The blockchain industry subsector of “privacy coins” – cryptocurrencies with embedded technology that shields identifying information from public view – is becoming one of this year’s hottest buys. One of the biggest privacy coins, zcash (ZEC), which offers “shielded transaction” capabilities, has nearly tripled so far in 2020, while monero (XMR), which uses a technique called “ring signatures” to obscure sender and receiver data, has doubled.
Litecoin founder Charlie Lee told CoinDesk in an interview the project is now looking to adopt key privacy-enhancing features, which he sees as increasingly attractive to cryptocurrency users. The enhancements are already being tested, and an upgrade to the main network is scheduled for next year.
If the effort succeeds, it might inject a jolt of enthusiasm into a project that has suffered from a lack of momentum and enthusiasm in digital-asset markets. Litecoin is up 21% this year after a 38% gain in 2019, which pales in comparison to bitcoin’s 59% year-to-date gain and a 94% increase last year.
“I want to make it so that users don't have to worry about giving up their financial privacy by using litecoin,” Lee said. “Even if you're not doing anything illegal, you don't want people to know how much money you have or what your paycheck is.”
An innate feature of blockchain technology is that transfers of cryptocurrency across the computer networks are typically visible to anyone with Internet access, making it easy to track and monitor specific wallet addresses – and sometimes trace those addresses back to identifiable entities.
So digital-asset developers have been working for years to invent new ways to preserve the advantages of blockchain – the ease and speed of money transfers without the need for banks as intermediaries – without the glaring transparency.
Such features are becoming even more desirable as regulators and law-enforcement agencies ramp up scrutiny of cryptocurrency trading and compliance with tax and anti-money laundering rules.
Lee, a former Google and Coinbase software engineer who spearheads litecoin, is a closely watched entrepreneur partly because his experience dates back to the early years of cryptocurrencies, following bitcoin’s launch in 2009.
Litecoin is often referred to as the silver to bitcoin’s gold, and it’s been used over its history as a grounds for testing technologies that later became a mainstay of bigger blockchain networks, including bitcoin’s. The network processes new data blocks four times faster than the Bitcoin system, but its smaller size makes it less secure.
The new privacy features are designed to operate in accordance with cryptocurrency exchanges’ increasingly stringent compliance with global regulators.
Litecoin is relying on a technology called mimblewimble, which reduces the amount of data that’s publicly visible on the main blockchain network, through the use of “extension blocks” that help to hide inputs and outputs.
“The analogy I like to use is it’s similar to wrapping and unwrapping the coin,” Lee told CoinDesk.
It’s not yet clear whether regulators will move to curtail the use of privacy features, which potentially could be used to conceal transfers of illicit funds or shelter money from tax authorities.
Both zcash and monero, which include privacy directly on their protocols, have faced regulatory pressure. Europol, a European Union law enforcement agency, recently declared privacy technologies, including privacy-focused coins, a “top threat” in an assessment of Internet-based organized crime. In 2019 the cryptocurrency exchange Coinbase delisted zcash for trading in the U.K. without giving a reason, but speculation immediately centered on the digital token’s identity-shielding features.
For litecoin, it might be another chance for differentiation from bitcoin, which has captured the attention of many cryptocurrency traders as a hedge against inflation.
“I don't think bitcoin will follow this path of what we're doing, because it's a bit drastic,” Lee told CoinDesk in a video chat.
Put another way, litecoin has more to prove.
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