Dash was originally considered to be a privacy coin, a cryptocurrency that uses cryptographic algorithms to shield potentially identifying information about its users. The primary goal of such privacy algorithms is to obscure details around transactions to help shield users from prying eyes. Like regular cash, privacy coins can be used for a wide variety of purposes by users who want to control what information they share with the world. One of the challenges for Dash is balancing privacy with regulatory compliance. It’s an issue that roils the general crypto market whenever regulators flex their muscles. We explain how Dash and privacy go hand-in-hand to help you get a better understanding of these discussions.
What Is KYC
Discussions of crypto privacy nearly always mention KYC. KYC is an acronym for “know your customer.” Know Your Customer standards, which came into effect as part of federal Anti-Money Laundering (AML) regulations for financial institutions, require verifying customers’ identities. By design, KYC helps identify and prevent fraud, money laundering, and terrorist financing. In addition to traditional asset classes like money and equities, KYC also applies to blockchain assets.
Starting from Bitcoin
Bitcoin addresses enable transactions without identifying personal information. Because the transaction history lives in public view on the blockchain, however, Bitcoin isn’t completely anonymous. Investigators can determine identities by triangulating movement of coins and details associated with addresses. Note, there are blockchain analytics firms that specialize in deanonymizing bitcoin activity and selling the resulting data to corporations and law enforcement agencies.
Enter Bad Actors
Unfortunately, privacy coins can be popular for ransomware and other illicit purposes. As a result, they have attracted attention from law enforcement and regulators. In 2021, the amount of money collected through cryptocurrency-based crime hit an all-time high. We’ve seen significant media coverage of ransomware attacks, where cybercriminals lock a victim network’s files, demanding bitcoin in order to release them. Two high-profile examples were Colonial Pipeline Co., a critical East Coast pipeline, and JBS SA, one of Amerca’s largest meat processing plants.
But What About Privacy
The challenge with privacy is that not all actors are bad. Cryptocurrency and cash can both be used in illicit activities (ever watch Narcos on Netflix?). While cash is easy to spend anonymously, blockchain is less so. Consumers often have legitimate reasons to resist digital spending surveillance, particularly when monitoring happens without their knowledge or when the activity is something they wish to keep secret (from curious employers or suspicious spouses, for example). In the end, there are hundreds of reasons a consumer might not want any third parties to view their 100% legal activities.
Then there’s Dash’s CoinJoin. It makes it extremely difficult for an outside observer to determine the source of funding. Automatically included in Dash Core wallet, CoinJoin gives Dash the same level of privacy as pulling cash from an ATM. Coins go through a “mixing” of denominations, which is seamless and automatic for the Dash sender.
CoinJoin works by obfuscating the origins of Dash funds. It starts by breaking your transaction inputs into standard denominations (0.001, 0.01, 0.1, 1 and 10 DASH). Next, your wallet sends requests, with no identifiable information, to Dash masternodes to mix those denominations. When others send similar requests to mix the same denomination, the masternode mixes the inputs and instructs the users’ wallets to pay the transformed input to themselves. Your wallet pays that denomination directly to itself, but using a different address. This process repeats up to 16 times with each denomination, making it exponentially more difficult to determine where your funds originated. Finally, when you wish to make a private transaction, your funds are ready, with privacy in place.
Dash and Privacy
As a privacy coin and a highly transaction-oriented cryptocurrency, Dash lives up to it’s moniker of “digital cash”. Cash transactions are difficult to trace, and the vast majority of them are legal. The dark element of cryptocurrency is really no different than the dark side of traditional currency. It’s an innovative new era, so regulators look for ways to keep the situation more in line with existing programs, like KYC. Dash and privacy are interwoven – users have the option of using CoinJoin to protect their identity from observation — and that’s yet another reason Dash is a leading blockchain platform.