Crypto Gloss

Crypto Privacy Coins

Transaction privacy is one of crypto’s original ambitions — Satoshi explicitly cited avoiding trusted third parties with access to personal financial history. Yet by 2024, most mainstream crypto activity is more public than traditional bank accounts: every Bitcoin or Ethereum transaction is permanently recorded on a globally accessible ledger. The tension between financial privacy (a legitimate human right) and regulatory AML/CFT requirements has played out most dramatically in the privacy coin sector: Monero remains functional but delisted from most Western exchanges; Zcash is technically sophisticated but has struggled with shielded pool adoption; and Tornado Cash — which provided privacy for Ethereum users — was OFAC-sanctioned in 2022 in an unprecedented action against open-source software, with one developer convicted of criminal charges in the Netherlands. This entry covers the full privacy tech landscape, its regulatory context, and where privacy-preserving DeFi developments stand.

Note: For Monero specifically (the dominant privacy coin), see the [monero] entry. This entry covers the broader privacy technology and regulatory landscape.

Why Financial Privacy Matters

The case for privacy:

  • Employees shouldn’t be able to lookup exactly what salary their coworkers receive
  • Businesses shouldn’t have to disclose competitive payment relationships
  • Domestic abuse survivors need financial separation from abusers
  • Political and religious minorities may face risks from visible financial associations
  • Government surveillance creates chilling effects on legitimate financial activity

The regulatory concern:

  • Illicit actors (ransomware, sanctions evaders, drug trafficking) use privacy tools
  • AML/CFT frameworks require transaction tracing for financial crime investigation
  • Sanctions compliance requires ability to block designated parties

The tension is genuine. Both sides have legitimate interests, and the resolution is not obvious.

Zcash (ZEC)

Zcash was launched in 2016 by the Electric Coin Company (Zooko Wilcox) as the first production cryptocurrency using zk-SNARKs for transaction privacy.

How Zcash Privacy Works

Two address types:

  • Transparent addresses (t-addresses): Standard public blockchain addresses — visible on-chain like Bitcoin. Transactions between t-addresses are public.
  • Shielded addresses (z-addresses): Privacy-enabled addresses. Transactions involving z-addresses use ZK proofs to prove validity without revealing sender, recipient, or amount.

Shielded transaction mechanism:

  • Sender creates a proof that: “I own an unspent coin; the recipient’s address is valid; the output coins sum to ≤ input coins minus fee” — without revealing which coins, which recipient, or how much
  • The blockchain records: “A valid shielded transaction occurred” — nothing more
  • This is true financial privacy: amount, sender, and recipient are all hidden

Upgrades:

  • Sapling (2018): Dramatically reduced proving time and memory requirements for shielded transactions from minutes to seconds on mobile
  • Orchard (2021): New shielded pool using Halo 2 proving system (no trusted setup required, unlike original Sprout and Sapling pools which required setup ceremonies)

The Adoption Problem

Despite superior privacy technology, Zcash has struggled with actual privacy adoption:

  • ~80%+ of Zcash transactions use transparent addresses (public, like Bitcoin)
  • Only ~20% use shielded addresses
  • Anonymity set problem: Privacy only works when many people use shielded transactions. If only 20% of users are in the “shielded pool,” investigators can potentially narrow down transactions by correlating the 20% with specific users.

Why adoption of shielded transactions is low:

  • Exchanges historically required transparent addresses for deposits (no z-address support)
  • Wallet UX was worse for shielded transactions (slower, mobile limitations pre-Sapling)
  • Many Zcash users treat it as “just another coin” rather than specifically seeking privacy
  • ZEC supply inflation from miner rewards meant privacy-focused holders faced dilution

Zcash Regulatory Status

Major exchanges: Coinbase delisted ZEC in Canada and Australia due to regulatory pressure. Binance delisted ZEC and several other privacy coins for select jurisdictions. ZEC is still listed on Coinbase US as of 2025.

Tornado Cash: OFAC Sanctions Against Open-Source Software

Tornado Cash was an Ethereum smart contract protocol — essentially a mixing service that pooled ETH and ERC-20 tokens and issued zero-knowledge proof receipts allowing withdrawal by different addresses:

How it worked:

  1. Deposit 1 ETH into Tornado Cash contract
  2. Receive a cryptographic “note” (secret + nullifier)
  3. From a completely separate Ethereum address, submit the note to withdraw 1 ETH
  4. The withdrawal address has no on-chain connection to the deposit address

This broke the public transaction graph — providing “blockchain privacy” for Ethereum users.

August 8, 2022: OFAC Sanctions

The US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned:

  • Tornado Cash as an entity
  • 44 specific Ethereum smart contract addresses

These smart contracts are open-source code deployed to the Ethereum blockchain — they cannot be taken down, modified, or controlled by anyone. The sanctions were unprecedented: the US government had never before sanctioned a computer program in this way.

