggesting that centralized institutions may not be able to hold privacy-enhancing coins.

It also suggests that users will need to KYC, even for occasional transactions of under 1000 EUR. It states that no transactions over 1000 EUR should remain private. Even without explicit restrictions on privacy-enhancing coins, this rule will supersede any right to privacy and the user’s account, identity, and transaction history would be doxxed.

Understandably, people are nervous about this, as it feels like an encroachment on privacy and freedom.

What does this mean for Dusk?

Dusk is not specifically a privacy-enhancing coin. We use zero-knowledge technology to ensure that transactions remain private, but our goal is to build a technology that simultaneously protects privacy, while remaining compliant with regulations.

For the previously mentioned reasons, we strongly believe that privacy is essential for mass adoption. No one will use blockchain for payments if that means that their whole financial life is now public for everyone to see. At the same time, privacy is an inalienable right, formally enshrined in the Charter of Fundamental Rights here in the EU, and even required by the law in the professional realm..

In fact, given the GDPR rules in the EU, public blockchains could never meet regulatory requirements as not only the data they store in the ledger is public, but is also immutable - i.e. there forever. It appears evident then that the only way to be compliant with GDPR is to grant the level of privacy that we provide.

Secondly, our technology is designed to have compliance built-in at a core level.

Dusk is building for Regulated DeFi, where KYC is an absolute requirement. By using Dusk protocol, you do KYC, but your KYC is kept private at all times. Thus, when you transact, you are able to do so only in a compliant way, thanks to our use of zero-knowledge cryptography. If there are sanctions on a particular country - for example - you just are mathematically prevented from transacting with that entity. Dusk isn’t trying to avoid regulations or get around them, rather we’re building them in so that the only possible way to use our tech is the “right” way.

We see this as being much more powerful than both obscuring transactions and having everything public.

What next for Dusk?

We will obviously continue to monitor the situation and are ready to respond, but we are also pleased to see regulation leaning toward our side, as that means we can really start moving towards a blockchain-based financial system that works. However, until they are officially in place though, the ground underneath our feet is ever moving:as far as we are concerned the sooner the rules and regs are sorted, the better.

In the meantime, we will continue to educate institutions, authorities and users on our tech, as we strongly believe it to be the solution to everyone’s problems. Auditors are able to ensure that what is happening on our network complies to the regulations, in addition to compliance being built in from the core. If you’re not allowed to turn left, there is simply no option to turn left. You don’t need to monitor that people aren’t turning left, as it were. Institutions are able to use our technology without fears of being penalized as we are compliant with the rules, and users are able to have a system that gives them control over their assets, the chance to use them outside of the crypto sandbox, without having to air their dirty laundry for all to see.

So, we are optimistic about the future, and even more confident that RegDeFi is the way. In order to interact with legacy finance - which let’s face it is all finance - we need to follow the rules, and through decentralization and blockchain, we can build a better, faster, and more innovative system that is fit for the modern world we live in.

About Dusk Network
Dusk Network is the privacy blockchain for financial applications. A new standard for compliance, control, and collaboration. Our mission is to enable enterprises of any size to collaborate at scale, meet compliance requirements and ensure that personal and transaction data remains confidential.

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