Evolving Privacy in Crypto: Beyond Privacy Coins

Key Takeaways

• The 'travel rule' hinders businesses from using privacy coins due to compliance issues.
• Enterprises need greater transaction privacy than standard blockchain options provide.
• Emerging B2B platforms offer private yet compliant payment solutions.

Traditionally, private crypto payments were synonymous with privacy coins like Monero (XMR). However, a new wave of business-to-business (B2B) platforms is emerging, designed to obscure transaction details from the public ledger while adhering to regulatory requirements.

Why Institutions Avoid Privacy Coins

Regulated financial institutions generally avoid privacy coins because of regulations like the 'travel rule'. This rule mandates that financial intermediaries gather and transmit information about transaction senders and recipients. Applying this to anonymous privacy coin transactions can put institutions in regulatory jeopardy.

The Financial Action Task Force (FATF) has broadened the travel rule to encompass crypto firms, leading to privacy coin delistings and a shift towards decentralized, harder-to-regulate venues.

The Need for Institutional Privacy

Despite anti-money laundering regulations that restrict the use of privacy coins, institutions often desire to keep their transactions private. Public blockchains expose sensitive data like payment amounts, counterparties, and cash flow patterns, which businesses prefer to keep confidential.

Fully anonymous transactions are not an option because of the travel rule, so companies like Celo have created privacy focused chains.

Private and Compliant B2B Payment Solutions

Platforms like Celo's Nightfall provide private, but not anonymous, transactions. While transaction data is encrypted on the public ledger, the system remains fully auditable.

Regulated companies can comply with jurisdictional requirements and share transaction details with relevant parties as needed. Paxos Labs has also developed a similar approach with USAD on the Aleo Network, an enterprise blockchain that balances privacy and regulatory compliance.

On Aleo, payments are encrypted by default, and account holders can selectively reveal transaction information. This built-in transparency allows USAD to offer features like programmable payments and fund freezing for AML compliance.