Hello and welcome to the latest edition of the FT’s Cryptofinance newsletter. This week we’re taking a look at the future of privacy coins.
This week Binance, the world’s largest crypto exchange, announced it was delisting a token called monero, and sparked controversy in some corners of the industry.
Not among the new crowd of asset managers and Wall Street suits that got into this business for the fees, but those who champion crypto because of a belief that people’s finances should be impossible to control or censor.
Monero is a so-called privacy coin, beloved by libertarians because they see it as the closest thing to everyday private money.
I could hand you my bank account number to transfer money but you can’t see other payments I’m making or receiving from that account, without committing a crime.
If I hand you my crypto wallet address to make a payment, from then on you can see any other activity I do through that address. A privacy coin means one cannot spy on the lives of others. It hides information about transactions such as amounts traded and the wallets that execute the trades.
“This isn’t some revolutionary idea; all of us have financial privacy when we pay for a meal in cash or drop a few dollars in a donation jar,” said Rainey Reitman, civil liberties advocate who sits on the board of the Filecoin Foundation for the Decentralized Web. “Privacy coins are importing these basic features into a digital world.”
Yet for all the high principle, it remained a niche coin. Monero’s market cap is just $2.2bn compared with bitcoin’s whopping $920bn. Given it’s marginal impact, I asked Binance why it chose to delist monero.
Binance “places a high value on regulatory compliance” and the decision aligned with a movement towards “greater transparency amid evolving regulatory frameworks”, a spokesperson said.
It’s not hard to guess what “evolving regulatory frameworks” means.
Binance paid a whopping $4.3bn fine to US authorities last year and pleaded guilty to a money laundering charge. As part of its settlement with FinCEN it agreed to be monitored for improvements in identifying reporting suspicious transactions. If one can’t track where monero is coming from or going to, it’s hard for Binance to list it. The team behind monero said on X that Binance now requires all deposits to come from publicly transparent addresses.
Is the money Binance can make from offering a particular coin on its platform worth the risk from potential non-compliance? Part of the FinCEN settlement includes the threat of another $150mn fine for failure to comply.
Monero is down almost 25 per cent since the delisting, but the bigger picture here is that if you’re an ardent libertarian, there are fewer places to trade your coins. Binance’s rival OKX also delisted privacy coins, including monero, in December.
“I’m worried that this is part of a larger backlash against privacy coins,” Reitman added. “People who care about digital privacy should be concerned and speak out.”
If crypto exchanges are going down the path of listing coins they feel can be monitored for suspicious activity, there’s a convincing case that the crypto market is little better off than it was in 2008 when the bitcoin white paper envisaged a world without going through a financial institution.
“If the world we end up in is one where we’re using crypto via intermediaries, and those intermediaries forbid you from using private cryptocurrencies, we have a situation where users have no privacy from the intermediary, the government, or the general public . . . that’s a pretty big failure,” Coin Center’s head of research Peter Van Valkenburgh told me.
“In the banking system, you have no privacy from your banker or the government, but at least your neighbour Ted doesn’t see every transaction you’re making,” he added.
But this withdrawal from Binance represents another blow to attempts to create a truly private financial network, underpinned by crypto. In 2022 the US imposed sanctions on mixing platform Tornado Cash, a service designed to totally obfuscate people’s financial trails. Authorities alleged it helped North Korean criminals launder more than $7bn.
Tornado Cash and other mixers are not meant to be intermediaries in the way an exchange is: a mixer is meant to be a tool that can run in perpetuity — even after their developers have stepped away from the project (or in Tornado’s case after they’ve been charged and arrested).
Privacy coins can still be traded on small exchanges such as Kraken or Bitfinex but right now it has been driven to the fringes of crypto. As Van Valkenburgh surmised:
“I would question at that point why we even have crypto. Why do we engage with these farcical proof of work or proof of stake discussions if we’re still dependent on these [entities] for most day-to-day financial operations?”
What’s your take on Binance’s decision to delist monero? As always, email me at scott.chipolina@ft.com
Weekly highlights
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Do Kwon had a reprieve from extradition to the US from Montenegro this week when a court granted an appeal and set a retrial for the former Terraform Labs chief executive. However, his partner, Terraform Labs’s former chief financial officer Han Chang-joon, was extradited to South Korea.
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Another crypto company teeters. Bakkt, a US-listed crypto company founded and majority owned by the $76bn Intercontinental Exchange, warned it might run out of cash in the next year. It had once partnered with Starbucks to try to give customers the chance to buy coffee with bitcoin. Needless to say, you still need standard cash or credit to buy a coffee at Starbucks.
Soundbite of the week: Yellen takes aim at stablecoins once again
US Treasury secretary Janet Yellen again called for federal-level stablecoin regulation in the US.
At a hearing at the Senate committee on financial services this week, Yellen said the Financial Stability Oversight Council — which she leads — is focused on potential runs in digital assets.
“It’s critical for there to be a federal regulatory floor that would apply to all states, and that a federal regulator should have the ability to decide if a stablecoin issuer should be barred from issuing such an asset.”
Data mining: Ransomware comes back to haunt crypto
Crypto’s defenders argued throughout the course of last year that 2023 would be when the industry cleaned up its act after the collapse of FTX.
One subsector of the market didn’t get the memo: ransomware. According to blockchain analytics firm Chainalysis, ransomware actors pocketed more than $1bn in extorted cryptocurrency payments from victims, breaking the industry’s previous record of $983mn set in 2021.
Last year’s record also undermines the idea that crypto is gradually solving its ransomware problem. Figures dropped drastically in 2022, partly due to Russia’s invasion of Ukraine disrupting some actors’ operations, but against 2023’s boom that decrease looks more like an anomaly than any substantial clean-up act.
“Despite the decline in 2022, the long-term trend line indicates ransomware is an escalating problem,” Chainalysis’s head of cyber threat intelligence Jackie Koven told me.
FT Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.
