The U.S Secret Service Office of Investigations warned the U.S Congress against certain cryptocurrencies that encourage illicit activities by offering untraceable transactions in a recent hearing. Cryptocurrency users often carry out transactions that they would like to be completely private, anonymous and untraceable.
Sometimes, these currency transactions could simply involve paying for a service like gift cards anonymously, but other times, such coins may be used to pay for illegal drugs, weapons and other illegal items. This has led to a demand for privacy coins like Monero and Zcash which are allegedly popular on the dark web.
According to North Carolina Representative, Robert Pittenger, the illicit use of these cryptocurrencies is a cause for concern and is now viewed as one of the biggest emerging threats to national security in the United States. Authorities are now calling for the strict regulation of these privacy coins to minimize the threat. Currently the most popular privacy coins, Monero and Zcash were originally created to address users concerns over the privacy of their transactions on Bitcoin, Ethereum and the blockchains of other big cryptocurrencies.
The Secret Service Office of Investigations, which has been involved in issues pertaining to financial crime, was originally created to address and prevent counterfeiting. Robert Novy, deputy assistant in the U.S. Secret Service Office of Investigations, briefed the congress on the proposal to consider taking action to control the issue of criminal transactions with both virtual currencies.
Novy also called for the strict regulation of tumbler (cryptocurrency mixing) services as well as mining pools. Apart from calling for regulation and stricter control laws for anonymity-enhanced coins, Novy commended the United States Congress on the passage of the Clarifying Lawful Overseas Use of Data (CLOUD) Act in 2018.
The Act gives federal law enforcement the right to request for customer data from U.S technology corporations through a warrant or subpoena even if the data is stored on foreign soil. Many civil liberties groups have since condemned the legislation as a violation of the 4th amendment rights.
Greg Nevano, the Deputy Assistant Director of Illicit Trade, Travel, and Finance division of the Immigrations and Customs Enforcement (ICE) and the Department of Homeland Security’s (DHS) Homeland Security Investigations also echoed Novy’s sentiments. Nevano testified before the panel that newly emerging cryptocurrencies are increasingly difficult to track.
According to Nevano, such coins are hard to track as a way to deliberately deter law enforcement due to their intended use for illicit operations. However, Nevano also stated that it is not fully impossible to trace these cryptocurrencies.
Nevano also requested that Congress pass a law that will allow law enforcement officials to compel cryptocurrency companies to hand over customer data for scrutiny. Companies like Coinbase have been successful in protecting customer data from the government so far, but if such a law is passed, customer records including those involving privacy currency like Monero and Zcash will be open to compromise from law enforcement.
According to Nevano, ICE and the DHS are mostly concerned about P2P exchanges that are unregistered, especially the decentralized ones, as well as classified cryptocurrency exchange listings on websites like Craigslist.
Nevano also recounted that in April 2018, about $25 million worth of cryptocurrency was seized by his agency during law enforcement actions. He also commended the various blockchain analysis services for helping law enforcement agents with the deanonymization of cryptocurrency users and their related data.
Thomas P. Ott, the Associate Director of the Enforcement Division of the Financial Crimes Enforcement Network (FinCEN) also testified before the Subcommittee on Terrorism and Illicit Finance. According to Ott, FinCEN has cause to believe that billions of dollars worth of cryptocurrency transactions have been carried out on suspicious activity.
These transactions include about $1 billion in ransomware payments and $1.5 billion in thefts and exchange hacks so far. He also commended nations that have put effort into regulating their cryptocurrency industries and fighting money laundering such as Australia, Japan and South Korea.
Monero is a popular cryptocurrency under the category known as privacy coins. It was created in 2014 and claims to offer security, privacy and untraceable transactions. It is currently the 13th largest cryptocurrency with a market cap of $1,643,539,366 USD and a price value of $101.04.
Monero cryptographically ensures that transactions carried out on its network cannot be traced or linked to the users who make them. The mechanism for this failsafe approach to privacy is fairly complex and has worked well to date, making Monero one of the most coveted coins.
The cryptocurrency was created as a fork of Bytecoin when users noticed that there were a lot of shady occurrences on the network. Formerly named Bitmonero, Monero came at a time when users were growing increasingly concerned about the privacy of their data on the Bitcoin blockchain. The platform is open source, completely crowdfunded and is headed by a team of seven developers, five of which have chosen to remain anonymous. The main features of Monero include:
- Fungibility: This is the interchangeability of an asset with other assets of the same type. Due to Monero’s protocol, transactions on the network have no trail. As a result, other users can’t know a token’s transaction history. This means that there is no differentiation of Monero into “clean” and “dirty” coins. Therefore, they can be easily interchanged.
- Scalability: Monero is highly scalable since its blocks have no size limit like Bitcoin, Litecoin and other cryptocurrencies.
- Privacy: Monero transactions are rendered untraceable by cryptographic functions.
Just like Monero, Zcash is a secure privacy cryptocurrency that uses a unique protocol to ensure that users’ transactions carried out on its network are fully anonymous and untraceable. The cryptocurrency started out as a fork of the Bitcoin blockchain and was created by Zooko Wilcox in 2016.
The network uses a cryptographical function known as Zero knowledge proofs to secure its network and prevent double spending. It is currently ranked as the 19th largest cryptocurrency with a market cap of $768,853,757 USD and a price value of $169.69.
Just like Bitcoin, the total number of Zcash tokens that will ever exist is limited to 21 million but that is the only real similarity to Bitcoin that it maintained after the fork. Unlike Bitcoin, Zcash has faster transaction confirmation speeds of 2.5 minutes, just like Litecoin. It also has 4MB block size limit and the network block rewards are halved every four years.
Monero, Zcash and other privacy coins and blockchain projects were created as a direct solution to the problems that Bitcoin had to struggle with, especially privacy. While a normal blockchain like that of Bitcoin can offer value that translates into transparency, not every user wants that quality in their transactions.
Unfortunately, the type of privacy that comes with this type of cryptocurrency, makes it attractive for use in illegal transactions. This has caught the attention of U.S law enforcement in light of recent hacks and the increase in cryptocurrency ransomware payments.
If the U.S congress passes a law allowing strict regulations for such coins, there will be a negative effect on the adoption and mass use of cryptocurrency. This is because if a government controls the process, there won’t be much difference between a cryptocurrency and traditional digital cash. Time will tell whether regulations will truly cause a wide-scale regression in the cryptocurrency industry or have the opposite effect: gaining the trust of more people and ensuring the long-term adoption of the technology.