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Jun 17, 2021Not all Privacy Coins are the same

There are both minor and significant differences in how privacy coins operate and their ability to function in the real world. Let’s examine these coins and Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) requirements.

I recently wrote a light post on what a privacy coin is. After I’d written that, I took a night to reflect on the words I chose to share. And it dawned on me; I lumped all privacy coins into one grouping. When, in fact, not all coins in this genre are the same.

While most, if not all, of the coins in this category can provide some protection of your funds or identity, very (very) few of them could maintain those same protections while remaining within the confines of the law for interstate/international money wire transfer laws. And that is a big deal. Don’t be fooled; while not masterfully regulated by the world’s nations yet, moving cryptocurrency from one country to another may be susceptible to financial regulations. 

The reasons for these regulations are to keep crime in check. So let’s first examine what the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) laws are. Then we’ll take a look at how your transfer method of choice could be the wrong one. We’re not going to dive too deep, but it’s good to understand what the AML and CTF are. It’s also important to know that these initiatives and laws are not just a local thing. They are spearheaded by the Financial Action Task Force (FATF) and International Monetary Fund (IMF).

Anti-Money Laundering (AML)

As one may deduce from its name, the AML laws are to stop money laundering. The act of committing money laundering is done when someone or an organization takes funds obtained or earned illegally and gives or deposits that money into a seemingly legitimate business. Once said business deposits the money into a bank or an account of some sort, the someone/organization then withdraws that money. Pushing it through a banking institution makes it more legal.

They’ve effectively laundered the money, making illegal (dirty) money look legit (clean), hence the term.

The AML laws overseen by the FATF and IMF work with their member nations and strategic financial cooperatives, which now number over 200 countries/groups collectively. Concerning AML laws, these nations/groups have aligned with one another to make it a little harder to illegally push funds and withdrawal “legally.” 

For example, “[o]ne rule in place is the AML holding period, which requires deposits to remain in an account for a minimum of five trading days. This holding period is intended to help in anti-money laundering and risk management.” (Kenton) It gives authorities time to view transactions, looking for irregularities.

Counter-Terrorism Financing (CTF)

The CTF, which probably needs little introduction due to its namesake, is in the business of limiting/cutting off financing of terrorism and terrorist. The IMF is the lead body that, made up of 35 countries, works to follow and stop the flow of funds that support terrorist activities. 

A significant focus of the CTF’s energy is trying to figure out where the money originated. Because it’s outright illegal to finance terrorism, funding sources have to hide the fact that they’re giving money to this illicit activity. Much like money laundering, a seemingly legitimate business or charity could be a front. It’s the mission of the CTF to find out who’s who and what’s where in the realm of terror financing. 

I invite you to check out Investopedia to read more on Anti-Money Laundering and Counter-Terrorism Financing. But first, let’s see what this all has to do with choosing the right privacy coin.  

Privacy Coins and AML/CTF laws - choose wisely

As the title outright says, the 50+ privacy coins out there are not the same. Sure, some use this algorithm or that obfuscation technique; however, I’m talking about their legal status to move funds across borders. And while me sending my friend USD 50 in some crypto might not raise eyebrows, sending them USD 500,000 might (it will, especially when someone goes to cash it out).

For the sake of argument and your time, I’m focusing on two coins: Monero and PIVX. This is not to “pit” them against each other. I like most privacy/user protection coins, Monero included. However, their methodology of user protection versus that of PIVX makes for a great case study of privacy and international law.

In the branding of coins, Monero’s can be summed to “always private, always.” Conversely, PIVX’s, in the same sense, could be “privacy when you need, and not, if you don’t.” Take these two statements at face value, please. While they are true, they’re very simplified.

While privacy is paramount in today’s world (big fan of Signal here), there are instances when it can be too much. Finance is one of those. Let’s go back to my earlier example of sending USD 500,000. We will send it to Poland from the United States via three methods and explain it along the way. Oh, and this should be considered a legitimate transfer of funds- no funny business here.

Note, there is a whole other rant I could go down with how a bank transfer relies on vast sums of physical cash on the receiving end, and cryptocurrency doesn’t. But I won’t. We’re keeping this simple.

Sending it via a bank transfer

This would be the current standard for one to send money. To do so, you need to go to a local bank, show an appropriate amount of identification, and either have the cash with you or already deposited into the bank you’re dealing with. 

After filling out the proper paperwork, to include all of your identifying information, the receiver's information (depends on the country and amount sending), and checking a little box promising you're not doing something illegal, you send the money to Poland. Filling this out keeps the banks in check with the FATF Travel Rule. These forms are also part of the declaration process. The current send/receive average, while much better than it was only a few years ago, is one to four days. 

During this time, you can bet that our friends with the FATF and IMF will be taking a look at the details and making some inquiries. It’s standard, so no big deal.

Sending via Monero

The super secret-ness of Monero is appealing to many. And for a good reason, if it’s as private as the community says it is, that privacy has got to be a good thing, right? 

Here again, we’re sending our friend in Poland USD 500,000 but in XMR tokens (Monero’s token). Monero states that all information flowing from your XMR wallet to the recipients is unviewable. And that’s probably true. 

They also state that it’s untraceable. This is a debatable subject, but it is hard to trace (here are two opinions on the subject: one and two). Whether anyone knows that I sent my friend USD 500K worth of XMR does not matter. We’ll say it’s invisible.

My friend needed that money in cash to buy his wife a Meerkat, so he moved the funds from his wallet to an exchange. The money is now in the open. A sudden USD 500,000 just came out of thin air and entered the European Union. Assuming it’s a reputable exchange, the local financial authorities are now aware of it too. This could cause some trouble, as EU rules require a declaration of any amount over EUR 10,000 entering their territory. While these may indeed be legitimate funds moved to my friend, EU’s financial authorities may have a different opinion. 

Sending via PIVX

PIVX’s take on protecting information/funds is a little of this (the standard wire transfer) and a little of that (super secret-ness). See, the project allows users to choose when their funds and information should be and shouldn’t be viewable by others. For our continued example, we again are sending our friend in Poland USD 500,000, but this time in PIV, the PIVX native coin.

To keep in line with the user data protection we used above, we’re going to turn on our SHIELD feature which encrypts the from, to, and any funds information. Very similar to the above example, however, PIVX has a unique function to ensure it can meet the FATF Travel Rules. 

While your funds and identifying information are always kept protected, there is a memo function that will allow you to input necessary data (e.g., name, account number, ID number, or other info) to ensure you’re complying with the rules of the receiving institution/person/country. This, too, is protected. Only the sender and the receiver can see this information. 

I believe to comply with EU laws and regulations (and they’re different everywhere you go), a certified financial institution would have to be in direct receipt of the funds. This is one of those areas I have to advise you to DYOR

Assuming the provided information was correct and acceptable, our friend can now go buy his wife that Meerkat she’s been wanting. 

In Closing

The future of finance is in a precarious position at the moment. The realization of cost in running a global financial dynasty has been realized. When you look at the above examples, and while Monero may not be the most compliant project, PIVX and a few other players in the genre are changing how the world views user data and financial information protection.

PIVX’s method of ensuring compliance with Anti-Money Laundering and Counter-Terrorism Financing rules is a game-changer. 

Ensuring its users maintain control of their information and the data necessary to remain within the confines of financial law is a significant milestone in the cryptocurrency space. Especially crypto-project managed by a Decentralized Autonomous Organization (don’t worry, I’ve already started that post too).

Questions, Comments, or Concerns? Contact me via [email protected].

Ryan Erickson

Father of five, husband of one and career Project Manager. I get things done!