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The Looming Conflict Between Privacy and National Security: A Tale of Two Cryptocurrencies

What price anonymity?

The prospect of going incognito is thrilling, even intoxicating, in a world filled with catharsis-driven social media posts. Being anonymous is empowering — but elusive.

Today, websites collect a treasure trove of web visitor data, and marketers use that data to deploy targeted marketing campaigns. For the 18-24 age group, businesses pay $0.36 per person for their data, which amounts to an eye-watering $14,253,466.27 a year.

The mass accumulation (and sharing) of data has led to the adoption of privacy-focused regulations like the GDPR and the California Consumer Privacy Act (CCPA).

The Dark Web: Venturing Into the Unknown

Anonymity: It's why the Deep Web fascinates us.

Within the recesses of the Deep Web lurks the Dark Web. Many people use the terms interchangeably, but they're really quite different. The World Wide Web consists of a Surface Web (where all pages are indexed and accessible to all) and a Deep Web (where all pages are non-indexed).

You can access the Deep Web's non-indexed sites if you know their exact URLs. If, however, you want to explore the criminal world, you'll want to head into the Dark Web, located in the bowels of the Deep Web.

The Dark Web consists of peer-to-peer networks or Dark Nets that require special software to access. You'll find illicit weapons and drug sales here, as well as child pornography platforms, terrorist networks, and human-trafficking rings. However, not all Dark Web activities are illegal.

You'll also find AECs (anonymity-enhanced cryptocurrencies), which you can use to buy and sell lawful items. And, this is where a legal conflict arises: while AECs can be leveraged by criminals, they are also used by everyday citizens who prize personal autonomy.

The question that's hotly debated in Internet chat forums and courtrooms across the world is this: do governments have the right to implement mass surveillance of all financial transactions?

Citizens say no — and they're ready to lawyer up to fight for their rights.

Anonymity-Enhanced Cryptocurrencies: The New “Secret” Digital Money

When Bitcoin (the first digital currency) premiered in 2009, it garnered media attention across the world. The virtual coin traded at almost zero that year but increased to $0.08 in the summer of 2010.

Today, Bitcoin trades above $23,000, and there are upwards of 18 million Bitcoins in circulation. Bitcoins aren't the only cryptocurrencies available, however. There are also altcoins like Ethereum, Litecoin, and Ripple.

But, why purchase AECs when a variety of cryptocurrencies are readily available? In one word: privacy.

There's one stark similarity between non-AECs and fiat money (government-issued currency): both can be tracked by state surveillance software. Until now, AECs guaranteed 100% anonymity.

How Anonymity-Enhanced Cryptocurrencies (AEC) Are Anonymized 

Currently, the most popular AECs are Beam, Grin, Horizen, and Monero.

Beam and Grin: These are open-source cryptocurrencies based on the Mimblewimble protocol. Essentially, both currencies can verify transaction amounts and sender identities without revealing sender & receiver addresses and exact transaction amounts. The word “Mimblewimble” references a Harry Potter curse, which ties a victim's tongue and prevents the speaking of intelligible words. 

Horizen: Horizen (formerly ZenCash) is a privacy-focused zk-SNARK blockchain platform. It's an upgraded version of zCash, the first altcoin to use the zero-knowledge proof protocol. Essentially, zk-SNARK, which stands for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge,” allows two parties (the prover and the verifier) to substantiate the validity of information without revealing that information.

The proof protocol is also not dependent on interactions between the prover and verifier. Thus, both identities are protected.

A common criticism of zk-SNARK is that a malicious actor can access a user's private key and create false proofs. However, to prevent the exposure of zk-SNARK's public parameters, the creators relied on a complex (and undisclosed) method of creating the proof protocol.

Today, Horizen is one of the most popular AECs on the market, and no wonder: With its deployment of ZenHide (which mimics TOR endpoint masking), the Horizen platform can bypass firewalls set up by collective state authorities in some of the world's most restrictive regimes.

Monero: Many cryptocurrency enthusiasts maintain that Monero is superior to all the other AECs. Three qualities separate Monero from the pack: untraceability, unlinkability, and fungibility. Monero uses ring signatures, the newest of which is "A Multi-layered Linkable Spontaneous Anonymous Group Signature.” This allows transaction amounts, origins, and transaction destinations to be anonymized.

In addition, unlike Bitcoin, Monero doesn't publish a “rich list.” Such a list reveals the users owning the highest number of Bitcoins.

Take a look at Bitcoin's rich list. As of this writing, there are more than 2,000 addresses holding more than 1,000 Bitcoins in the world. Do you think global law enforcement agencies have the ability to uncover the actual identities of the wealthiest Bitcoin owners? You bet your bottom Bitcoin they do. If you'd like your financial transactions to be anonymous, you'll want to choose Monero.

That said, all AECs aren't made equal.

Two well-known cryptocurrencies, zCash and DASH, are no longer known as AECs. Both zCash and DASH transactions can be un-encrypted or de-anonymized by intelligence firm Chainalysis. And, why is this important? One of the firm's biggest clients is the United States government.

In 2013, Edward Snowden, an NSA whistleblower, revealed that the government was using the PRISM program to spy on Americans under the supervision of the Foreign Intelligence Surveillance Court (FISA). The 4th Amendment violations perpetrated under PRISM was egregious, and the knowledge of it led Snowden to fall into a deep depression. Today, he lives in Russia, forever exiled from the country of his birth.

That said, the issue of government surveillance is a complicated one.

