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Does regulation and increasing transparency in the bitcoin ecosystem spell the death knell for privacy-focused coins? More specifically, should investors bother to invest in such coins given the prospect of regulations that might strip them of privacy features?
To understand the future of privacy-focused cryptocurrencies, it is first important to understand the need for such coins. Although it claims to be anonymous, bitcoin is, in fact, a public currency. Bitcoin transactions are recorded on a public ledger. It may not be possible to trace bitcoin addresses back to their rightful owner, but it is definitely possible to know details of transactions, such as amounts and location of the cryptocurrency. In addition, linking your real identity to a bitcoin address makes it possible for others to see details of your financial transactions without your permission.
In sum, bitcoin is not as secure and private as its developers would like you to believe. Among other things, in practical terms, this means that it is not possible to know the consolidated total of Monero coins held by a particular node.
Not surprisingly, the WannaCry ransomware hackers chose to convert their stash into Monero to evade detection by authorities. Even after they closed it down, authorities said they were unable to estimate the amount of Monero, which was the most popular cryptocurrency used for transactions there, floating around in the marketplace.
Another example of a cryptocurrency that incorporates privacy features is Dash, which is competing with the likes of Litecoin and bitcoin to become a cryptocurrency for daily use. At first glance, the protocols and examples provided above might make it seem that criminal activities and actors are the primary use cases and users for privacy-focused coins.
But when one considers current regulations for commercial transactions, the utility of privacy features dramatically expands. A new class of coins, which bridge the gap between the anonymous world of cryptocurrencies and the real world of business applications and commercial transactions, has emerged to take advantage of this space. For example, Ripple and ZCash have included a functionality that enables the disclosing of transaction data and identity metrics to comply with regulatory agencies.
This means it can be utilized for transactions that users of the cryptocurrency would like to keep hidden from the public blockchain. As an example, rent payments and salary information can be hidden from other users. Noted cryptocurrency investor Barry Silbert expressed the same view at a cryptocurrency conference recently.
Silbert is an investor in ZCash, a coin that is being tested by Wall Street banks for transactions. Rob Viglione, co-founder of ZenCash , a cryptocurrency focused on privacy and security, said such coins also empower individuals in repressive political regimes.
For example, Venezuela and Zimbabwe have reportedly witnessed a surge in the use of cryptocurrencies as their economies deteriorate. In fact, users in these countries are willing to pay a premium to own bitcoin. Government regulation is mostly focused on making virtual currencies accountable and transparent in their transactions.
But it could also have an adverse effect on cryptocurrency valuations. The market size for such use cases is still unknown, but there is a good chance that privacy might become a key selling point for cryptocurrencies in the future. Investing in cryptocurrencies and other Initial Coin Offerings "ICOs" is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions.
Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date, this article was written, the author owns small amounts of bitcoin. Scientific American. Department of Justice. Cryptocurrency News.
In response, the U. Perhaps the highest profile success story of this effort was the seizure last year of The implication was that this was not a one-off success but instead the beginning of a period of much more serious policing of cryptocurrency transactions that would result in similar such seizures in the future.
At the same time, the retrieval of the Bitfinex funds suggests that law enforcement may be successfully targeting some of the most important or large-scale criminals with their investigations.
The most promising signs of progress for cryptocurrency regulation lie not in law enforcement efforts to catch cybercriminals and take back their illicit profits, but instead in efforts by the Treasury Department to make it harder for them to receive those profits in the first place.
On September 21, , the Treasury Department announced its first ever sanctions against a virtual currency exchange and blocked transactions with the Russia-based Suex exchange. Of course, circumventing these restrictions is simpleï¿½just shift to a non-sanctioned exchangeï¿½so the only way for this strategy to work was for the U.
In May , Treasury went a step further and sanctioned virtual currency mixer Blender. It remains to be seen whether the United States can keep that list of sanctioned cryptocurrency intermediaries up-to-date and comprehensive enough to put a real dent in overseas cybercrime profits, but for the first time, they are pursuing a strategy that might actually have a chance at succeeding.
