The vast majority of crypto assets have no default privacy features, raising questions about how viable this approach is. Everyone in the financial industry can benefit from privacy-oriented solutions, and cryptocurrencies should not be an exception.
Why Privacy Is Needed In Finance
There has been a notably higher demand for financial privacy over the past few years. Initiatives such as PrivacyRightsNow illustrate that point perfectly. The goal is to have consumers achieve a higher degree of privacy rather than keep empowering financial institutions and governments. There are many good reasons why financial privacy is a must and should, in theory, be a fundamental right for all humans.
The first significant issue in the current system comes through telemarketers. As if unwanted emails about loans, savings, and other financial services weren't enough, telemarketer calls make things even more problematic. Whether banks and their affiliates sell this information to telemarketing companies will always remain a guessing game. However, there have been incidents of financial institutions and their affiliates sharing customers' financial data with telemarketers for a fee.
A second issue is the growing threat of identity theft and stalking. As consumers' financial details are exposed online, criminals can leverage these details to perform identity theft. As the sharing of social security numbers is not entirely uncommon, a very serious problem is created. In the United States, it is no longer allowed to share SSNs with other companies, even though there are still over 400,000 identity theft cases every year. Additionally, there is the threat of stalking, as criminals may keep snooping on one's financials without the victim ever being the wiser.
Unfortunately, it is complicated to achieve financial privacy through normal means. Banks and governments will not necessarily adjust their operations because a few million people are unhappy. As such, more and more people explore cryptocurrencies, an industry with perceived privacy. Nothing could be further from the truth, though.
The Current State of Privacy Coins
Many people think that Bitcoin, Ethereum, and other public blockchains all offer privacy by default. Unfortunately, that is not the case, although users can be pseudonymous when using wallet addresses. However, thanks to the growing popularity of blockchain analysis firms, linking a pseudonymous wallet address to a real-world identity is a lot more straightforward. As a result, there is no absolute privacy to speak of in most coins, although there are exceptions.
Some currencies provide privacy, either at the protocol level or by having users opt-in. Monero leads the privacy and anonymity race, as it has undergone multiple evolutions to provide financial privacy efficiently. Dash, a currency formerly focused on privacy, is now tackling the payments channel. ZCash, PIVX, and others all have some degree of privacy, with varying success. However, all of these currencies suffer from exchanges delisting them for the sole purpose of being privacy-oriented in some shape or form.
Despite this uphill battle, one should never give up on financial privacy. If the eCash project is an example, there is a future ahead for privacy coins. However, that will only be possible through scaling, censorship resistance, and protection from inflation. Privacy alone may no longer be sufficient in this ever-changing financial paradigm. Building sound money first is essential, and eCash opts for that route while introducing optional privacy for those who want it.
To expand the ecosystem, the team also intends to support the Ethereum Virtual Machine, allowing for the development of financial applications, products, and services. Its proof-of-stake consensus layer removes the need for miners, making it different from Bitcoin and Ethereum.
The biggest change is how it will only have two decimal places instead of eight. Lead developer Amaury Sechet feels that a lower unit price can lead to higher bull market appreciation. Personally, I think eight decimals works fine, even if it is a bit confusing to newcomers at first. Opting for two decimals can make more people acquainted with the concept of digital currency.
Protecting Against Inflation And Censorship
In the current financial industry, everyone who owns money is subject to inflation. Whether one wants to admit it or not is irrelevant. Governments and banks continue to print and spend money like there is no tomorrow. Although that approach can give a short-term boost to domestic economies, it will always lead to inflation. For consumers, that means losing purchasing power, requiring them to earn more money to pay for the same goods and services.
Sound money, on the other hand, will protect users from inflation. Precious metals are often considered a store of value as their prices do not diminish. Cryptocurrencies would be a worthwhile addition to this list were they not so volatile. For me, Bitcoin and other public crypto assets can never be considered a store of value until they achieve the status of "sound money". Unfortunately, these assets will always be liable to a sudden appreciation of depreciation in value.
Changing that narrative will usher in the next generation of crypto assets. While some may see stablecoins as sound money, they often are not. Most stablecoins are backed by fiat currency reserves, the same currency that is subject to inflation. As such, one's stablecoin holdings are equally subject to inflation. It baffles me how few people seem to grasp that concept today.
Rather than non-privacy coins and stablecoins, building sound money will serve a second purpose. It is crucial to protect consumers from censorship. Giving them a say about how they manage and spend their wealth is very different from today's financial system. banks can prevent customers and corporations from completing purchases for arbitrary reasons.
Moreover, if one tries to express an opinion online and accepts payments through traditional means, payment processors will stop working with you. WikiLeaks witnessed that first hand, yet Bitcoin offered a viable solution. Imagine if a solution offers optional privacy, sound money, and censorship-resistance all rolled into one? I cannot wait to see what the future holds in this regard.
The future of cryptocurrency will require some degree of privacy to protect consumers from prying eyes and censorship. At the same time, the focus needs to shift to provide sound money capable of avoiding inflation. Creating a new currency that will not act as volatile as Bitcoin or Ethereum - even on a good day - will not be easy, but it is possible with the right fundamentals.
I expect great things in the field as new infrastructure is already under development. However, although I remain a big fan of Bitcoin, no one can look past its shortcomings and inefficiencies. Better ideas and concepts will emerge, providing consumers with the solutions they require in this digital age. That doesn't mean Bitcoin will go away, as some of these under-development features may be integrated in that protocol over time.