Robert Viglione is the co-founder of ZenCash and a PhD candidate in finance at University of South Carolina. Prior to ZenCash, Rob was a physicist, mercenary mathematician, and U.S. military officer with experience in satellite radar, space launch vehicles, and combat support intelligence.
Crypto enthusiasts, heed this warning: Japanese regulators are veering into the unknown.
A country that once served as a beacon of hope for the development of blockchain-backed initiatives in the region has abruptly changed its stance in recent months, reconsidering the role that cryptocurrencies should be allowed to play in Japan’s commercial ecosystem.
And this is no more apparent than when discussing the current state of privacy coins.
Earlier this week, the Japanese Financial Security Agency (FSA) announced that on June 18, there will be an outright ban on all cryptocurrencies that provide a sufficient degree of anonymity to its end users.
For the most part, Japanese exchanges are listening, pulling four major privacy coins — monero (XMR), dash, Augur’s reputation (REP), and zcash (ZEC) — from their platforms.
As the wider crypto community begins to assess the implications of this decision, it’s becoming increasingly evident that the January hack on Japanese cryptocurrency exchange CoinCheck, which resulted in the theft of 523 million NEM tokens (worth an estimated $524 million), has created a ripple effect that has had repercussions for the future of the space.
To understand the road ahead, I posit that crypto companies — especially those in the privacy space — should consider the advantages, instead of the disadvantages, that privacy coins will provide to the greater community so that they can better advocate for regulatory leniency in both Japan and beyond.
Making the case
Stepping back, if you were to ask any industry expert what the fundamental aspects of cryptocurrencies are, they would likely say immutability, fungibility, decentralization, and confidentiality. At first glance, these attributes may seem incongruous; however, they are all uniquely important to the long-term success of the industry.
For a platform to truly be considered “decentralized,” it must eliminate the possibility of manipulation or control exhibited by centralized entities, which cannot happen without confidentiality. And, as evidenced by the recent incidents at major multinationals Equifax and Facebook, the need to protect one’s identity has never been more top-of-mind.
In fact, at present, there have been an estimated 12,918,657 exposed records thus far in 2018 alone, and that number is only expected to increase. This is why blockchain-based cryptographically secure projects are so necessary — to shield the general public from major multinationals (or hackers) looking to take advantage of their valuable information.
Similarly, for a platform to be considered “immutable,” it must provide unprecedented transparency to the exchange, which cannot effectively occur unless there is an added layer of privacy. Every time a cryptocurrency transaction occurs, a user’s information is viewable to the entire community.
On its surface, it might seem as if most cryptocurrencies — from bitcoin to ethereum — satisfy these criteria. However, as of late, bad actors have found ways to outsmart the system. And once they do so, not only can they connect an individual to one transaction, but they can connect them to their entire crypto history.
It’s becoming an undeniable truth that traditional coins will simply not fit the bill. Exchanges of the future will require more secure platforms that protect users with strong cryptography.
So where do we go from here? In their assessment of privacy coins, the FSA explicitly stated that a primary justification for its preemptive ban was to eliminate bad actors from being able to conduct criminal activity under the guise of anonymity.
Admittedly, the justification is sound. In the wake of the CoinCheck hack, the presence of anonymity has undoubtedly proven to be an obstacle for authorities looking to find the culprit of the attack.
But don’t be fooled. There are myriad reasons for why this hack occurred in the first place, and none of them are anonymity. If the hack on CoinCheck was a primary justification for the FSA’s decision, then privacy coins were an unfortunate scapegoat.
To ensure a domino effect doesn’t occur in countries around the world, crypto companies should take the initiative and educate regulators about the potential value proposition that privacy coins provide to the blockchain industry.
The FSA decision is one of the first instances where a government entity has questioned the status of privacy coins and their ability to positively impact our commercial ecosystem. It won’t be the last.
By taking precautionary action, companies can quell any misconceptions about the use-cases of the technology, and ensure long-term sustainability of the space for years to come.
Lock image via Shutterstock.
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