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Privacy coins no more? CipherTrace files patents for tracing Monero transactions



Crypto analytics firm CipherTrace announced on Friday that it had filed two patents for technology capable of tracing transactions for privacy coin Monero.

In a Nov. 20 blog from CipherTrace, the firm stated that the patents would include forensic tools to explore Monero (XMR) transaction flows to assist in financial investigations, statistical and probabilistic methods for scoring transactions and clustering likely wallet owners, as well as visualization tools and ways to track stolen or illegally used XMR.

“CipherTrace’s Monero tracing capabilities will allow [Virtual Asset Service Providers] to identify when inbound XMR may have criminal origins, allowing them to adequately risk rate customer transactions per any required regulations,” the blog stated. “[Our] goal is to enable the detection of criminal users, therefore increasing the safety and sustainability of privacy coins like Monero in the future.”

While Bitcoin (BTC) is still the preferred medium of exchange for many darknet market users, there has been increasing acceptance for privacy coins like XMR. Law enforcement agencies have not yet determined a reliable way to trace Monero, and firms like CipherTrace have an opportunity — the company has reportedly been working on a means to trace XMR transactions since early 2019.

CipherTrace CEO Dave Jevans told Cointelegraph in August that the firm developed the first tool for tracking Monero transactions. Such a tool could potentially support investigations of crimes and reduce incidents of money laundering.

The company has stated it developed these Monero-tracing tools as part of a project with the U.S. Department of Homeland Security, but the latter isn’t the only government agency looking for a way to identify XMR wallets, transaction dates and times. In September, the Internal Revenue Service announced it would give a bounty of up to $625,000 to anyone who can break Monero.

Capabilities for CipherTrace’s tracing tools have not yet been confirmed. One Monero Outreach representative told Cointelegraph in October that they would be “highly suspicious of any claims that corporations can trace Monero transactions” and any firm that did so would be unlikely to “trace the wallets or amounts for any transaction.”

The price of Monero is $123.37 at the time of publication, having fallen 3.6% in the last 24 hours.

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Some major altcoins failed to match Bitcoin’s rally




Since then, the price of Bitcoin has suffered a correction, and most of the crypto market followed. Bitcoin is currently sitting at just over $35,000, and while traders suggest the pullback to be a healthy correction required for Bitcoin to maintain its bullish momentum, some believe the cryptocurrency may plunge below the $20,000.

The Bitcoin price action has also been reflected in the altcoin market as it usually does, with many popular cryptocurrencies surging alongside BTC. Noticeably, Ether (ETH), the native token of the Ethereum platform, has doubled in value in the last month and is currently sitting at over $1,300.

While Bitcoin has blasted through its previous all-time high, multiple coins in the top 100 have yet to do so despite seeing substantial price surges. This may suggest that a new alt-season may be coming, especially as multiple DeFi tokens break into the top 20 market cap even as the direction of Bitcoin’s price remains uncertain. Jonathan Hobbs, the author of The Crypto Portfolio and a former digital asset fund manager, told Cointelegraph:

“Bitcoin dominance has started to drop against altcoins. While not yet a full-blown ‘alt season,’ the signs are certainly there for one. I would like to see Ethereum break the $1,500 level for a final alt season confirmation.”

While the latest crypto rally has taken the global cryptocurrency market capitalization to the $1-trillion mark, there have been a few notable cryptocurrencies that have failed to keep up with Bitcoin’s growth for different reasons.

Ripple and the law

After some bullish action in November, XRP’s price began to drop heavily on Dec. 22, following reports that the U.S. Securities and Exchange Commission was preparing to take legal action against Ripple, its CEO, Brad Garlinghouse, and co-founder Christian Larsen. Since the company has overcome other issues with regulators in the past, many hoped that the news would not amount to anything.

However, by Dec. 23, XRP had plummeted by 41%, and exchanges began delisting the cryptocurrency. By the end of December, XRP was delisted from major exchanges such as Coinbase, Binance US and OKCoin, with a few exceptions like Uphold and GateHub leaving the crypto for trading until the court decision. Currently sitting at $0.28, XRP has dropped around 47% in the last 30 days.

Keeping up with Ether

As Bitcoin rallied throughout the month of December and January, Ether has rallied alongside it. Since Dec. 18, Ether has grown substantially, although so far, it has barely managed to reach its all-time high. However, other smart contract-centric projects have failed to follow along even with Ether’s rally. These include NEM, EOS and Tron, which are all in the top 30 for the biggest monthly value losers in the top 100 cryptocurrency list by market cap.

