Compliance & Regulatory issues have been a sticking point for Blockchain startups & Cryptocurrencies for as long as they have been in existence. To address this problem, some startups like Chainalysis have come up with innovative solutions — bridging the gap between regulators and blockchain/crypto businesses.
Although the company has been in existence since 2014, they were noticed more recently after their specialized software suites called “Chainalysis Reactor” and “Chainalysis KYT” started getting adopted by financial institutions, government agencies & blockchain/crypto businesses for compliance purposes.
They have been adding cryptocurrencies to their advanced AML and blockchain analytics platform, but privacy coins have been somewhat of a grey area until now. Privacy centric coins like Monero, Zcash & Dash have been faced will another dilemma recently with the FATF’s travel rule taking effect this month. Rather than complying with the new regulations, several crypto exchanges have delisted these coins.
In another massive blow to these so-called privacy coins, Chainalysis announced the support for Zcash and Dash to their transaction monitoring ad compliance platform. According to the blog, these two popular privacy coins account for $1.5 billion of the reported daily trading volume.
So the question that arises is how would Chainlysis be able to trace these privacy coins when they proclaim to make transactions impossible to trace? Apparently, the privacy features offered by these crypto coins are an oversimplification — all of it boils down to how users actually utilize those optional features in everyday transactions.
Dash, which is a code fork of Bitcoin, employs PrivateSend functionality — which is a branded implementation of the CoinJoin protocol. This technique employs the mixing of several transactions to hide the origin of funds. Chainalysis comes down hard on Dash saying that in actuality Dash transactions are unmixed by default & also that mixing transactions with other cryptocurrencies are only possible that are functionally identical to PrivateSend. It labels Dash’s privacy functionality similar to Bitcoin’s, making the label of “privacy coin” a misnomer for Dash.
“Dash offers users the option of privacy-enhanced transactions because user safety is important for mainstream adoption of cryptocurrency, and it is there for end-users that value that functionality. At the same time, Chainalysis is a leading provider of advanced AML and blockchain analytics that is necessary for money services businesses needing to balance privacy needs with compliance needs. Ultimately, both promote the safe use of cryptocurrencies, while ensuring access to legacy financial markets, so I’m pleased that Chainalysis has chosen to implement Dash into their platform.” ~ Dash Core Group CEO Ryan Taylor
On the other hand, Zcash utilizes advanced cryptography techniques called zk-SNARKs, a type of zero-knowledge proof that enables private transactions through its shielded pools (visualized above, right)— a collection of encrypted addresses where the balances and transactions within the pool are all always encrypted. As with the case was in Dash. this is an Opt-in feature.
The blog goes on to state the percentage of transactions that actually employ these privacy techniques in Dash & Zcash. Mixing transactions related to PrivateSend make up roughly 9% of all Dash transactions. For Zcash, 14% of the transactions involve one of Zcash’s two shielded pools in some way — of this, ones which interact with a shielded pool, only 6% are completely shielded, i.e. sender, receiver, and transaction amount are all encrypted. Overall, only 0.9% of all Zcash transactions are fully private.
While Dash and Zcash allow users to conduct transactions with greater privacy than some of the other cryptocurrencies, it is apparent that they lack total anonymity. The two cryptocurrencies’ privacy features — how they are employed and utilized in the real world, leave room for regulators, investigators, and compliance professionals to monitor illicit activity.
An extremely perplexing response from the Dash CEO (above) and Zcash declining to comment on the topic seems to validate this conclusion.
Originally Published on Medium
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