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Craig Salm (Grayscale), Marta Belcher (Protocol Labs) and Chen Arad (Solidus) discuss how regulation and privacy can get along.

The careful dance between global financial regulators and cryptocurrency exchanges saw a particularly big shift in January when the Bittrex exchange removed privacy coins monero (XMR, +2.6%) and zcash (ZEC, +2.38%) as well as dash from its offerings. The self-custody exchange ShapeShift has also delisted the three coins, which was especially notable given ShapeShift’s hyper-libertarian founding ethos. (Representatives of the organization behind dash argued the coin was delisted based on a misunderstanding of its privacy features.)

Privacy coins are still available on major regulated exchanges including Kraken and Coinbase, but the delistings point to the inherent tension between exchanges and privacy coins. Financial regulators lean hard on centralized exchanges to monitor their users (one reason serious cryptocurrency users aren’t fans of the exchanges). Privacy coins, in principle, conceal information about where they’re sent, making such monitoring more difficult. Selling them may also draw added scrutiny from regulators simply out of distrust about their uses.

David Z. Morris is CoinDesk's chief insights columnist.

But that suspicion is likely misplaced. “There’s sort of been this insinuation that because you’re using digital currency that has additional privacy-preserving features that it’s inherently bad or you’re using it for improper reasons,” Grayscale VP Craig Salm told CoinDesk’s Colin Harper late Wednesday at the Consensus 2021 conference. “And that’s not true.” (Grayscale is a CoinDesk sister company.) At least according to existing analyses, a much lower proportion of cryptocurrency transactions are tied to criminal activity than is seen with U.S. dollar transactions.

Regulators may understandably regard privacy tokens and related technologies as ripe for abuse by money launderers and bad actors. But Wednesday’s panelists argued that restricting their use would be both legally misguided and bad for society. Salm argued, for instance, that exchanges restricting coins that have been “mixed” for anonymity was misguided: “At the end of the day, the technology shouldn’t be what’s being regulated, it should be the uses of the technology.”

“A cashless society is a surveillance society, and anonymity is absolutely necessary for civil liberties,” said Marta Belcher, who serves as general counsel of Protocol Labs and also works with the Electronic Frontier Foundation. Many other observers, including the policy group CoinCenter, regard anonymous digital transactions as crucial for the preservation of civil liberties in the 21st century.
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