[header date=”23 October 2018″]What’s the difference between Monero and Zcash? Also, a Bitso exec shares his thoughts on crypto-based remittances.[/header]
Can you keep a secret?
Bitcoin is not anonymous. In fact, far from it. If you want, you can explore any block (where transaction data is stored), or wallet on the bitcoin blockchain. Although it might take some time and effort (or perhaps a leak), it’s possible to link a wallet to its owner. And once that happens, there’s no going back. You can easily track a person’s entire transaction history and even use that information to identify the people or companies with whom they’ve traded.
In many ways, the so-called pseudonymous nature of the bitcoin blockchain is one of its largest problems. The public ledger is “simply incompatible with having an enduring mechanism for trade,” said NSA whistleblower and privacy advocate Edward Snowden while addressing the Blockstack Berlin conference in March (via webcam). “You cannot have a lifelong history of everyone’s purchases—all of their interactions—be available to everyone and have that work out well at scale.”
To protect privacy, developers have created other cryptocurrencies that use different encryption algorithms. Two of the most popular “privacy coins” are Monero and Zcash.
Monero, derived from Bytecoin, is the older of the two and, like bitcoin, it uses a proof-of-work consensus algorithm. Created in 2014, one of its most fundamental features are ring signatures. In this digital signature scheme, multiple parties sign a transaction, which helps obscure the identity of the true signer. Investopedia has compared this to having multiple people sign a check from a joint checking account. Instead of money obviously moving from person A to person F, it appears that the transaction to person F might’ve originated from persons A, B, C, D, or E (with equal probability). On the receiving side, Monero uses something called “stealth addresses,” which help conceal amounts transacted and ultimate wallet destinations (so, person F is never identified as the recipient at all).
The Zcash approach to privacy is a little different—and that’s not even considering its elaborate ceremony used to generate the encryption (even if you’re a privacy nut, these guys took it to the next level). The cryptocurrency, which was released in October 2016, relies on cutting-edge mathematical proofs designed so one person can basically prove something to another person, without revealing the actual content that they’re proving (yeah, it’s a bit mind-boggling).
From an economic standpoint, Monero and Zcash also have some important differences. Like bitcoin, Zcash is capped at 21 million units, of which 5 million, worth $606 million, have been mined. It’s also crucial to note that the project’s mining setup features a “Founders Reward,” meaning that 10% of newly-mined coins go straight to the Zcash Company (this happens for four years).
By comparison, Monero is probably a little more democratic (and its founders a little less avaricious). It will reach a supply of about 18.4 million units sometime in the year 2022, at which point the network will institute a steady inflation rate (to incentivize mining). Thus far, 16.5 million units, worth $1.7 billion, have been brought into existence.
Which privacy coin you choose—if you’re into that sort of thing—depends in part on how much you trust each development team and what you think of the economics of each cryptocurrency. Ultimately, however, the appeal of these tokens rests on the power of their anonymizing measures, and that can’t be known unless—or until—they’re cracked. —Matthew De Silva
[mailto filter=”Monero” subject=”Privacy coins”]Do you prefer Monero or Zcash? Why?[/mailto]
[supplemental headline=”Market chatter: Not-so-stable coins”]
[img src=”https://cms.qz.com/wp-content/uploads/2018/10/2018.10.23-Stablecoin-prices-October-2018-draft-3.png”]
Last week, we discussed why Tether (USDT) is trading at a discount from its $1 peg, citing a lack of faith in the company’s banking relationships and lingering doubts about whether management has adequate reserves to back the digital tokens. While Tether volumes remain enormous—indeed, the 24-hour volume is $2 billion—newer and more trusted stablecoins are trading at higher prices than USDT, although they represent just a fraction of overall market volume.
The Paxos Standard (PAX) seems to range between about $10 million and $20 million in trading volume per day. Meanwhile, the Gemini US dollar (GUSD) has only cracked $1 million in daily trading volume twice. These are not exactly fat stacks. Curiously, though, while global USDT prices remain below $1, GUSD and PAX are actually trading at a premium, or over $1 per unit.
[takeaway]The premium that investors are paying for GUSD and PAX indicate they’re trusted more than USDT. Of course, logically speaking, even if they’re “more trusted,” this doesn’t make a lot of sense, since these tokens are only redeemable for $1 each. It would be like buying a $25 gift card for $30. But don’t go shorting these tokens just yet! In the words of economist John Maynard Keynes, markets can remain irrational longer than than you can remain solvent. ➡️ [/takeaway]
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On the record: Eduardo Jr. Arenas
[img src=”https://cms.qz.com/wp-content/uploads/2018/10/Eduardo-Jr.jpg”]
Eduardo Jr. Arenas is head of product at Bitso, a custodial digital currency exchange in Mexico City. The former chief advocacy officer for Reforestamos Mexico, an environmental organization, Arenas became involved with cryptocurrencies as a master’s student in public policy at the University of Chicago. He spoke with Quartz’s Matthew De Silva at Ripple’s Swell conference.
