Empire Newsletter: Privacy Coins Sacrificed So Cryptocurrencies Can Work

Rest in privacy

The world tends to move slowly on cryptocurrency regulation, but the cumulative effect on investors’ stock markets can be enormous.

Privacy coins are, on the surface, a case in point. Over the past six years, bans and delistings have overshadowed some of the biggest projects.

The European Union’s Markets in Crypto Assets Act (MiCA) regulatory framework, which came into force last year but will be enforced at the end of 2024, is truly a milestone in the government’s anti-privacy currency movement.

Authorities have prosecuted the developers of the Tornado Cash, Samourai Wallet and Blender privacy protocols, including arrests and prison sentences. Regulators and other agencies have instead targeted privacy coins at the enterprise level.

MiCA openly prevents crypto providers (which include exchanges and other payment services) from dealing with privacy unless the holders can be identified. The same goes for credit and financial institutions.

This was enough for cryptocurrency exchanges operating in the EU to largely abandon cryptocurrencies tied to protocols with built-in privacy features. Binance delisted Monero earlier this year, after initially pledging to restrict trading in EU countries last year, before withdrawing that statement two weeks later.

OKX abandoned a number of privacy coins when it delisted nearly two dozen tokens in December, while Kraken will stop supporting them in Ireland and Belgium next week after suspending trading and deposits in May. These delistings follow moves made by crypto platforms including Coinbase UK and Shapeshift dating back to 2018.

Other avenues to acquire privacy coins are drying up along with their trading volumes. LocalMonero, a platform for peer-to-peer selling XMR without providing identification, announced it was closing in May, after operating for nearly seven years.

The dominance of privacy coins has, perhaps not surprisingly, shrunk with every market cycle since the first delistings occurred in Japan.

Privacy coins have declined as regulatory pressure has increased

Monero, zcash, and a handful of others actually enjoyed their heyday in mid-2017, about six months before cryptocurrencies peaked in the wake of the ICO boom, reaching about 5% of the total market.

They now account for less than half of the cryptocurrency market. Monero (XMR) is the only privacy coin in the top 100 right now, also the only one with a market cap above $1 billion.

(For what it’s worth, activity on the Monero blockchain has grown steadily in recent years, despite all the regulatory pressure. One theory among many is that XMR trading may have been pushed towards atomic swaps in place of crypto trading pairs offchain. )

It may be that the shrinking market share of privacy coins has more to do with the fact that monero, zcash and dash are going out of fashion, and less to do with regulators.

Perhaps this has left little room for monolithic privacy blockchains, powered by an entirely separate cryptocurrency, to attract venture capital interest in those ecosystems.

There are exceptions, but interest in the next wave of blockchain privacy has also shifted towards creating zero-knowledge proofs at the protocol level, in many cases through layer 2 solutions.

I fear it’s only a matter of time before the regulators get involved and rain on that parade too.

—Davide Canellis

database

  • Bitcoin was interrupted by another attempt to reach an all-time high following this morning’s positive US jobs data, quickly falling below $71,000.
  • Open interest on BTC Futures meanwhile on centralized stock exchanges it has never been so high, now standing at 37.73 billion dollars.
  • ET open interest is just below its recent record, at $16.33 billion.
  • Basic Memecoin BRETT it extended its rally another 24%. It is now the seventh largest memecoin behind BONK, with a value of $1.75 billion up from $2.11 billion.
  • That of Ethereum validator count is back at all-time highs after gaining 10,000 in the past week.

A new sheriff in town

Be careful, everyone.

There are only a few weeks left until part of the MiCA comes into force in Europe.

While the broader regulation won’t take effect until later this year, the June 30 deadline will impact stablecoins. Binance said it intends to comply with the new set of regulations and that it will limit access to so-called unauthorized stablecoins.

Here’s the deal: The European Economic Area (EEA) will only allow certain regulated companies to issue and offer their own stablecoins to the public, which will be known as regulated stablecoins.

Others will be defined, at least by Binance, as “unauthorized stablecoins” because they do not fall into the above-mentioned category. They will also face some restrictions.

“There are currently few regulated stablecoins with limited liquidity which may not be sufficient to support sudden demand across the industry. In the coming months, we expect to see more regulated stablecoins available on the market, which will allow the market to fully transition to regulated stablecoins over time, ensuring MiCA goals are achieved,” the exchange said in the post.

Obviously not everyone is happy with these changes. Tether CEO Paolo Ardoino told The Block earlier this week that he was “concerned” about some of the MiCA requirements.

Other companies, such as Paris-based Lugh, are abandoning ship. The company has announced that it will end issuance of its stablecoin offering in light of the new regulation.

“Due to the impending implementation of MiCA and in accordance with its compliance commitment, LUGH announces the cessation of issuance of its EURL stablecoin and guarantees the redemption of existing EURLs until August 30, 2024,” said the company on its website.

In all honesty, the company’s euro-based stablecoin doesn’t hold a candle to the might of Tether’s billion-dollar stablecoin empire, with DeFiLlama pegging its market capitalization at just $34,726.

Any transition from limited regulation to stricter rules will be uncomfortable for companies looking to get around the rules with little or no disruption.

And, since this is actually a smaller segment of the overall cryptocurrency market (don’t get me wrong, powerhouses like Tether and Circle are still heavyweights), many other companies have a few more months to get their ducks in a row.

But MiCA is (partially) here. It will set the tone for how cryptocurrencies are regulated in the EU, where companies (thankfully) are not exposed to the same regulation-by-application approach that US companies are faced with.

—Katherine Ross

Jobs

  • Franklin Templeton has enabled USDC conversions on its Benji Investments platform.
  • It appears that the scammers have gained access Hulk Hogan’s X and promoted a fake HULK token.
  • Cryptocurrency exchange Kraken is in talks for pre-IPO financing, Bloomberg reported.
  • Between the GameStop stock surge and memecoin pumps, The Roaring Kitty The YouTube channel has a live stream set for today at noon ET.
  • Scientific core rejected The one from CoreWeave A $1 billion takeover offer, Ben Strack of Blockworks reported.

The morning riff

Q: Is cryptocurrency really worth regulating?


I go back and forth on this. On the one hand, the only interesting crypto thing is the one that is impervious to regulators: impeccably conceived and decentralized, to the point that there is no room for the SEC – or anyone else – to stop it.

But going back to the Monero example, it’s obvious that regulatory pressure has, at least in part, made it easier for the market to move on to other things. Projects that can be listed on cryptocurrency exchanges, for example.

Whether we know it or not, we are all here looking for the finance agency. No one can dictate what we can do with our digital assets, and private coins were in many ways cryptocurrency’s first major stance in support of that vision.

Was their sacrifice necessary? I’m not sure I would agree. It’s not clear that cryptocurrencies ever had a choice.

—Davide Canellis

YES.

It is quite obvious at this point that cryptocurrencies cannot simply operate in a vacuum, away from other financial systems. And, if the industry is to grow, there must be ways for crypto companies to interact with other companies, be they financial institutions or mom-and-pop shops in small towns.

That means regulation. For cryptocurrencies to reclaim their place at the adult table and be taken seriously by other industries and governments, they will need to comply with regulations. Hopefully the rules will also gain confidence for the kinds of people who weren’t wooed by the prospect of bitcoin 10 years ago, but who now want to add some to their wallets.

No one is exempt from these laws, and while there are cases where this may not be the case, regulation is meant to protect consumers. Maybe that’s a little idealistic, but that’s the goal… at least for me.

—Katherine Ross

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