Influential think tank Brookings is ringing alarm bells about privacy-centric cryptocurrencies Monero and Zcash while remaining cautiously optimistic about Bitcoin and Ethereum.
Brookings warns that cryptocurrencies that offer anonymity impede criminal investigations and sanctions enforcement.
In a note published Monday and authored by Princeton and Cornell professors, Brookings acknowledges lawmaker concerns about crypto enabling sanctions violations or money laundering.
However, Brookings reminded readers that most crypto assets (particularly Bitcoin and Ether), as well as centralized exchanges, have notably increased the ease of compliance with anti-money laundering and know-your-customer regulations.
It recommended that law enforcement agencies instead focus more on anonymous digital assets like Monero and Zcash, as well as decentralized exchanges (DEXs).
“While current policy fears about money laundering via cryptocurrency are overblown, there are a few trends that policymakers should be concerned about,” wrote the authors.
“The first is the emergence of and potential mass adoption of privacy-preserving coins, which threaten to decouple the link between crypto wallets and traders’ identities.”
Brookings offered Monero as an example, as it uses “privacy-enhancing technologies like obscuring IP addresses.” This helps hide identities of who trades the cryptocurrency and boosts its fungibility.
The authors added: “Monero therefore increases the likelihood that criminals can evade law enforcement and anonymously convert coins to cash.”
“As the privacy protections of a given coin increases, so too does the likelihood it could be used as part of a sanctions-evasion scheme.”
Bitcoin helps law enforcement, Monero and Zcash don’t
Criminals may use privacy coins and mixing services to obscure their transaction history. They also have a new chain-hopping tool: decentralized exchanges (DEXs).
Without these checks, tracing crypto flows becomes burdensome for law enforcement. Services like Chainalysis can easily track transactions on their blockchains. So, Brookings cautioned against privacy coins and DEXs.
Consider an extreme example.
- Provisions on Page 1482 of the America Competes Act would authorize the US Treasury to ban crypto exchanges.
- Instead of such a drastic measure, Brookings implored, the government could simply enforce AML/KYC.
- Agencies could then rely on Chainalysis to track transactions across public blockchains.
Law enforcement has already cracked crypto capers utilizing this toolkit. Recently, the Justice Department traced 94,643 of the 120,000 BTC stolen in the 2016 Bitfinex hack to two individuals in New York City.
Traceable ledgers like Bitcoin assist, not impede law enforcement. As Brookings reiterated, regulators could be more effective regulating Monero, Zcash, and DEXs than public blockchains.
The IRS already offers a $625,000 bounty to anyone who cracks the anonymity mechanisms used by privacy coins like Monero and Zcash.
And while analytics unit CipherTrace advertised that it could track Monero last year, no word yet on whether it’s claimed the bounty. The Menlo Park startup was since acquired by Mastercard.
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