Talking about regulation and crypto seems to be an oxymoron. Bitcoin was created with the sole purpose of giving people an alternative to the established, regulated system that failed miserably during 2008-09. So, what does crypto regulation hold for privacy coins in relation to cryptocurrencies?
The creation of Bitcoin and the parallel economic meltdown of the traditional economy taught the world two important lessons: 1. Rules governed by algorithms that are very difficult to change, can’t really be broken 2. Traditional regulation much like the one that enabled the crash of 2008-09, is made to be broken.
But along the way, came a twist. Most people see the sprawling cryptocurrency space as a market for alternative investment assets; fewer use these assets like currencies.
With the advent of privacy coins then, the question of untraceable transactions and their implications raised concerns among people running the bridges between crypto and the traditional market – exchanges – that allow others to invest.
Regulation is exchange-centric
Early adopters in the space didn’t care about regulation because they were laying the foundations for a new kind of currency to underpin the economy. In fact, cryptocurrency holders, as long as they own their private keys in a non-custodial wallet, shouldn’t care about regulation unless they are thinking about fiat profit.
Cryptocurrencies themselves cannot be regulated in countries that protect freedom of speech because they exist as internet protocols, so if holders shouldn’t care, the only ones that have anything to win or lose when it comes to regulation are the exchanges.
Exchanges run a business based on for-profit trading that requires a bridge between the parallel worlds of fiat and cryptocurrency. Furthermore, the biggest exchanges out there and the ones that can provide that fiat to crypto to fiat bridge, are centralized corporations.
They are susceptible to government pressure. Therefore, exchanges must comply with KYC/AML provisions depending on the territory they operate from. Privacy coins present an insurmountable challenge for regulators, which means it is easier to cut them from an exchange than to try to comply with them listed on the platform.
Cut An Arm to Save the Body
Many of the biggest exchanges that also offer a bridge to fiat are increasingly treating privacy coins – Monero, Dash and Zcash to mention the most prominent of them – as an appendage that must be cut in order for the main business to survive.
What does crypto regulation hold for privacy coins? Privacy coin foundations, in turn, are now rushing to do the work necessary to comply with regulations to avoid delisting of the assets they represent.
Nonetheless, the delisting has already begun. Prominent exchanges like BitBay and OKEx have already delisted Monero – which is probably the most staunchly anti-establishment asset within the privacy coin asset class.
Zcash and Dash are rushing towards compliance through their respective foundations to avoid Monero’s perceived destiny. In doing so, they are stressing that privacy on their respective networks is actually not a default feature but something that users can opt into.
Do Privacy Coins Face Shrinking Liquidity?
Until Dash and Zcash can extricate themselves from the compliance risk conundrum that they have created for exchanges, they face the prospect of dwindling liquidity.
Exchanges that have a lot to lose will not take the risk, and as governments become more sophisticated actors in the crypto space, these coins will bear the brunt of the regulatory squeeze. That doesn’t mean these assets will suddenly become compliant or that every exchange will delist them.
Where there is a crisis, there is always a pain for some and opportunity for others. Smaller exchanges, which struggle to position themselves in an industry that is oversaturated with supply, might be able to rise by taking Monero, Zcash and Dash liquidity away from the bigger exchanges that must delist them.
The opportunity is also jurisdictional. Exchanges that run from countries in which regulatory frameworks are not as stringent, will be able to have their privacy coin cake and eat it.
Regulating Privacy Coins and Fiat Cash
Nevertheless, the noose is tightening in many of the developed countries that are deemed “favorable” to trade-in. EU member countries, South Korea, Japan, and the US are all expected to regulate cryptocurrency exchanges more heavily as their bureaucrats and elected officials become more crypto-proficient.
Some of these countries have already regulated fiat cash almost out of existence, which is a presage of what can happen with privacy coins in these jurisdictions.
Privacy coins fulfill many of the same roles that cash does. They do so in the digital world, which cash is ill-equipped to do, making them potentially more dangerous to the gatekeepers of the financial status quo.
If anyone can buy anything anonymously with cash where they are present, privacy coins allow them to do the same globally without even having to meet with anyone else face to face.
Therefore, countries like Sweden and France – which have almost legislated cash away entirely – are expected to be at least as harsh on crypto and even harsher on coins like Monero, Zcash, and Dash.
The Regulatory Fallacy
Regulation has limits, however. Given that privacy coins like other cryptocurrencies exist digitally, malicious actors only need a few exchanges that are either small enough to draw attention from authorities or are based out of jurisdictions in which there is a less regulatory burden to use these cryptocurrencies for their own purposes.
It is quite easy to commit a crime using privacy coins and then swapping those out on smaller, non-compliant exchanges for Bitcoin or other widely accepted cryptocurrencies, and then transfer those funds to exchanges in which fiat pairs are available. No degree of KYC or AML can stop that at all; only a full-scale
cryptocurrency ban would be able to curtail this kind of activity, which would, of course, be a frontal attack on freedom of speech.
They can’t take away your privacy coins without taking your freedom
So what does crypto regulation hold for privacy coins? Regardless of how much any country decides to crack down on privacy coins, the most important point to remember here is that the crackdown is an affront to freedom.
Governments are ultimately positioning themselves to review, control and veto every single transaction made within its jurisdiction. Any argument that can be made against privacy coins – that they enable crimes like tax evasion or drug trafficking – can be made of any asset out there, physical and digital alike. In fact, much of the crime committed around the world is done under the watchful eyes of regulators with fiat money.
That is because criminals do not care about regulation. Therefore, any government that mounts a regulatory attack on exchanges to stem the flow of fiat into and out of privacy coins, is infringing upon the freedom of law-abiding citizens. The fact that this is a point that privacy coin holders will read, is ironic.