The main difference between anonymous cryptocurrencies and other coins on the crypto market is reflected in their name – they seek to ensure maximum privacy of their users’ data. 

Bitcoin and similar cryptocurrencies have not been considered truly private for a long time: it is easy enough to find out how many coins a particular user has in his wallet, track the transfer of coins to another wallet, and when exchanging cryptocurrencies for fiat it is not difficult to identify the owner. In addition, today, most major exchanges are required to comply with national financial laws and identify their customers, reporting their transactions to regulators. 

How do anonymous cryptocurrencies work?

In anonymous cryptocurrency transactions, the transactions are also viewable, but the addresses and amounts are hidden. As a result, it is very difficult, and in some cases almost impossible, to identify the owner of the wallet. 

However, this approach has its disadvantages. To confuse the traces, transactions have to be complicated: for example, by passing through many nodes. The large size of transactions leads to high fees and forces the network to consume a lot of resources – this is one of the main disadvantages of private blockchains. As a result, anonymous cryptocurrencies are poorly suited for private and small transfers. But among the positives, it is worth noting that the teams of popular projects are well aware of this problem and are gradually solving it with updates. 

The most popular anonymous cryptocurrencies

According to CryptoSlate, there are 75 anonymous cryptocurrencies on the market. Let’s take a look at some of them:

Monero (XMR)

Capitalization: $4.04 billion

Monero is the most popular anonymous coin. The project has been in operation since 2014 and was created by a developer or team under the pseudonym of Nicholas van Saberhagen. 

Monero is anonymous by default, while for many other private coins private transactions are an option. In the public Monero blockchain, you can only check if a particular wallet exists, but you cannot find out its balance or see transactions. 

The Monero blockchain runs on the CryptoNote protocol, which is based on the following technologies:

Ring signatures are a type of digital signature. It allows one anonymous user to sign a transaction on behalf of a group of potential signers. In such a case, it is impossible to tell who exactly signed the transaction;

Stealth addresses act as a kind of hidden layer for Monero transactions. When coins are transferred, a one-time secret account is automatically created, which only the recipient has access to.

Dash (DASH)

Capitalization: $1.44 billion

Although many associate the DASH project with anonymous cryptocurrencies, its developers aim to provide the market with a blockchain with high bandwidth and the ability to conduct private transactions. The coin was launched in 2014 by developer Evan Duffield – he sought to improve bitcoin’s privacy, but eventually decided to launch a new project.

The DASH cryptocurrency is not anonymous by default and is great for everyday shopping. But users of the network can make any of their transactions anonymous by selecting the “PrivateSend” function. Such transactions are more complicated and take longer to complete, so they are more expensive.

DASH runs master nodes – they store a complete copy of the blockchain, acting as the second layer of the network. User privacy is achieved through a complex system that obfuscates the course of transactions, resembling a built-in cryptocurrency mixer – transactions are “run” through several nodes. Also, all transaction data is not recorded in the public blockchain, but only on the master nodes.

Zcash (ZEC)

Capitalization: $2.03 billion

Zcash is a project launched by Zerocoin Electric Coin Company in 2016 under the leadership of Zuko Wilcox.

The privacy of the Zcash blockchain is ensured by zk-SNARK, a zero-disclosure proof protocol. It allows users to make transactions without disclosing their addresses and amounts. Only the confirmation that the transaction took place and the time of its execution remain in the public domain.

Just like in DASH, the private transaction in Zcash is not a mandatory but a customizable feature. Users can choose between two types of addresses:

  • t-addresses (beginning with the letter “t”) – public and known to all members of the network;
  • z-addresses (beginning with the letter “z”) – allow hidden transactions.

Transfers to z-addresses require more resources and, as a consequence, are more expensive. 

Horizen (ZEN)

Capitalization: $0.81 billion

Horizen is a fork of the Zclassic coin, which itself is a fork of Zcash. The project was launched in 2017 by the American company Zen Blockchain Foundation. Initially the coin was called ZenCash, but in 2018 it changed its name to Horizen.

Horizen, like Zcash, uses the zk-SNARK protocol, and the user can also choose confidential z-addresses and public t-addresses.

Horizen is the first blockchain with end-to-end encryption at the node level. It is a way of transmitting messages and transactions in which only the recipient and the sender can decrypt them. Therefore, the reward for the blockchain is not only for the miners, but also for those participants in the network who store the blockchain’s history.

Horizen’s blockchain structure is multi-layered and consists of secure nodes that use encryption and super nodes that allow the creation of branches of the blockchain (sidechains). The system also runs ZenChat, which allows users to exchange encrypted messages of up to 512 characters within the network.

Verge (XVG)

Capitalization: $0.29 billion

Verge was launched by anonymous developer Sunerok in 2014. The project was originally called Dogecoin Dark, but because of associations with Darknet and crime, the name was changed to Verge. 

Instead of relying on crypto tools, Verge uses onion router (TOR) technology and I2P networking to protect the identity of its users:

TOR transmits user transactions through a distributed network of repeaters and tunnels located around the world – this prevents the sender and receiver from being traced.