While NEM has lost 21.6% of its value in the last 30 days, it did so after a considerable price increase during the month of November. EOS and Tron prices have dropped 11.6% and 2.69%, respectively. Both, the company behind the EOSIO ecosystem, and Tron have faced issues with regulation in the past, with the former receiving a $24-million fine from the SEC in October 2019 and the latter currently facing a lawsuit pertaining to its 2017 initial coin offering.

However, it seems that a more plausible reason as to why these projects are failing to grow alongside Bitcoin is that they are seen as direct competitors to Ether, which has had a great run in the past month and hosts most of the DeFi industry. Hobbs told Cointelegraph:

“Bitcoin and Ethereum have already proven themselves with real-world use and strong network effects. Bitcoin is digital gold. Ethereum houses over 95% of all DeFi smart contracts. I think that makes them less speculative than other digital assets right now.”

Monero, Dash, Zcash and other privacy coins

Privacy coins also came under regulatory fire in 2020. On Jan. 1, U.S. exchange Bittrex announced that it would be delisting Monero (XMR), Zcash (ZEC) and Dash, the three biggest anonymity-centric cryptocurrencies on the market. While unlisting these cryptocurrencies was an initiative by Bittrex, it does not come as a complete surprise, especially as regulators continue to crack down on crypto.

On Dec. 23, the U.S. Treasury Department’s Financial Crimes Enforcement Network issued a proposed rule change, in which it stated that anonymity-enhanced cryptocurrencies, like those mentioned above, are becoming more popular and are believed to be more closely associated with illicit activity such as money laundering and ransomware attacks.

As frequent hacks on decentralized finance and other sets of crypto continue to occur, with the funds being disposed of in crypto exchanges, it also makes sense that the venues would want to disassociate themselves from untraceable money laundering and to comply with any upcoming regulation.

As a result, trust in privacy coins seems to be shaken. Monero and Dash rose 0.79% and 3.79%, respectively, in the last 30 days. While these numbers don’t seem bad, they pale in comparison to Bitcoin’s price action. According to Dr. Octavius, co-founder of DeFi protocol OctoFi, the growth of the DeFi space may help these types of coins survive any upcoming regulatory hurdles:

“For many of these projects, their days as a ‘product’ are likely numbered, but the opportunities to pivot toward existing as ‘features’ are certainly plentiful. […] Those who value privacy will go to great lengths finding it, and so long as there’s permissionless access to it, projects who enable it can still thrive.”

CeFi tokens

Another predominant type of token that seems to have stayed on the sidelines during the BTC rally was tokens issued by centralized exchanges, including Nexo, Unus Sed Leo (LEO) and Coin (CRO). While the fundamental value proposal for these tokens remains the same, they are somewhat tied into the success of the venues they are associated with, being used mostly for discounts on trading or lending fees or other perks.

With DeFi on the rise, it seems likely that people would rather speculate on DeFi-related tokens or invest in the yield farming protocols themselves, which could account for the slow price action on these assets. LEO has dropped 1.66% and Nexo has surged by 11.3% in the last 30 days.

What’s next for alts?

While it is unclear what the road holds for coins like XRP, Dash, Monero and ZEC, whose future seems to be heavily tied to upcoming regulation, it looks like there’s a general shift in interest taking place when it comes to altcoins, especially as multiple DeFi tokens begin to take their place in the top 20 market cap list.

As for smart contract platforms, it also seems unlikely that Ethereum will be dethroned soon, especially as the network continues to make strides toward the full release of Eth2. Not all Ethereum competitors are doing badly, however, as for example, the price of Near Protocol (NEAR) has recently soared 106% amid the current DeFi craze.

Some have noted that the current bull market is likely to do away with speculative coins, as more value is now concentrated on Bitcoin and Ethereum, a clear divergence from what was observed in the 2017 rally that took BTC to its previous all-time high.

On Dec. 16, Bitcoin’s price breached its previous all-time high of just over $19,500, previously reached on Dec.17, 2017, according to data from CoinMarketCap. Since then, Bitcoin (BTC) has seen an incredible bull run, which has led the cryptocurrency to new heights, having reached an all-time high of $41,941 on Jan. 8 and rallying by over 115% during this time.

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Dash, ZEC and Monero reach boiling point?




On New Year’s Day, the U.S.-based crypto exchange Bittrex announced via Twitter that it was delisting three leading privacy coins: Monero (XMR), Zcash (ZEC) and Dash. A link promised further details, but those who followed it learned nothing to explain why trades in those tokens would end on Jan. 15.

Still, the news couldn’t have been entirely surprising. Regulators, both in the United States and abroad, have been casting a gimlet eye at privacy coins these days. Unlike Bitcoin (BTC) and Ether (ETH), the coins promise enhanced anonymity by hiding users’ addresses and transaction amounts, which make transactions more difficult to trace. Government agencies suspect they may be used for tax evasion, money laundering and perhaps other criminal activities.

