Privacy coins test crypto exchanges’ comfort with compliance

Crypto industry’s cypherpunkian mettle will be tested as governments and regulators tinker with privacy tools to possibly enable criminals to do bad things—as well as ordinary people doing everyday things.

Driving the news: Seven tokens are set to be delisted on September 19 from top 10 exchange Huobi Global, which on Monday sent a jolt through the industry when it cited compliance with the “latest financial regulations” as a just cause.

• Token issuers who spoke to Axios expressed disappointment. One said it would fight the decision.
• The exchanges FTX, Binance, Kraken, OKX and Coinbase, as well as Huobi Global, declined to comment.

Why it’s important: The “do it yourself” and “don’t ask permission” philosophy is a feature of the crypto industry, not a bug.

• The question of whether tools like Tornado Cash can help bad actors avoid government sanctions has nevertheless caused the crypto industry to roll over on its own, regardless of whether it leaves customers in the lurch.

Between the lines: The Huobi issue centers around Monero, Zcash, Dash, Firo, Decred, Verge and Horizen, which together have a market capitalization of $5.5 billion.

• Some emphasize the privacy features of tokens more than others, so we will avoid labeling them generally as “privacy coins”. We will call them the “Lucky Seven”.
• Monero’s XMR is the largest of them with a market cap of $2.5 billion, and it – along with the others named – has privacy-enhancing features to hide the identity of the parties to a transaction.

What’s up: “I spoke with Huobi before they removed Monero and other assets, and they indicated that South Korea was pushing them to remove these assets worldwide,” Justin Ehrenhofer, of Monero-focused crypto wallet software firm Cake Wallet, told Axios.

• “This speaks to Huobi’s reliance on South Korea.”

Flashback: Recall Kraken removed Monero’s privacy coin in the UK late last year.

• “Unfortunately, we have to pick our battles and look after the broader business in the country,” Kraken CEO Jesse Powell said at the time in response to aggrieved customers in a Reddit thread.
• These unclear regional regulatory directives seem to be lost on crypto customers, with one asking on Reddit last year: “Can someone tell a simple why Monero and some others are not tradable on Coinbase?”

What they say: “Privacy is a fundamental requirement for any currency to be useful, so it’s unfortunate that some exchanges see this as problematic,” said Jonathan Zeppettini, International Operations Lead at Decred, in an email reply to Axios. “Especially when all of these exchanges by nature require users to submit personal information in order to transact.”

• “The larger exchanges such as Binance, Coinbase and FTX have been more forward-looking and likely appreciated that the future of cryptocurrency includes strong privacy guarantees,” he added.

Dash is “identical to bitcoin,” given that transactions and addresses are publicly visible on the blockchain, Ernesto Contreras, Dash Core Group’s global head of marketing and business development, told Axios.

• “We are reaching out to Huobi and the regulators, and hope to clear this misunderstanding soon, as we have done in the past with exchanges that had this attitude,” he says.

What others are saying: “It’s very possible that exchanges could feel pressured to remove privacy technologies. And we’re definitely looking at what they’re doing,” Galaxy Digital’s Alex Thorn told Axios.

In-game status: The US Treasury just this week published guidance on Ethereum’s biggest privacy tool, Tornado Cash, which provides clarity on how users can legally withdraw money.

• Meanwhile, FTX recently warned customers about interacting with the Aztec privacy protocol.
• And Binance and Coinbase, respectively, have tried to explain their stance on certain tokens, but don’t directly address where in the world certain directives come from that would prevent them from listing them.

What will be next: Issuers of Lucky Seven appear to deny that the main feature of their tokens is privacy-enabling in hopes of deflecting attention and remaining in the good graces of coin gatekeepers.

Crystal’s thought bubble: Cypherpunk principles are what separate the crypto crew from Wall Street, without it they are just a Rube-Goldbergian version of the same financial machine. And that money comes for the industry anyway.