Success would mean that criminals have to expend real time and effort to identify and move to new intermediary organizations, including exchanges and mixers, in order to receive payments and ransoms from U. So, if the rate of ransomware attacks slowed, or shifted to non-U. These more aggressive sanctions and policing efforts directed at cryptocurrencies in the past year have occurred alongside a call for the United States to develop a central bank digital currency CBDC.
Unlike cryptocurrencies, CBDCs are intended to be centralized, issued, and, in some cases, directly managed by central banks rather than public, decentralized blockchains. Given the backing of a central bank, CBDCs might compete more directly with stablecoins than other cryptocurrencies like Bitcoin that are not pegged to a reference asset. Ideally, CBDCs would offer some of the benefits of cryptocurrenciesï¿½fast transactions, innovation, financial inclusionï¿½while also, like stablecoins, offsetting some of the risks, such as volatility, criminal activity, and energy-intensive mining.
The effort to develop CBDCs is driven in part by a desire on the part of national governments to supplant cryptocurrencies with a form of virtual currency that will be designed to conform to existing financial systems and regulations. But it is difficult to imagine many of the users of cryptocurrencies who were drawn to the decentralized blockchain design of Bitcoin or Ethereum wanting to use something like a CBDC.
And so much depends on the specifics of those designs ï¿½exactly how centralized these currencies will be, how anonymous, how traceable, how susceptible to fraudï¿½that it is difficult to determine at this early stage who, if anyone, will want to use such state-backed virtual currencies and what benefits, if any, they will provide over and beyond existing forms of currency. Thus far, China is the country that has been most aggressively committed to the development of a CBDC, perhaps in part due to its determination to stamp out any private sector competitors in the cryptocurrency space.
Many of those benefits, particularly financial inclusion and easier access to currency for unbanked people, have proved largely elusive. The people who seem to have gained the most from cryptocurrencies were not unbanked but rather entrepreneurs with easy access to capital and the ability to treat cryptocurrencies as investments rather than use them as a means of covering needed expenses.
In that regard, developing CBDCs may be not so much a means of replacing cryptocurrencies as an attempt to make good on some of their as-yet-unrealized promise for a larger group of people. There are also significant concerns around privacy and security linked to CBDCs. This is a particular fear that authoritarian governments that might view CBDCs as an opportunity to conduct surveillance on their population, though many central banks, including the U. But the exact mechanisms by which that data would be protectedï¿½as well as who would have access to it under what circumstancesï¿½remain hazy since many countries have not yet decided on the implementation of their CBDCs.
But as that statement implies, U. The rise of cryptocurrencies has demonstrated just how difficult it is both to enforce existing financial regulations in the context of new currencies and to predict how those new currencies will be used, and by whom.
It has taken years for regulators to acknowledge and address the fact that requiring U. Even after a decade of efforts aimed at figuring out how to regulate cryptocurrencies effectively, the United States and other countries continue to struggle to enforce their own regulations due to the inconsistency of international regulations and the ease with which criminals can create new cryptocurrency wallets and accounts when theirs are targeted by law enforcement.
There are clearly positive developments in the past few years that indicate the U.
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NIST researchers have been investigating blockchain technologies at multiple levels: from use cases, applications and existing services, to protocols, security guarantees, and cryptographic mechanisms. Research outcomes include scientific papers and the production of software for experimentation as well as providing direction for other NIST endeavors in this space. Blockchain has the potential to be implemented in many different systems, to include manufacturing supply chains, data registries, digital identification, and records management.
Richard Kuhn Summary: The Enhanced Distributed Ledger Technology project examines the traditional blockchain data structure and seeks to create a new data structure the block matrix to provide high reliability, and security while also enabling deletion or updating capabilities not currently found in most blockchain systems. Information Technology. Credit: NIST. This legislation paved the way for companies like Amazon, eBay, Yahoo, Google and others to boom and made the U. By we saw the introduction of web browsers, and shortly after, the start of the dot-com era in that cemented the U.
