For the uninitiated, cryptocurrency is generally traceable because the blockchain requires a decentralised ledger which is very much logged. Since it is stored in multiple locations, accessing it and gleaning information is fairly easy to do, even for someone with little to no technical knowledge. Information on the sender’s wallet, the receiver, the amount transferred and when it was sent are all readily accessible. There are no names, but all you really have to do is follow the numbers and the wallets involved in making the transactions.

This can help track the sender, and the receiver will usually end up either off-ramping their crypto (converting it to fiat currency) or spending it, both of which are also traceable. A lot of centralised exchanges and crypto platforms require customer information, which is why most wallets can be traced to individuals and businesses if you really start sleuthing (or if the authorities start digging into things).

Privacy coins are a type of cryptocurrency that tends to mask one (or more) of these key identifiers: the sender, the receiver, or the amount sent. I won’t get into the technical aspects of this, but coins such as Zcash ($ZEC) and Monero ($XMR) are two of the most popular examples of privacy coins.

This past week, Dubai’s financial regulator, the Dubai Financial Services Authority (DFSA), banned the trading, promotion, fund operations and derivatives of privacy tokens within the jurisdiction of the Dubai International Financial Centre (DIFC). This was done in a bid to stay consistent with anti-money laundering and terror financing practices. Dubai’s regulatory authority is not the only one to have made this decision. The European Union, Japan, South Korea and others already have legislation in place that restricts or outright bans the use of privacy tokens.

Decentralisation is an inalienable aspect of crypto. But speak to any of the OGs in the web3 space, and most of them will tell you that privacy was always meant to be just as important. Privacy was a key tenet since the beginning. For states and lawmakers, however, while the decentralisation aspect of cryptocurrency remains unavoidable, privacy has been acted against since the industry first started picking up steam.

The argument put forth has been this: if a transaction cannot be tracked by the authorities, this leaves room open for nefarious activities such as money laundering and other criminal activities to be conducted without alerting law enforcement agencies.

Privacy is a basic human right, although in this day and age, with the rise of social media and constantly increasing state surveillance, it is easy to forget that. The state can potentially circumvent some individual rights for the greater good of the collective, but in an ideal world, this must only be done if there is clear evidence that exercising the right is causing obvious harm.

I’m sure you’re thinking, “Okay, let’s not be optimistic to the point of naivety.” Yes, crime exists in society, and yes, if you give a section of the population an opportunity to mask these crimes, they will use it as often as possible.

“Well, even if they don't commit crimes, at the very least they won't pay taxes,” you will probably say next. Well maybe, sure, but there are a lot of other sources and means to document wealth.

Also, what about cash—what about the old boomers sitting on wads of it or storing it under their proverbial mattresses? Does that not bother the state?

“Cash is traceable,” you will say next. There are literal serial numbers on it. But once it leaves the mint, the only time it is really being tracked is at the bank. Once it is withdrawn and starts exchanging hands in the open market, no one is really tracking it. This is why it is the go-to option for people who might be committing crimes and want to launder their wealth or hide traces of it exchanging hands.

Money laundering, terror financing and other serious crimes are a big problem. But research tells us that criminals tend to rely on offshore accounts, foreign exchange and most importantly, cash to move funds around. The majority of the global population is behind the curve on cryptocurrency and blockchain technology, which is why the vast majority of criminals will also be relying on pre-existing technology. That is just simple maths.

But even if we focus on the very small percentage of illegal activity in the crypto space—researchers believe that 1-2% of crypto volume is crime-related—there is evidence to support that the majority of criminals using the blockchain are actually just using the more commonplace, non-privacy-oriented cryptocurrencies, such as Bitcoin ($BTC) and Ethereum ($ETH).

It is important for the state to protect its people, but is it really a net positive for society to view everything with distrust? And if we are really viewing everything under that lens, how is cash not made more traceable?

Dubai has long been considered a haven for people who work and operate in the crypto industry and decentralised finance. The major reason for this is the lack of taxation, or more specifically, the lack of direct taxes on most sources of income, especially for people that earn from salaries and personal investment incomes.

But the privacy ecosystem is very much a part of the crypto industry and should be treated as such.

If we look back at the process of states slowly changing their minds about cryptocurrency—it was considered a scam for the better part of a decade—the privacy coins might also follow the same route in terms of regulatory practices.

States and institutions will first decry them as evil and highlight how their use is a net detriment to society. But then slowly, they change their minds once they see that there is no turning back, and decide to join the bandwagon, instead of attempting to ignore it until it becomes too large to look away from.

The only problem with this thesis is that things are very different from when cryptocurrency was first introduced to the world at large. Back then, institutions were reticent and did not have a stake in the industry. They do now, a very big one at that.

So I foresee this going one of two ways. The first is mentioned above. States will first act against privacy coins until they see their growing use as unstoppable. Eventually they will put some safeguards in place and allow them to operate, and also realise that there is a benefit in investing in them, and put money in the coins themselves.

Conversely, since the stablecoin rails, investment in majors such as $BTC and $ETH and prominent legislation in most countries are already in place, there might also be an attempt to clamp down on the privacy sector in its entirety. Global policymakers will use the anti-money laundering and financial crime arguments against privacy coins and will exert pressure on non-complying states. Institutions such as the Financial Action Task Force (FATF), which has often mentioned the risks of money laundering and terror financing in crypto, will be central to this. If that is the case, we are in for a long battle as policymakers debate a course of action.

We can only hope that logic and sense will prevail in the end.