Sep 15, 2022 - Economy

Privacy coins test crypto exchanges' comfort with compliance

Illustration of a cane pulling a pixelated coin off stage.

Illustration: Shoshana Gordon/Axios

The crypto industry's cypherpunkian mettle will be tested as governments and regulators finger privacy tools for possibly enabling criminals doing bad things — in addition to normal people doing mundane things.

Driving the news: Seven tokens are set to be delisted on Sept. 19 from Top 10 exchange Huobi Global, which on Monday sent a shudder through the industry as it cited compliance with the "latest financial regulations" as just cause.

  • Token issuers that spoke with Axios expressed disappointment. One said it would fight the decision.
  • Exchanges FTX, Binance, Kraken, OKX and Coinbase, as well as Huobi Global, declined to comment.

Why it matters: The "do it yourself" and "don't ask permission" philosophy is a feature of the crypto industry, not a bug.

  • Yet, the question of whether tools like Tornado Cash can help bad actors evade government sanctions has the crypto industry rolling over on their own, regardless of whether that leaves customers in the lurch.

Between the lines: The Huobi issue centers around Monero, Zcash, Dash, Firo, Decred, Verge and Horizen, which collectively have a market capitalization of $5.5 billion.

  • Some tout privacy features of their tokens more than others, so we'll avoid labeling them broadly as "privacy coins." We'll call them the "Lucky Seven."
  • Monero's XMR is the largest of them with a $2.5 billion market capitalization, and it — along with the others named — have privacy-enhancing features to obscure parties' identities in a transaction.

What's happening: "I spoke with Huobi before they delisted Monero and other assets, and they indicated that South Korea pressured them to delist these assets worldwide," Justin Ehrenhofer, of Monero-focused crypto wallet software company Cake Wallet, tells Axios.

  • "This speaks to Huobi's dependence on South Korea."

Flashback: Recall Kraken delisted Monero's privacy coin in the United Kingdom late last year.

  • "Unfortunately, we have to pick our battles and look out for the broader business in the country," Kraken chief Jesse Powell said at the time in response to bothered customers in a Reddit thread.
  • These fuzzy regional regulatory directives appear to be lost on crypto customers, with one asking on Reddit last year: "Can anyone tell a simpleton why Monero and some others are not tradable on Coinbase?"

What they're saying: "Privacy is a basic requirement for any currency to be useful, so it's unfortunate that some exchanges see this as problematic," Jonathan Zeppettini, International Operations Lead at Decred, said in an email responding to Axios. "Especially when all these exchanges by their nature require users to submit personal information in order to trade."

  • "The larger exchanges such as Binance, Coinbase, and FTX have been more forward thinking and likely appreciate that the future of cryptocurrency includes strong privacy guarantees," he added.

Dash is "identical to bitcoin," given transactions and addresses are publicly viewable on the blockchain," Ernesto Contreras, global head of Dash Core Group's marketing and business development, tells Axios.

  • "We are reaching out to Huobi and the regulators, and hope to clear this misunderstanding soon, like we have done in the past with exchanges that had this stance," he says.

What others are saying: "It’s very possible exchanges could feel pressured to delist privacy technologies. And we're definitely watching to see what they do," Galaxy Digital's Alex Thorn tells Axios.

State of play: The U.S. Treasury just this week published guidance around Ethereum's largest privacy tool, Tornado Cash, providing clarity around how users can withdraw funds, lawfully.

  • Meanwhile, FTX recently warned customers about interacting with privacy protocol Aztec.
  • And Binance and Coinbase, respectively, have tried to explain their stance on certain tokens, but don't directly address where in the world certain directives are coming from that would bar them from listing them.

What's next: Issuers of the Lucky Seven appear poised to deny that the main feature of their tokens are privacy-enabling in hopes of diverting attention and staying in the good graces of coin gatekeepers.

Crystal's thought bubble: Cypherpunkian principles are what separate the crypto crew from Wall Street, without it, they are just a Rube-Goldbergian version of the same financial machine. And those moneyed interests are coming for the industry anyway.

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