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Banning Privacy Coins: Why the U.S Might Try and Fail

Last Updated November 20, 2023 4:54 PM
Josh Adams
Last Updated November 20, 2023 4:54 PM
Key Takeaways
  • Privacy coins allow for complete financial anonymity online.
  • Many countries have explored banning them outright.
  • We spoke to three experts on why a U.S. ban will likely fail.

Private cryptocurrencies – or “privacy coins” – have faced increased scrutiny as governments worldwide worry about their ability to enable illicit activity. Though few comprehensive national bans exist, many jurisdictions now limit trading. South Korea banned the exchange of privacy coins in 2018. Japan and Dubai have gone further, banning them entirely. 

However, experts argue that while tightened regulations could hamper adoption, an absolute prohibition would likely focus on significant legal and practical challenges. We spoke to three of those experts on why a workable ban in the United States might be impossible.

Cracking Down On Financial Privacy

According to digital rights expert and advocate SethForPrivacy , authorities have already covertly pressured exchanges to delist privacy-focused coins like Monero using “shadowy back-channel bank pressure.” Whereas banks threatened to withdraw services from exchanges that listed anonymity-centered cryptocurrencies.

In addition, lawyer David Lesperance  believes the government could make access even more difficult by directly targeting the creators of privacy coins and layer-two protocols through legal action. He points to previous prosecutions of Bitcoin mixing services like Tornado Cash  as an example.

Lesperance also expects attempts to introduce strict regulations around privacy coin use, positing that policymakers could “put in barriers to Americans having easy access.”

The easiest way to do so would be to target centralized on-and-off-ramps like exchanges, where most people get hold of them.

However, all three experts fundamentally agree that the U.S. would ultimately struggle to completely prohibit peer-to-peer use of privacy coins among ordinary citizens. As Aleph Zero  co-founder Matthew Niemerg told CCN: “The US cannot effectively ban the use of privacy coins by individuals transacting in the open market.”

Why A Ban Would Be So Difficult

The main barrier in the way is the intrinsically decentralized nature of most leading privacy coins and their networks. Coins like Monero and Zcash have specific in-built resilience to government control and censorship – transactions are made private by default, nodes can be run anonymously behind tools like Tor, and mining tends to be decentralized across global participant pools.

Formidable legal obstacles seem imminent if a full ban is pursued. Lesperance believes any such prohibition could face overturning, albeit only after navigating a lengthy passage through the appeals court system.

It will be up to those who suffer under these restrictions to challenge these laws and regulations as unconstitutional,” he told CCN.

Although, according to Lesperance, its win will be “a pyrrhic victory at best.”

Digital rights specialist SethForPrivacy holds a notably less optimistic view of privacy precedents implemented so far, citing recent unilateral prosecutor actions against high-profile mixing services like Tornado Cash. But he retains hope that ongoing court cases could ultimately restrain authorities and reestablish robust privacy rights.

Personally, I’m not concerned about attempts to prohibit privacy coins from a usability perspective,” Seth told CCN. “But I am concerned about what impact a federal ban would have on the average American being willing to use them.”

The Practical Difficulties Of Enforcement

Even if the U.S. enacts restrictions or narrow bans, experts argue enforcing them would be exceptionally challenging. Lesperance suggests motivated users have practical options like VPNs, loading cold wallets overseas, or using decentralized exchanges to circumvent barriers.

More broadly, purely peer-to-peer barter systems would be practically impossible for authorities to monitor or restrict.

Aleph Zero’s Matthew Niemerg also highlights his own startup’s anonymous transfer solution “Shielder ,” which validates user identities but crucially keeps subsequent transaction details private. Solutions like this are a demonstration that anonymizing systems can potentially suit both privacy advocates and cautious policymakers, he says.

Although, the battle for privacy coins is still important, says Niemerg. “If financial privacy fails in the US, then it is highly likely that other countries will follow suit and enact similar policies.”

Though tighter regulations may restrict adoption and access, experts suggest a widespread political ban on major privacy coins is likely to fail.

Achieving some level of transactional privacy for millions of ordinary Americans seems feasible through technological, legal, or practical workarounds. The genie cannot be easily put back into the bottle.

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