Implications:

  • US persons prohibited from using Tornado Cash (using a smart contract = violating sanctions)
  • Circle froze all USDC in Tornado Cash contracts
  • Infura and Alchemy blocked RPC calls to Tornado Cash
  • Tornado Cash front-end website taken down by GitHub, hosting providers
  • Tornado Cash community forum defaced

Legal challenge: Coin Center and others filed lawsuits arguing the sanctions exceeded OFAC’s statutory authority (property sanctions require property that can be owned and controlled; immutable code cannot be controlled). In November 2024, the 5th Circuit Court of Appeals ruled in favor of Coin Center — finding that the immutable Tornado Cash smart contracts are not “property” of any person and therefore cannot be sanctioned.

Roman Storm and Alexey Pertsev: Developer Prosecutions

Alexey Pertsev: Dutch developer prosecuted by Netherlands authorities for money laundering through Tornado Cash. Convicted May 2024; sentenced to 5 years and 4 months in prison.

Roman Storm: US developer and co-founder of Tornado Cash. Arrested August 2023 in the US; charged with money laundering conspiracy, sanctions violations. Trial scheduled for 2025.

Roman Semenov: Russian co-founder; remained outside US; also charged but not arrested.

The developer prosecutions raised significant policy questions: Should developers of open-source financial privacy software be criminally liable for illicit uses they explicitly warned against and had no ability to prevent?

Privacy in DeFi: Current Frontier

The following sections cover this in detail.

Aztec Network

Aztec is the most sophisticated privacy-focused Layer 2 for Ethereum:

  • Aztec Connect (deprecated): Allowed private DeFi — users could interact with Uniswap and other L1 protocols through shielded transactions (amounts hidden)
  • Aztec Network (rebuilding as of 2024): New architecture using the Noir zero-knowledge programming language for programmable privacy
  • Noir language: A ZK-specific programming language (like Rust) for writing privacy-preserving smart contracts; allows developers to write “programmable privacy” — defining exactly what is revealed and what is hidden per application

Aztec is the most developer-focused privacy project: the goal is a programmable privacy platform where any application can have configurable privacy, rather than simply a private transfer system.

Status: As of 2025, Aztec is still in development/testnet for its next generation. Significant venture funding ($100M+). Building the Noir language ecosystem with external developers.

Penumbra

Penumbra is a privacy-native chain for the Cosmos ecosystem:

  • Designed for private transactions, private staking, private DEX trades
  • Uses ZK proofs for hidden transaction amounts and shielded addresses
  • Native to IBC (Inter-Blockchain Communication) — private transactions that can interact with Cosmos chains
  • Unique feature: Multi-asset shielded pool (unlike Zcash which has separate pools per asset)

Status: Mainnet launched; growing ecosystem in Cosmos.

Railgun

Railgun provides on-chain Ethereum privacy without a separate chain:

  • Users deposit funds into Railgun smart contracts
  • Trade/interact with DeFi from inside the shielded pool
  • Withdraw to standard Ethereum with privacy
  • Supports: Ethereum, Arbitrum, BNB Chain, Polygon
  • Distinct from Tornado Cash: Railgun is a smart contract privacy shield for DeFi activity, not just a mixing service

Exchange Delistings: The Regulatory Squeeze

Since 2020, major exchanges have progressively delisted privacy coins:

Delisted by major exchanges:

  • Monero (XMR): Removed from Binance, Coinbase (not listed), OKX, Kraken (partially)
  • Zcash (ZEC): Removed from Binance (certain jurisdictions), some regulatory markets
  • Dash (DASH): Previously delisted from multiple exchanges (though DASH’s privacy features are optional and rarely used)
  • Horizen (ZEN): Limited exchange support

Pattern: Compliance teams at exchanges under regulatory pressure from FinCEN, FCA, and other bodies have proactively delisted privacy coins rather than face enforcement risk.

Result: Privacy coin holders increasingly use DEXes (non-custodial swaps, Haveno for XMR), P2P markets (LocalMonero before closure), or atomic swaps for liquidity rather than centralized exchanges.

How to Access Privacy Tools

Zcash: Zcash ecosystem wallets (Zashi mobile wallet by ECC for shielded transactions). Listed on select exchanges.

Privacy-first storage: Regardless of privacy coin use, hardware wallets provide security for crypto holdings. Privacy of holdings is separate from transaction privacy.

Legal context: In the US, using privacy tools is not itself illegal. Tornado Cash sanctions create specific restrictions for US persons. Consult legal counsel for specific use cases.

Related Terms

Sources

Ben-Sasson, E., Chiesa, A., Garman, C., Green, M., Miers, I., Tromer, E., & Virza, M. (2014). Zerocash: Decentralized Anonymous Payments from Bitcoin. IEEE Symposium on Security and Privacy 2014.

Van Saberhagen, N. (2013). CryptoNote v 2.0. CryptoNote White Paper.

Chainalysis. (2022). The Privacy Coin Challenge: How Blockchain Analytics Are Adapting to Privacy Cryptocurrencies. Chainalysis Intelligence Report.

MacCartney, T., & Goldfeder, S. (2023). Regulatory and Technical Analysis of Financial Privacy Protocols. ACM Financial Cryptography 2023.

Möser, M., Soska, K., Heilman, E., Lee, K., Heffan, H., Srivastava, S., Hogan, K., Hennessey, J., Miller, A., Narayanan, A., & Christin, N. (2018). An Empirical Analysis of Traceability in the Monero Blockchain. Privacy Enhancing Technologies Symposium 2018.