- Numerous exchanges, like Bittrex, have delisted coins that have features to protect user privacy.
- Explanations of why they’ve done so have been vague or non-existent.
- It has set up clashes between the exchanges and Zcash, Monero and Dash over whether there is actually regulatory pressure to do so.
On New Year's Day, cryptocurrency exchange Bittrex announced it would be delisting these three so-called “privacy coins” as of Jan. 15, adding its name to a growing list of exchanges that have done the same.
In a blog post announcing the development, Bittrex did not provide a reason for doing so.
Bittrex: No explanation offered
The assumption has been that the delistings are related to know-your-customer and anti-money laundering (KYC/AML) concerns. But by and large, exchanges have delisted without much explanation, leaving users and privacy advocates out in the cold, with little recourse.
“Where privacy is opt-in and not mandatory such as in dash or zcash, which allows the vast majority of transactions to remain traceable, the difference between these assets and bitcoin [or] ether is often just in focus and marketing,” Reuben Yap, project steward of the privacy coin firo told CoinDesk, as he saw exchanges also delisting firo in December.
“In some cases – even where coins did not have any meaningful privacy features or even had them disabled – they weren’t spared from delistings, supporting the claim that many of these bans were established for form over substance.”
Bittrex did not cite any specific regulatory challenges or reasons for the delisting in its post, and declined to comment for this piece. Notably, the crypto exchange continues to host other privacy coins such as firo, verge and horizen at the time of writing, giving little insight into the rationale.
'No public regulatory rationale'
In response to Bittrex’s decision, Electric Coin Company (ECC), the makers of zcash, published a blog post that criticized the decision and asked a question that has yet to be answered – why?
“In spite of all the conjecture on Twitter, there is no public regulatory rationale for delisting zcash,” the company said in the post. “Law firm Perkins Coie recently published a paper that lays out how regulated entities can comply with regulatory requirements and support cryptocurrencies that include privacy as a feature.”
According to the paper, “Not only do privacy coins provide public benefits that substantially outweigh their risks, existing AML regulations properly and sufficiently cover those risks, providing a proven framework for combatting money laundering and related crimes.”
Perkins Coie declined to comment for this article.
With a lack of specific regulation to point to, it seems that the decision to delist these coins is a decision made by the businesses themselves, rather than responding to some perceived immense, yet still unclear, regulatory pressure.
In response to Bittrex’s decision, Kraken CEO and co-founder Jesse Powell tweeted, “Haven’t heard of anything on the regulatory side. Presumably, it’s something specific to their business.”
As Justin Ehrenhofer, a Monero developer, previously said, the most common reason given for delistings is de-risking from perceived (or direct) pressure from regulators and banks.
“Most jurisdictions do not impose strict bans on these privacy-preserving cryptocurrencies, but they may require more detailed AML programs before feeling comfortable with them,” he said.
ShapeShift and Bittrex’s responses
Indeed, “derisk” is the term that the exchange ShapeShift used when it delisted zcash, monero and dash last year.
“We’ve taken down the privacy coins because of their regulatory concerns,” Veronica McGregor, ShapeShift’s chief legal officer, told CoinDesk’s Brady Dale in an interview. “At least for the moment, we’re not working with those coins.”
They “were delisted at the same time for the same reason – to further derisk the company from a regulatory standpoint,” McGregor wrote in a followup email.
This week though, ShapeShift pivoted to routing orders through decentralized finance (DeFi) applications and integrated with multiple decentralized exchanges, abandoning the KYC regulations that sapped users from them when they were implemented in 2018.
Even as ShapeShift has added back support for dash, Dash Core Group CEO Ryan Taylor said in a recent Zoom interview with CoinDesk that they’d never heard from the exchange about being re-listed. They’d sent along their material arguing that their coinjoin function, introduced in 2014 and advanced for the time, was no longer enough to classify them as a privacy coin, particularly with bitcoin also having a coinjoin function. Eventually, with no communication from ShapeShift, they saw they’d been relisted.
“There's no definition you can set where we're dash falls in the privacy coin bucket, and bitcoin falls out,” said Taylor. “All we're asking for is fair treatment.”
Need for privacy coin education
In Taylor’s experience with regulators around the world, he proactively engages with them and tries to educate them. This education effort isn’t new, and isn’t a reaction to Bittrex.
“We've been working on this for a couple of years,” said Taylor. “And in my interactions with regulators, they don't even understand how the technologies work. Almost always, when you ask them, ‘Why was dash included?’ They say, ‘I googled it.’”
“There is no regulatory requirement in the USA that would result in a coin being delisted due to it protecting the user’s privacy,” said Zooko Wilcox, cypherpunk and CEO of the Electric Coin Company.
ShapeShift did not respond to questions regarding whether it would now add support for zcash and monero, or why they decided to re-list dash.
ECC’s blog post also pointed out that both Coinbase and Gemini, prominent U.S. exchanges, support zcash. In September 2020, Gemini launched support for zcash shielded withdrawals, a first for a regulated exchange.
ECC then questioned whether the decision came in response to the New York Department of Financial Services (NYDFS) rejecting the exchange’s application for a virtual currency and money transmitter license in part because of “deficiencies in Bittrex’s BSA/AML/OFAC compliance program.”
Coinbase and Gemini, both of which support privacy coins, hold such licenses.
“ShapeShift and Bittrex have not told us why they delisted zcash,” said Wilcox. “Coinbase and Gemini continue to work with us to further increase their support for zcash.”
Bittrex declined to comment when sent a list of questions about the rationale behind the delisting, whether regulatory requirements forced it to do so, and if the action was linked to the concerns NYDFS raised.
But given the numerous concerns about transaction monitoring, sanctions violations, major compliance issues such as inadequate customer due diligence, trying to strike down some of the more popular privacy coins could be a low-effort way to address these, but not if other privacy coins remain listed.
No big deal
Kristin Boggiano, co-founder and president of CrossTower, a global digital asset infrastructure platform, said she did not see delisting of privacy coins as a trend in the industry, and that most digital asset trading platforms will evaluate the tokens they trade from time to time.
When asked why some exchanges were able to list these coins while others declined to, Boggiano said she couldn't speak to other platforms’ listing decisions or frameworks but that CrossTower’s current Digital Asset Risk Assessment Framework takes a number of factors into consideration when listing a token.
“We consider trader feedback, market demand, whether our technology can support it, whether our vendors support it, regulatory considerations, and other compliance considerations,” she said in an email to CoinDesk. “The framework is dynamic because the industry is clearly rapidly changing.”
She did recognize that it’s natural there is a market for privacy tokens, especially given there is a growing awareness in the U.S. and internationally that the disclosure of certain personal information can cause serious issues.
“There may be data mining, which can cause minor inconveniences if their information is sold,” she said. “However, it could also be sold to advertising agencies and other entities without consent, causing significant friction in digital operations. Worse, it may also be used for malicious purposes such as hacking, identity theft, blackmail and other harmful purposes.”
Whether such delistings continue will seemingly be up to the perceived regulatory environment and exchanges involved, but a good place to start addressing the merits of the issue is the reasoning behind why these decisions are taken, rather than leaving users with little or nothing to go on.