The U.S. Treasury Department’s Financial Crimes Enforcement Network, for instance, noted in its Dec. 23 proposed rule change that anonymity-enhanced cryptocurrencies, or AECs, “have a well-documented connection to illicit activity,” having been “used to launder Bitcoins paid to the wallet used in the Wannacry ransomware attack,” for instance. Moreover:

“Several types of AEC (e.g., Monero, Zcash, Dash, Komodo, and Beam) are increasing in popularity and employ various technologies that inhibit investigators’ ability both to identify transaction activity using blockchain data and to attribute this activity to illicit activity conducted by natural persons.”

Elsewhere, the U.S. Internal Revenue Service announced in September that it would provide a bounty of up to $625,000 to anyone who could break Monero, the most widely used privacy coin — suggesting that the agency believes the coin may be used to hide taxable income.

“Bittrex’s action does not surprise me”

Timothy Massad, former chairman of the U.S. Commodity Futures Trading Commission and now a senior fellow at Harvard University’s Kennedy School, told Cointelegraph: “Bittrex’s action does not surprise me.” He went on to clarify that “the use of crypto for illegal purposes has been a top concern of law enforcement agencies and regulators in the U.S. (and elsewhere), so a focus on privacy coins is to be expected.”

The scrutiny of the coins is not confined to the United States. In 2019, the South Korean unit of OKEx delisted five privacy coins, including XMR, Dash and ZEC, citing the G20’s Financial Action Task Force’s Anti-Money Laundering rules — in particular, the need for the exchange to have an address for both the sender and recipient of a crypto transaction, which privacy coins do not provide. Japan, for its part, banned privacy coins in June 2018, referring to Monero, Zcash and Dash at that time as “three anonymous siblings.”

BTC remains “currency of choice for criminals”

But as is often the case with cryptocurrencies, things aren’t as simple as they first appear. While acknowledging that many of regulators’ concerns with privacy coins are valid, Jevans observed that “the data still shows that Bitcoin, which is more traceable than cash, remains the currency of choice for criminals because of the ubiquity of off-ramps into fiat.” Meanwhile, following the Bittrex delisting, Dash’s Twitter account unsurprisingly issued a defensive statement, noting: “Dash’s privacy functionality is no greater than Bitcoin’s, making the label of ‘privacy coin’ a misnomer for Dash.”

Others have suggested that the Bittrex action might have been an effort to get in step with the FATF’s Anti-Money Laundering guidelines, or “travel rule,” and if so, other U.S. exchanges may soon do likewise. Andrew Miller, a professor at the University of Illinois and a board member at the Zcash Foundation, had doubts about this explanation, telling Cointelegraph: “Since Kraken, Gemini and other exchanges continue listing privacy coins, I don’t think it’s because of a specific regulatory requirement.”

When Cointelegraph contacted Bittrex about its recent delistings, a spokesperson for the company said: “Bittrex does not have a comment for this story.” It should be noted that Bittrex U.S. also delisted XRP on Dec. 29, but that is likely down to the U.S. Securities and Exchange Commission filing charges against Ripple.

“Nothing inherently wrong”

Other commentators argue that there is not anything intrinsically problematic about privacy coins. Indeed, they are a useful innovation, though perhaps they need to be managed better. “There is nothing inherently wrong with privacy coins,” said Jevans, even if they make it easier to launder money than BTC.

As noted, cash is easier to launder than Bitcoin, yet no one is talking about eliminating cash, he suggested. Miller added that privacy coins, too, could be a counteragent for excessive monitoring of crypto markets on the part of authorities, including “warrantless bulk surveillance.”

Giulia Fanti, a professor at Carnegie Mellon University, told Cointelegraph: “The global economy is moving towards a digital financial system that will enable fine-grained surveillance by governments and/or corporations.” Privacy coins matter, among other reasons, as they signify innovation:

“They are helping spur the development of cutting-edge privacy technologies that could eventually be used in centralized digital financial services. So, while privacy coins can certainly be used for money laundering, they also provide an important counterweight to some concerning societal trends.”

Preston Byrne, a partner with law firm Anderson Kill, told Cointelegraph: “Privacy coins are an important innovation not just in terms of incentivizing the development of new decentralized crypto systems but also in terms of the importance to society of having a confidential means of entering into transactions generally, a role currently filled by cash.” Moreover, privacy coins may be less useful in hiding certain illicit activities than some regulators think — provided certain guardrails are in place, according to Byrne:

“Attempting to hide one’s activity through a privacy coin is also unwise due to the fact that, at least for the time being, getting from the cryptoverse into real assets requires touchpoints with regulated exchanges where KYC [Know Your Customer verification] is conducted. Pushing privacy coins off of exchanges where KYC takes place strikes me as counterproductive.”

