What are Privacy Coins?

Privacy coins are a specialized class of cryptocurrencies focusing on user anonymity and transaction confidentiality. Bitcoin, for example, records all transactions on a transparent public ledger, while coins like Monero, Zcash, and Dash use cryptographic techniques to protect transaction details from public view.

When you use Bitcoin, your transaction history is permanently visible on the blockchain, similar to having your bank statements posted publicly with a pseudonym. Privacy coins fix this issue by hiding sender information, recipient details, and transaction amounts through technologies such as ring signatures, zero-knowledge proofs, and stealth addresses.

How Privacy Coins Work

As we mentioned, the mechanics behind privacy crypto coins implement additional layers of security to make the information more secure. Let’s discuss some of the cryptographic techniques used to achieve anonymity:

• Ring Signatures: This method combines the sender’s transaction signature with other users, making it nearly impossible to determine which user actually initiated the transaction. Think of it as a digital version of multiple people signing a document, with no way to determine whose signature was the authentic one. 
• Stealth Addresses: Unlike regular cryptocurrency addresses that remain static and traceable, stealth addresses generate one-time addresses for each transaction. When you receive funds through a stealth address, the blockchain displays a randomly generated address rather than your permanent public address. As a result, it is impossible to link multiple transactions to the same wallet.
• Zero-Knowledge Proofs: Technologies like zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge) allow users to prove they possess information (such as funds) without revealing the information itself. 
• CoinJoin: This method combines multiple transactions into a single one before distributing funds to individual wallets. By mixing inputs and outputs from different users, CoinJoin makes transaction histories difficult to trace. 

Transaction Privacy and Anonymity

Privacy coins differ in how they implement transaction privacy:

Some coins, like Monero, apply privacy features to all transactions. Every Monero transaction automatically uses ring signatures, stealth addresses, and RingCT (Ring Confidential Transactions) to hide details, ensuring privacy across the network.

Other coins, such as Zcash, offer a choice between transparent and private transactions. Users can decide whether to conduct standard transactions (similar to Bitcoin) or “shielded” transactions with enhanced privacy. This flexibility allows users to balance privacy needs with other considerations like transaction speed or regulatory compliance.

Transaction Privacy in the Context of Blockchain

What makes privacy coins particularly interesting is how they maintain blockchain’s core benefits while adding privacy:

• Decentralization: Like other cryptocurrencies, privacy coins operate on decentralized networks without central authorities.
• Immutability: Transactions remain permanently recorded and cannot be changed or deleted, though the details are encrypted or obscured.
• Fungibility: By hiding transaction histories, these coins achieve true fungibility—each coin becomes indistinguishable from others, similar to physical cash.

Top Privacy Coins

Here is the privacy coins list you can check out if the topic seems interesting to you:

Monero (XMR)

Monero, launched in 2014, is the most recognized privacy coin with a market capitalization of $3.83 billion as of writing. Its core strength is providing mandatory privacy for all transactions through:

• Ring signatures that hide transaction origins by mixing the user’s transaction with others
• Stealth addresses that generate one-time addresses for each transaction
• RingCT that Conceals transaction amounts
• IP obfuscation that hides user IP addresses when broadcasting transactions

Monero is the go-to coin if you seek maximum authority, but this same feature has attracted regulatory attention in some jurisdictions. 

The European Union’s 2024 anti-money laundering rules now prevent crypto service providers from listing, storing, or facilitating transactions with coins like Monero. In the US, FinCEN has proposed mandatory reporting requirements for cryptocurrency mixing activities, directly targeting privacy mechanisms. 

As a result, many centralized exchanges have delisted Monero and other privacy coins, reducing their accessibility to mainstream users while forcing privacy-focused transactions into P2P channels.

Zcash (ZEC)

Zcash was created in 2016 as a Bitcoin fork (a currency that copied and modified Bitcoin’s original code) enhanced with privacy capabilities through its zk-SNARKs technology. With a market cap of almost $500 million, here are Zcash features:

• Optional privacy: Users can choose between transparent and shielded transactions
• zk-SNARKs: Cryptographically proves transaction validity without revealing details
• Selective disclosure: Allows users to share transaction information with trusted parties

Dash (DASH)

Originally launched as “Darkcoin” in 2014 before rebranding to Dash, this cryptocurrency combines privacy features with a focus on payment functionality. As seen on the screen, the coin has a market cap of almost $272 million, and it offers:

• PrivateSend: An optional CoinJoin-based feature that mixes transactions
• InstantSend: Allows for near-instant transaction confirmations
• Self-funding governance: Sets aside some mining rewards to pay for ongoing improvements to the network

While not as privacy-focused as Monero or Zcash, Dash provides a balanced approach that can be appealing to users who want both privacy options and practical payment features.