The Dark Web Criminal Enterprise Is Real

Curious about the Dark Web? You can use the TOR anonymizing browser to access it. Essentially, TOR renders your IP address undecipherable and untraceable. Interestingly, TOR was created by DARPA, the same agency responsible for the Internet's origin.

Although some 1st Amendment proponents argue that TOR was created to protect dissident communications in totalitarian regimes, the rationale for its creation was a little less altruistic in nature.

The Pentagon and military simply wanted to make intelligence gathering a more covert process. In fact,  the U.S. Research Naval Laboratory originally created the onion routing program to anonymize government communications online. The TOR browser uses onion routing — all network communications travel along a chain of nodes (called an onion). Each circuit path is untraceable and thus, completely obscures the user's identity.

Although the Dark Web allows you to access legal documents and websites, it also hosts a range of illicit activities. Once you're in, you may not like what you find.

Here are some statistics that may keep you up at night:   

Unsurprisingly, the United States government has increased its efforts to bring accountability to the Dark Web. To accomplish its goals, it has teamed up with law enforcement officials in the United Kingdom, Australia, Canada, and New Zealand.

In 2019, the government announced the arrest of Jong Woo Son, 23, a South Korean national who operated Welcome to Video, a Dark Net child pornography site. Simultaneously, 337 site users from the United States, United Kingdom, South Korea, Germany, Saudi Arabia, Canada, Ireland, Brazil, Australia, the Czech Republic, and the United Arab Emirates were also arrested.

In March 2020, the Department of Justice indicted a Dutch national for operating DarkScandals, a website featuring the violent rape and abuse of victims. Meanwhile, in August 2020, the Department of Justice dismantled three Dark Web financing schemes by Al-Qaeda, ISIS, and the Al-Qassam Brigades.

Despite its successes tracing the criminal use of cryptocurrencies on the Dark Web, the FBI, Department of Justice, and other law enforcement entities are still flummoxed by one AEC: Monero. Consistently, Dark Web or Dark Net Market Actors have been converting illicitly obtained Bitcoins into Moneros using the MorphToken cryptocurrency exchange.

Now, there's a new kid on the block: Pirate Chain. This AEC secures 51% attack protection with Komodo's delayed Proof of Work (dPoW) and also uses the zk-SNARK proof protocol. Proponents of the currency point out that Pirate Chain is advertised as the most secure cryptocurrency on the planet. And, it may well live up to its name, due the fact that it doesn't leak sensitive metadata.

As can be seen, the United States government has reason to be wary of the Dark Web and AECs. But, what about 1st and 4th Amendment freedoms?

Anonymity and the Freedom of Speech: The Legal Issues

Are unconventional opinions a threat to the Union? Does the need for surveillance of bad state actors supersede our Constitutional right to privacy?

Edward Snowden argues that the latter mustn't be lost in the race to dismantle Dark Web criminal activity. He maintains that he isn't afraid to stand trial in the United States and indeed, wants to. He just wants to tell his story.

However, the government insists on a clear acknowledgment of no acceptable defense for his exposure of America's intelligence apparatus. This is why Snowden remains in Russia.

Cryptocurrency attorney Jake Chervinsky warns that a privacy battle is brewing and that the government increasingly views AECs (the Moneros and Pirate Chains of the Dark Web) as ever-present dangers to national security.

In June 2019, the Financial Action Task Force (FATF), the G20’s money-laundering and terrorist-financing watchdog, adopted a new “Travel Rule” regarding Virtual Asset Service Providers (VASP) that perform cryptocurrency-related services. This new rule can be found in the FATF's Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (Paragraph 114):

Countries should therefore ensure that ordering institutions (whether a VASP or other obliged entity such as a FI) involved in a VA transfer obtain and hold required and accurate originator information and required beneficiary information and submit the information to beneficiary institutions (whether a VASP or other obliged entity such as a FI), if any. 

Further, countries should ensure that beneficiary institutions (whether a VASP or other obliged entity) obtain and hold required (not necessarily accurate) originator information and required and accurate beneficiary information, as set forth in INR. 16. 

The required information includes the: (i)originator’s name (i.e., the sending customer); (ii) originator’s account number where such an account is used to process the transaction (e.g., the VA wallet); (iii) originator’s physical (geographical) address, or national identity number, or customer identification number (i.e., not a transaction number) that uniquely identifies the originator to the ordering institution, or date and place of birth; (iv) beneficiary’s name; and (v) beneficiary account number where such an account is used to process the transaction (e.g., the VA wallet). 

Then, in the waning days of 2020, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed a regulation to require cryptocurrency exchanges to collect data on anyone who uses self-hosted wallets for transactions. This, along with the 5th Circuit Court's decision to dispense with a warrant for the purposes of obtaining transaction data from cryptocurrency exchanges, is a concerning development for privacy rights.

By all indications, the government is moving swiftly to overlay AML rules over the movement of cryptocurrencies, specifically AECs.

If privacy is conflated with criminal conduct, how will the government protect the 1st and 4th Amendment rights of Americans? We foresee a strong role for legislators and attorneys in securing data privacy and custody in 2021. If the developments of 2020 are a harbinger of things to come, the new year will be interesting, indeed.

Writer Name

Shireen Stephenson

Publication Date

Published on Jun 17, 2021


<p>This article explores two types of cryptocurrencies: AECs (anonymity-enhanced cryptocurrencies) and non-AECs. Specifically, it highlights the looming legal issues surrounding AECs and privacy rights. The premise is that legislators and lawyers will play a role in working with the government to protect privacy rights and bring accountability to the Dark Web.</p>

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