Private Coins: Aren't all cryptocurrencies private?

14 June, 2019

Have you come across the term 'private coin' as you've roamed around the internet learning about cryptocurrency? If so, perhaps you do not quite understand what a private coin is. A private coin is one of several different kinds of digital assets that fall under the wide cryptocurrency banner.

On our website, we are all about people having the freedom to buy and sell as they see fit. That is one of the reasons we sometimes like to promote playing slots with Bitcoin, Bitcoin Cash, Litecoin, etc. We believe economic freedom and the freedom to gamble online go hand-in-hand. This freedom includes having the choice to use private coins if that is what you want to do.

Bitcoin is anonymous

It is not unusual for people to misunderstand what a privacy coin is. This is rooted in a misunderstanding of how private - or non-private as the case might be - the biggest names in crypto are. For example, take Bitcoin. Despite being encrypted and decentralized, Bitcoin is not truly private.

Bitcoin security is based in anonymity. Most other cryptocurrencies follow Bitcoin's model. They achieve anonymity by protecting the identity of coin owners using encryption. Transaction data is also protected the same way. If you own Bitcoin or you have ever bought or sold something with it, the information pertaining to those transactions exists on Bitcoins' ledger. Anyone with a copy of that ledger could find all of your transactions.

It would be impossible to identify you or the coins in your wallet simply by glancing at the ledger. All the ledger would show you is a running list of encrypted data that would be meaningless to you. However, the hardware and software both exist to decrypt the data.

It is possible, at least in theory, to completely identify every coin, wallet, and coin owner on the Bitcoin network. The reason most people do not worry about it is the simple fact that decrypting and understanding all of that data would take far too much time and work. There isn't enough incentive to put in the effort. But given enough time, sophisticated computer software could get the job done.

Private coins are private

What makes private coins different is that they hide user and transaction information. Look at a private coin's ledger and you will discover that there is nothing there to discover. You could decrypt the data and still be left with no way to track down owner identities and transactions. This is because the ledger doesn't contain that data. It is hidden away.

How is this possible? There are different ways to do it, but we can use Monero as an example. Monero utilizes something known as ring signatures to verify transactions and send coins on their way. You can think of a ring signature as similar to a joint checking account in which all of the joint holders are complete strangers to one another.

When a Monero transaction is initiated, it generates a single use spend the key that can only be received and decrypted by the recipient. All of those parties (they can be automated computers or human beings) come together to sign off on the transaction with each one passing it on to the next. This creates the ring.

As none of the signatories is known, they all remain completely unknown on the network. And once the last signatory completes the task and passes it on to the one who started the ring, the ring is completed and links between signatories remain internal. They cannot be discovered because no one knows where to look for them.

We have simplified the concept of the ring signature to make it easier to understand. Needless to say that there is a lot of technology behind it, technology that keeps all identities and transaction information completely private. Transactions made across the Monero network are completely untraceable.

Examples of private coins

Among the thousands of different cryptocurrencies on the market, only a small fraction are private coins. There are reasons for this, including the natural tendency to suspect users of private coins are up to no good. We will discuss that in just a minute. But first, here are a few examples of private coins now in the marketplace:

  • Monero - Monero is perhaps the most well-known private coin of all. It is also considered the most robust. It was originally released in 2014 as a fork of Bytecoin. Its trading symbol is XMR.
  • Dash - Another well-known private coin is Dash. It was also released in 2014 as a fork of Bitcoin. It utilizes a decentralized, coin-mixing service known as PrivateSend to maintain privacy.
  • PIVX - Originally released as Darknet, PIVX is another Bitcoin fork that utilizes a variety of technologies to maintain privacy. What makes PIVX so unusual is that it has dispensed with Bitcoin's proof-of-work algorithm and replaced it with 100% proof-of-stake. This eliminates the need for coin miners.

There are a few other private coins not mentioned in this list. The long and short of it is that they do exist for people who want to use them. They may not be anywhere near Bitcoin and Ethereum in terms of market capitalization and volume, but they get the job done.

Private coins' bad reputation

Here's the thing: Monero and other private coins have a bad reputation both inside the crypto community and out. For some reason, people just do not like the idea of true privacy.

The bad reputation some of these coins have is rooted in the fact that criminals use them. Remember that privacy does have its advantages - even if you are breaking the law. Imagine being a criminal trying to launder the proceeds of your activity through a traditional bank. You would be risking your entire operation simply because bank transactions are easily traceable.

Anonymous cryptocurrency transactions are traceable as well. Earlier you read that most people do not worry about Bitcoin anonymity because there is little incentive to put the time and effort into decrypting the ledger and identifying users. But 'most people' does not equate to everyone.

Your run-of-the-mill thief or computer network hacker is not going to put time and effort into cracking Bitcoin's ledger. But government regulators chasing criminals have all the time of the world. They don't mind doing whatever it takes to track down and catch those they are pursuing. Criminals know that, so they are more likely to trust something like Monero than Bitcoin.

This reality is not sufficient reason to dislike private coins or to distrust him. The fact is that criminals will always find a way to do what they want to do. They do what they do separate from the means that allow them to do it. As such, a private coin like Monero is just a tool. It neither establishes criminal activity nor promotes it. So why blame Monero for crime?

No one is looking to ban credit and debit cards even though criminals use them too. No one is looking to restrict the use of cash even though criminals have been using it to fund their operations for hundreds of years. So why do governments and police agencies think that going after private coins is a good idea?

Increased government regulation

Private coins are so effective at protecting user identities that governments are starting to take action. Japan is a good example. The Japanese Financial Services Agency began back in 2018 to put pressure on crypto exchanges to delist private coins. Just a few months later, they went further and banned private coins altogether.

South Korea followed suit this past spring by encouraging exchanges to list private coins and introducing new legislation requiring exchanges to identify all of their traders. And in the U.S., the Secret Service is now urging Congress to ban private coins.

The U.S. Department of Homeland Security isn't taking any chances. Whether Congress acts or not, Homeland Security is already working on ways to possibly trace Monero and Zcash transactions. All the while, the Netherlands and India are considering banning even anonymous cryptocurrencies like Bitcoin and Bitcoin Cash.

It would appear as though government regulators are not big fans of either anonymity or privacy. Regulators want the ability to track every single financial transaction that occurs within their jurisdictions. They believe it is necessary in order to curb illegal activity and fight terrorism.

The reality is that they are fighting a losing battle. Even if governments outlaw private coins like Monero, there really is nothing they can do to stop private coins from being used. If they cannot trace users or transactions, there is no way to enforce such bans.

As for figuring out a way to trace coins like Monero, it will not much matter. Any indication the government is getting close to cracking Monero would be followed by some new technology or protocol that gets around their tracking. If there is one thing we know from history, it is the fact that people who do not want their privacy invaded by the government will find ways to make sure that they remain untraceable.