Some Other Notable Privacy Crypto Coins

After mentioning the best privacy coins, let’s also discuss some other other noteworthy projects:

Grin and Beam 

Both implement the Mimblewimble protocol, which provides privacy through confidential transactions and features that remove unnecessary transaction data. Grin takes a community-focused approach with no pre-mine and a unique emission schedule that releases coins steadily. 

While Beam operates with a corporate structure, using a halving schedule similar to Bitcoin and focusing on building business applications on its privacy-preserving foundation.

PIVX (Private Instant Verified Transaction) 

A proof-of-stake privacy coin that utilizes a zk-SNARKs-based protocol called SHIELD. PIVX combines staking rewards with optional privacy features, allowing users to earn passive income while at the same time maintaining transaction confidentiality. 

Secret (SCRT)

Secret Network is a privacy-focused smart contract platform that enables confidential decentralized applications. It extends privacy beyond simple transactions to programmable smart contracts, and as a result, developers can build applications in which sensitive data remains encrypted while still being computable. 

Oasis Network (ROSE) 

It combines privacy features with smart contract functionality, targeting both financial and data privacy. This approach separates consensus and execution into two layers, which increases scalability and, at the same time, maintains privacy. 

Pros and Cons of Privacy Coins

As mentioned earlier, privacy is a feature that attracts people, but that same characteristic has its drawbacks too: 

Should You Invest in Privacy Coins?

Any investment decision needs in-depth research, planning, and consideration. Especially when it comes to crypto coins, as the industry is highly volatile. If you are thinking about these privacy tokens, several factors deserve your careful attention:

1. Regulations are probably the most important factor to consider. As governments are still trying to overcome the risks of these coins, they may face additional restrictions or requirements in the future.
2. Privacy technologies continue to evolve, and coins that fail to keep this pace may become vulnerable to deanonymization. Before investing, evaluate a project’s development team, update frequency, and technological innovation.
3. Despite regulations, the demand for financial privacy remains strong. Consider whether these coins address the market needs that other solutions cannot fulfill.
4. Because of these high risks, privacy coins should only represent a modest portion of your diversified portfolio.

Are Privacy Coins Legal?

Now, it’s time to answer one of the most frequently asked questions: Are these privacy crypto coins legal? The short answer is that it depends on the jurisdiction.

• For example, South Korea and Japan have implemented outright bans on privacy coins and required exchanges to delist them.
• In Australia, trading of privacy coins on regulated exchanges is restricted.
• These coins remain legal in the US, but exchanges are facing increasing pressure to implement stronger KYC procedures for privacy coin transactions.
• European Union regulations introduce new compliance requirements for coins.
• Dubai also banned privacy coins as part of its regulations.
• The ban is not outright in the UK, but many UK-based exchanges have delisted privacy coins due to regulatory guidance.

AML and CTF Risks

Privacy coins can be a headache for regulators focused on anti-money laundering (AML) and counter-terrorism financing (CTF) enforcement. While standard coins leave transaction trails that can be analyzed, privacy coins deliberately obscure this information, making it difficult for authorities to:

• Verify user identities through traditional KYC processes
• Track the source and destination of funds
• Observe suspicious transaction patterns
• Link digital activities to real-world identities

Criminal organizations might use these features through laundering techniques: They may purchase privacy coins through intermediaries, use mixing services to break transaction trails, layer transactions across multiple exchanges, and finally withdraw “cleaned” funds back into traditional systems.

Financial institutions and exchanges face a difficult choice: either implement specialized (and often inadequate) monitoring tools or refuse to support these coins entirely. Most major exchanges have opted for the latter approach, delisting privacy coins rather than accepting potential regulatory liability. 

The tension between privacy protection and regulatory compliance remains largely unresolved, with different jurisdictions taking varied approaches, as we’ve mentioned above.

Future of Privacy Coins

When thinking about the future, the privacy coins will likely be shaped by several key factors and the main one will be technological advancements. New cryptographic approaches may potentially find a middle ground between complete anonymity and regulatory compliance.

As some countries imposed strict bans, an option may be nuanced regulatory frameworks that will accommodate privacy coins while reducing risks. For example, allowing these coins with optional transparency features that can be enabled for regulatory review when necessary.

Privacy features are becoming more and more popular in broader decentralized finances, and we may speculate that privacy technology may evolve beyond standalone coins into privacy layers for existing cryptocurrencies.

One thing is for sure: some regulations are required as a big part of the community, and governments are concerned about illicit activities. The important thing is to find the balance between privacy and regulations. 

Privacy Coin FAQs

References

1. Stealth Address: Meaning and Concerns – Investopedia
2. What are ZK-Snarks – z.Cash
3. What is Monero (XRM) – Getmonero
4. How Dash Works
5. Global AML, CFT Context