Importance of “regulated touchpoints”

Still, Jevans believes that “we should expect more exchanges in the U.S. and globally to delist privacy coins in order to ensure compliance until they can deploy a risk-based approach to preventing money laundering.” This may not help, though, said Byrne: “In the long term, the explosive growth in so-called ‘decentralized exchanges’ will likely pick up the slack, without the benefit to the government of having coins occasionally make contact with regulated touchpoints.”

These “regulated touchpoints” could indeed prove privacy coins’ salvation. A custodial wallet operator, for instance, “can generally see the transactions a user is executing and can still require the user to provide some form of identity,” explained Fanti, adding:

“So, even if a privacy coin hides transaction contents on the public blockchain, there may still be ways to enforce regulatory requirements — at least for some important classes of transactions — with the cooperation of custodial wallet operators.”

Both Zcash and Monero also support a technology called “view keys” that give an option to disclose information about a transaction to auditors or regulators in a secure manner, as Miller added: “It’s a common misconception that privacy coins fundamentally undermine or are incompatible with the existing way regulations are applied” — a sentiment voiced on social media, suggesting that privacy coins are more about personal freedom than money laundering.

On Jan. 7, it was announced that a crypto custodian will issue wrapped Monero on the Ethereum network, suggesting that not just DEXs could be working on finding a place for the three so-called privacy coins to flourish.

Expect more KYC/AML enforcement

In the end, a kind of balancing act may be required on the part of regulators and the crypto community, where the challenge is to preserve the privacy strengths of cryptocurrencies but without making them a haven for money launderers and ransomware criminals.

“I would expect to see continued efforts to address the risk and to step up KYC/AML enforcement as the new administration comes in,” Massad told Cointelegraph, adding: “Whether privacy coins can be ‘managed better’ to satisfy both law enforcement interests and those who like the greater anonymity they provide is an interesting question. I can’t say I’ve seen that yet though.”

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Heavy hitters of crypto call for users to comment on proposed FinCEN wallet rule




A number of players are encouraging individuals to speak out against FinCEN’s new crypto rules before comments close next week.

Crypto exchange Coinbase and the foundation behind Monero are the latest firms to join in calling for crypto users to share their thoughts on the U.S. Treasury’s Financial Crimes Enforcement Network’s new rules. In a blog post today, Coinbase CEO Brian Armstrong said the proposal would represent “too big of an intrusion” on users’ privacy, stating that crypto exchanges would need to collect and share names and addresses for anyone sending or receiving more than $3,000 in crypto in a single transaction. The CEO called on users to submit their thoughts to FinCEN before Jan. 4 when comments would be closed.

Source: Twitter

Monero Outreach issued a similar plea on Monday with seemingly more assertive language, specially requesting crypto users “voice their opposition” to the “dangerous new rules.” The group claimed that once FinCEN had the necessary customer information, regulators would be able to track all user transactions without a warrant, data that could be potentially compromised.

“This [rule] not been required before, and it will not only threaten the privacy of every cryptocurrency user today, but it will also impede creative future uses of cryptocurrency,” said Monero Outreach. “This is in an area that can easily go very wrong.”

FinCEN proposed the new rule on Dec. 18, giving individuals 15 days to comment with their thoughts. If implemented, the rule would require registered crypto exchanges to verify the identity of their customers under certain conditions, including using “an unhosted or otherwise covered wallet” and if the transaction exceeds $3,000.

Coinbase chief legal officer Paul Grewal later responded that the deadline to provide feedback was inadequate given the holidays and the ongoing pandemic. He requested the regulator provide a 60-day period for comments on the proposed rules. At the time of publication, the Jan. 4 deadline is still firm.

Meanwhile, non-profit crypto advocacy group Coin Center is encouraging “everyone in the cryptocurrency ecosystem” to file a comment on the FinCEN proposal. More than 920 parties have already submitted their thoughts to FinCEN, including CEO Peter Smith and Compound General Counsel Jake Chervinsky. In a Twitter thread, Chervinsky claimed the rule would not “stop the flow of funds to bad actors or help law enforcement do its job.” 

Smith, on the other hand, sent his comment directly to Treasury Secretary Steve Mnuchin. In a blog post last week, the CEO said he believes the rule needs additional consultation and review before being considered, given the potential impact:

“Crypto is a nascent and growing industry. We have talented teams and entrepreneurs across the United States who are innovating yet would buckle under the weight of this regulation.”