The browser changed everything. In looking at the top Fortune companies in , technology was barely a blip on the radar with IBM standing as the lone tech company. Technology companies in the top have contributed close to three million jobs, with many leading in market value. We now have another chance to create a bipartisan effort focused on crypto innovation, one with public and private sector support to ensure clear regulatory frameworks.
Regulation will make it easier for innovators to create new products that keep the United States competitive with other countries and attract more investment. Major companies including PayPal, Square and Robinhood are leaning in to crypto and pushing it to the mainstream. With the validation from these brands, interest in the utility of cryptocurrencies and the ability of crypto to better serve businesses and their customers, continues to grow. However, unclear regulation will keep new entrepreneurs from innovating in the United States.
We are only at the beginning ï¿½ developers can build on open-source technologies, entrepreneurs can launch new companies and develop new products, and investors can invest in those companies.
California, New Mexico issued public warnings about investing in cryptocurrencies. In the past two years, another wave of states started to shift attention to blockchain technology and explore the potential roles of the technology in public and private services. Some of these states took a more cautionary approach. Colorado, for example, saw a bipartisan bill introduced recently to promote the use of blockchain specifically for government record keeping.
A few other states have sought initiatives with broader impact on the state economy. Several bills favorable to the blockchain technology are also processing through the Wyoming state legislature. One particular bill, SB , has passed both legislatures in Q1 It would exempt cryptocurrencies from state property taxes, potentially making Wyoming the friendliest state to investors of crypto assets.
Based on these preliminary findings, we classify the states according to their levels of engagement with the blockchain technology into the following categories:. Unaware : State that have taken no actions ï¿½ states for which we were not able to find any relevant information through publicly available sources e.
Reactionary : States that have taken a negative stand against cryptocurrencies or flagged them as potentially risky e. Appreciative : States that have made initial attempts to pass bills concerning cryptocurrencies without any successes e. Organized : States that have succeeded in passing some legislation in this regard e. Active Engagement : Seven states have gone beyond cryptocurrencies and examined the governmental use of blockchain, either as isolated applications in specific government functions, or as integration across different government functions.
Vermont, for example, recognizes data stored on a blockchain as admissible in the court system. Recognizing Innovation Potential : States that envision a broader role for blockchain in their economies. In addition to Delaware and Illinois, Arizona has introduced or passed regulations ranging from making signatures, transactions, and contracts on a blockchain legally valid to allowing residents to pay their income tax in cryptocurrencies. As the blockchain space is constantly evolving, we would expect to see the grades given to states to evolve as well.
Kevin C. Related Play Video. By we saw the introduction of web browsers, and shortly after, the start of the dot-com era in that cemented the U. The browser changed everything. In looking at the top Fortune companies in , technology was barely a blip on the radar with IBM standing as the lone tech company.
Technology companies in the top have contributed close to three million jobs, with many leading in market value.
We now have another chance to create a bipartisan effort focused on crypto innovation, one with public and private sector support to ensure clear regulatory frameworks.
Regulation will make it easier for innovators to create new products that keep the United States competitive with other countries and attract more investment.
Major companies including PayPal, Square and Robinhood are leaning in to crypto and pushing it to the mainstream. With the validation from these brands, interest in the utility of cryptocurrencies and the ability of crypto to better serve businesses and their customers, continues to grow. However, unclear regulation will keep new entrepreneurs from innovating in the United States. We are only at the beginning ï¿½ developers can build on open-source technologies, entrepreneurs can launch new companies and develop new products, and investors can invest in those companies.
We want the most innovative crypto and blockchain companies to be built and to grow here in the U.
WebApr 23, ï¿½ï¿½ Blockchain Government Regulation ï¿½ European Blockchain Partnership. In a standout announcement, 22 European countries have recently signed a Declaration . WebJan 17, ï¿½ï¿½ A multitude of countries worldwide, including the United States, Malta, and Belarus, have openly admitted to the need for proper blockchain regulations. Similarly, . WebFeb 15, ï¿½ï¿½ Research & Policy. NCSL actively tracks more than 1, issue areas. NCSL conducts policy research in areas ranging from agriculture and budget and tax .