I2P encrypts user data before it is sent. The coin also allows the location and IP addresses of transactors to be hidden.

The growing demand for privacy

The demand for data privacy and transaction anonymity is growing, and privacy is the new mainstream.

For example, the number of users of the anonymous crypto browser Brave has more than doubled in the last year, from 11 to 25 million people. Due to the update of the Privacy Policy in WhatsApp, the number of downloads of the private messenger Signal increased 62 times in just one week. At the same time, Telegram’s audience has already exceeded 500 million people. Privacy settings were added to their products by Opera, Firefox and Safari browsers.

Many cryptoprojects that have not previously positioned themselves as private are also adding solutions that provide more privacy. For example, the Litecoin team is finalizing an update to Mimblewimble that will improve network scalability and transaction privacy.

And Bitcoin Core developers are preparing to activate a Taproot update to the network that will make less data about transactions and participants available to outside observers.

The growing demand for privacy could lead to increased demand for anonymous cryptocurrencies. For example, in December, darknet site Whitehouse announced that it would no longer accept bitcoin payments – it now accepts XMR instead of VTC.

Authorities tighten regulation of private coins

At the time of this writing, anonymous cryptocurrencies were legal in most countries. However, it is unlikely that the situation will not change in the coming years, given the growing attention of regulators to private coins.

Back in May 2018, Japan’s Financial Security Agency (FSA) effectively banned Dash, Monero and Zcash: they can be owned and exchanged, but regulated cryptocurrency exchanges do not support them.

Dash, Monero, and Zcash have also been banned in South Korea since March of this year. The country’s Financial Services Commission (FSC) attributed this to the fact that these coins are often used in money laundering and criminal activities. We’ve written before that cryptocurrencies account for only a fraction of the total amount of money laundered, with most going through banks and cash. But regulators stubbornly ignore these facts.

Also this March, the international intergovernmental Financial Action Task Force (FATF) released a new cryptocurrency regulation document, “Guidance on a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (Vasp),” which was submitted for a public hearing. This is the 6th draft of the legislation regulating cryptocurrencies. Among other things, the FATF proposes identifying cryptocurrency holders and requiring cryptocurrency exchanges to report all user transactions.

And late last year, the U.S. Financial Crimes Enforcement Network (FinCEN) published regulatory proposals to regulate anonymous cryptocurrencies. FinCen wants banks, cryptocurrency exchanges and other financial enterprises to collect identifying information about any person who wants to transfer $3,000 or more from any cryptocurrency wallet. And the transfer cannot be made until the verification is complete.

Anonymous coins will suffer the most from the new rules, if they are adopted (and there is no doubt about it), because exchanges will not be able to identify senders and recipients. The reasoning is the same – combating money laundering, terrorist financing and other criminal activities. The document emphasizes that anonymous coins allegedly account for most of the criminal transactions.

Delisting anonymous cryptocurrencies

As we told earlier, cryptocurrencies are difficult to completely ban because of their decentralized nature. But banning certain coins forces regulated platforms, which must comply with the requirements of various financial laws, to delist them – remove them from trading.

This began back in 2019. In August of that year, CoinBase stopped supporting Zcash, South Korea’s OKEx did the same the following month, and Urbit did the same in September 2019.

Bithumb, OKEx, Urbit, Bitbay and, in April 2020, Huobi Korea all gave up listing Monero the same year. In November 2020, the U.S. exchange ShapeShift delisted Monero, Zcash and Dash, explaining its decision by a desire to “reduce regulatory risks.”

Delisting of private coins continued to gain momentum in 2021. At the beginning of the year, American Bittrex announced the delisting of the three most popular anonymous coins: Monero, Zcash and Dash.

Teams of popular private coins are increasingly declaring that they are not completely anonymous. For example, the developers of Dash announced that they contacted the compliance team at Bittrex and explained that “technically, Dash has no more privacy functionality than bitcoin, which makes the label ‘private coin’ incorrect in relation to Dash.” While DASH is often referred to alongside XMR and ZEC as a privacy coin only a small percentage of transactions in the Dash blockchain use the PrivateSend coin blending service, a feature of the network.

According to Chainalysis research, Dash and Zcash allow their use for criminal purposes to be tracked, so the coins can be placed on regulated platforms. According to Chainalysis, most of these coins are used for regular, rather than fully anonymous, transfers. 

Moreover, according to RAND, Dash and Zcash account for less than 0.2% of transactions on the Darknet. But this data has yet to convince regulators.

In conclusion

Right now, anonymous cryptocurrencies are between difficult choices:

On the one hand, there is growing demand for them among users and investors.

On the other, regulators are tightening the screws, forcing legal platforms to abandon them.

As a result, private coins may not fit into the general trend of global cryptocurrency adoption: exchanges will continue to abandon them, and they should not expect an influx of institutional money. But if teams decide to abandon the anonymity feature, their projects will lose their unique properties and a significant portion of users.

We think we will soon see a repositioning among many coins considered private. Some of them will give up their anonymous status, focusing on developing scalability and network speed. And some will remain a niche product for those who care about privacy.