Quartz: How did you become involved in the cryptocurrency world?
Arenas: I finished my master’s and came back to Mexico. I was really interested in fintech, but I was not crazy about crypto. I had heard about it and I’d actually made some transactions.
I had my credit card in the US and I had no money left. I owed like $200. So I came back to Mexico and I had money in Mexico. I was like “Okay, I’m going to use Bitso to buy bitcoins and send them to Circle, sell them, and deposit the money into my bank account.” Basically, that operation that I did is what got me my job at Bitso.
For me to send a wire from my bank to the US was like $65—terrible. And for sending $200, it was ridiculous.
How have things changed since Bitso started in 2014?
A big part of the push [by Bitso] has been toward regulation and compliance. Our founders decided to approach the regulators and say, “Hey, I want to do this. How should you regulate me?” and the regulators were like, “It’s so new. We have no idea. Our advice is that you follow the spirit of the law and then you can work from there.”
By the time I arrived, we already had a compliance officer, we already had a compliance manual. We were KYC-ing our customers, etc, and that helped build a good relationship with the regulators.
How has that relationship evolved?
We started pushing for a fintech law and finally in March 2018, the law was published. Its name is “activos virtuales.” In English, it means something like “virtual assets.” They [the regulators] didn’t want to call it currency, they didn’t want to call it crypto. So they called them “activos virtuales,” which we don’t love, but it’s okay. The law basically said you can do crowdfunding and they created categories for other fintech activities.
The work with the regulators was very intense, but we were really impressed—they were open and it was a dialogue. There were a lot of roundtables. Overall, it was a pleasant experience.
How does Bitso add new cryptocurrencies?
The central bank has to approve the assets that are listed. It’s a little bit impractical. Like what happens if bitcoin forks again? Right? The fork wouldn’t be the asset accepted [permitted] by the central bank. So, what do you do? You don’t give it to customers because it’s not approved?
With the law, we were grandfathered in. We can continue doing what we are doing, until somebody specifically says “no” or we get a license. We need to now apply for a license to be an “IFPE” (pronounced: “If-Pay”)—Instituciones de Fondos de Pago Electrónico [English: a financial institution for electronic payments]. We’ll have an additional permit for working with “virtual assets”—I hate that, I’ll just say “crypto.”
Why don’t you like the term “assets”?
Because we like the idea that they’re currencies.
In terms of actual use, it seems like there’s a tension between the currency and asset distinctions.
I think as an exchange, it’s hard to categorize your customers.
But are people actually buying their coffee with bitcoin or ether?
They’re not, but we do have companies that are doing cross-border transactions using crypto. Cuallix is a Mexican company and they operate with us. The xRapid part of their system happens through us. They are actually making cross-border payments using Ripple.
How do you think XRP addresses a market problem?
What happens when you’re not big and and you want to get into [the remittance] business is you need to find an FX provider. Because you don’t sell enough volume, they’re going to give you a terrible price [exchange rate]. [With XRP] we see that there’s an interesting use case in very fast ledger transactions that we can validate.
How does crypto taxation work in Mexico?
There’s still no fiscal clarity on virtual assets, including bitcoin. One of the things that we ask is, if you’re going to call it an asset, then it can’t be taxed. It can’t have VAT [value-added tax] because it would kill all use cases.
One of the reasons regulators were so open to discuss crypto was remittances. It’s huge. You have vulnerable families in terms of income that live [off of] remittances and if you close that flow, it’s terrible. If you make it so that more money arrives in their accounts, they’re happier. Remittances are the number one source of US dollars for the Mexican companies, like more than oil, more than tourism.
[mailto filter=”Feedback” subject=”Feedback”]Have you used cryptocurrency to avoid fees? Tell us about it.[/mailto]
[supplemental headline=”De-jargonizer: Tumbling”]
Tumbling is a process, often associated with money laundering, which uses staggered transactions and varying transaction amounts in an attempt to obfuscate the connection between a cryptocurrency wallet and the source of its funds.
Functionally, it’s kind of like shuffling a deck of cards between each hand. While some argue that tumbling (aka “mixing”) is useful for preserving financial privacy, the practice is more commonly affiliated with illegal money laundering. The businesses that provide these “services” are almost always located outside of the US and they usually charge a 1-3% fee. To be clear though, bitcoin is still very traceable—even the best tumbling services aren’t 100% effective.
[mailto filter=”Jargon” subject=”De-jargonize this…”]Heard a new crypto term? We can tell you what it means.[/mailto]
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Please send news, tips, and Tumblrs to privatekey@qz.com. If this email was forwarded to you, click here to sign up for your own subscription, which includes a free two-week trial. Today’s Private Key was written by Matthew De Silva and edited by Oliver Staley and Jason Karaian. This date in computing history: On October 23, 2001, Apple introduced the first iPod.