Zcash: A most private revolution
By: Greymatter Capital
Tags: Blockchain, Bitcoin, Zcash, Banking, Privacy

By James Todaro, Joseph Todaro and John Todaro

An iteration on bitcoin’s privacy

The creation of money outside the control of sovereign states is inextricably linked to privacy. Satoshi Nakamoto recognized this when he carefully maintained his own anonymity, and dedicated an entire section of the Bitcoin white paper to privacy. Any amount of privacy previously associated with bitcoin has been all but eradicated by tightening identity requirements for cryptocurrency exchanges and bitcoin’s permanent ledger of on-chain transaction history. In essence, anyone who has executed a bitcoin transaction from an exchange registered in their legal name likely has most of their transaction history and bitcoin holdings reconstructed and recorded in an institutional database.

This was not the “peer-to-peer electronic cash system” that Satoshi envisioned. Satoshi encouraged privacy through the use of new key pairs, while acknowledging that this practice was suboptimal.

“As an additional firewall, a new key pair should be used for each transaction to keep them from being linked to a common owner. Some linking is still unavoidable with multi-input transactions, which necessarily reveal that their inputs were owned by the same owner. The risk is that if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.”

Financial privacy is a fundamental right. Personal net-worth and asset holdings are a taboo subject, and unwelcome disclosure can have financial and reputational repercussions. Nearly 80% of private companies do not share quarterly or annual financial reports with employees for risk of information leaking to competitors. Investment funds often invest privately to avoid revealing strategies. The litany of reasons for financial privacy is exhaustive, and most agree it should remain the status quo.

There is also a fundamental right to financial privacy from the state. In the US, this was formalized in the Right to Financial Privacy Act of 1978, which gave US citizens some protection from surreptitious government investigations into personal financial information. Over the years, amendments to this privacy act, particularly the Patriot Act of 2001, have weakened it considerably.

It is critical that bitcoin does not facilitate any further erosion of financial privacy from the state. As bitcoin continues to capture value, it challenges the dominance of state-controlled currencies in what Nic Carter calls a most peaceful revolution. While simmering below the surface for years, this revolution erupted into the public spotlight in July 2019 when the POTUS delivered a tweet storm specifically addressing cryptocurrency, stating that the USD instead of bitcoin or any other cryptocurrency is the world’s dominant currency.

Bitcoin continues to face escalating regulatory scrutiny, which has been manifested in numerous US congressional hearings, by the FATF’s new banking guidelines surrounding the storage and transfer of cryptocurrencies, and cryptocurrency exchanges banned in China. Just recently, Elvira Nabiullina, head of the Bank of Russia, said she and the Russian Finance Ministry oppose the use of virtual currencies “as private money and money surrogates,” saying “this is necessary to protect the ruble as the single legal [means of] payment in Russia.”

In an increasingly adversarial relationship with central banks and governments, the state’s attempts to exploit bitcoin’s weaknesses will intensify. Bitcoin’s lack of privacy is one of its most critical vulnerabilities and is already being exploited by sovereign states and incumbent institutions with advances in blockchain analysis and KYC/AML identity requirements.