Zcash: A most private revolution

By James Todaro, Joseph Todaro and John Todaro

By James Todaro, Joseph Todaro and John Todaro

An iteration on bitcoin’s privacy

The creation of money outside the control of sovereign states is inextricably linked to privacy. Satoshi Nakamoto recognized this when he carefully maintained his own anonymity, and dedicated an entire section of the Bitcoin white paper to privacy. Any amount of privacy previously associated with bitcoin has been all but eradicated by tightening identity requirements for cryptocurrency exchanges and bitcoin’s permanent ledger of on-chain transaction history. In essence, anyone who has executed a bitcoin transaction from an exchange registered in their legal name likely has most of their transaction history and bitcoin holdings reconstructed and recorded in an institutional database.

This was not the “peer-to-peer electronic cash system” that Satoshi envisioned. Satoshi encouraged privacy through the use of new key pairs, while acknowledging that this practice was suboptimal.

“As an additional firewall, a new key pair should be used for each transaction to keep them from being linked to a common owner. Some linking is still unavoidable with multi-input transactions, which necessarily reveal that their inputs were owned by the same owner. The risk is that if the owner of a key is revealed, linking could reveal other transactions that belonged to the same owner.”

Financial privacy is a fundamental right. Personal net-worth and asset holdings are a taboo subject, and unwelcome disclosure can have financial and reputational repercussions. Nearly 80% of private companies do not share quarterly or annual financial reports with employees for risk of information leaking to competitors. Investment funds often invest privately to avoid revealing strategies. The litany of reasons for financial privacy is exhaustive, and most agree it should remain the status quo.

There is also a fundamental right to financial privacy from the state. In the US, this was formalized in the Right to Financial Privacy Act of 1978, which gave US citizens some protection from surreptitious government investigations into personal financial information. Over the years, amendments to this privacy act, particularly the Patriot Act of 2001, have weakened it considerably.

It is critical that bitcoin does not facilitate any further erosion of financial privacy from the state. As bitcoin continues to capture value, it challenges the dominance of state-controlled currencies in what Nic Carter calls a most peaceful revolution. While simmering below the surface for years, this revolution erupted into the public spotlight in July 2019 when the POTUS delivered a tweet storm specifically addressing cryptocurrency, stating that the USD instead of bitcoin or any other cryptocurrency is the world’s dominant currency.

Bitcoin continues to face escalating regulatory scrutiny, which has been manifested in numerous US congressional hearings, by the FATF’s new banking guidelines surrounding the storage and transfer of cryptocurrencies, and cryptocurrency exchanges banned in China. Just recently, Elvira Nabiullina, head of the Bank of Russia, said she and the Russian Finance Ministry oppose the use of virtual currencies “as private money and money surrogates,” saying “this is necessary to protect the ruble as the single legal [means of] payment in Russia.”

In an increasingly adversarial relationship with central banks and governments, the state’s attempts to exploit bitcoin’s weaknesses will intensify. Bitcoin’s lack of privacy is one of its most critical vulnerabilities and is already being exploited by sovereign states and incumbent institutions with advances in blockchain analysis and KYC/AML identity requirements.

Blockchain analysis

Blockchain analysis software continues to improve and become standard of industry for cryptocurrency exchanges and centralized wallets. The potentially malicious nature of this evolving standard became most apparent when Coinbase acquired the very controversial and aggressive blockchain analysis firm Neutrino in early 2019. The movement #DeleteCoinbase began trending when bitcoiners discovered the checkered past of Neutrino executives who previously sold offensive spyware to governments involved in human rights abuses, including the Saudi Arabian government allegedly involved in the murder of journalist Jamal Khashoggi.

Coinbase is not the first to deploy offensive blockchain analysis monitoring. In late 2018, in addition to its in-house compliance team, Binance partnered with leading blockchain analysis firm Chainalysis to better enforce compliance and AML/KYC laws with live transaction monitoring. Chainalysis markets itself to exchanges, institutions and governments, and currently boasts partnerships with the IRS, SEC, FBI, DEA and ICE in the USA. Other prominent exchanges such as Bitstamp and Bitfinex use Irisium’s blockchain analysis platform while Kraken claims 25% of its entire workforce deals with compliance. Even LocalBitcoins, what used to be a safe haven for privately trading bitcoin, recently instituted a robust new identity verification system requiring ID verification.

Blockchain analysis, image courtesy of Thomas Silkjaer

This erosion of financial privacy should worry you. In his well-written piece, A most peaceful revolution, Nic Carter eloquently states,

“Bitcoiners chose to abandon the rules of engagement and began work on a monetary system totally outside the purview and supervision of the State, entirely without restriction…And it is a rebellion, make no mistake. Cryptocurrency, despite the earnest protests of some of its lily-livered adherents, remains manifestly independent and ultimately hostile to the State.”

As many defenders of the US Constitution’s Right to Keep and Bear Arms frequently recite, registration is often the first step toward confiscation. This was most apparent in Germany and Russia in the mid-20th century where registration of arms quickly led to disarmament of the people and, subsequently, oppression and unspeakable atrocities.

Today, besides the few with the technological competence and patience to diligently strive for privacy with mixing services and private networks, nearly everyone has effectively registered their cryptocurrency transaction history with institutions. It is just a matter of time — if it has not happened already — before this data is shared with governments and sold off to data analysis and brokerage firms like Cambridge Analytica.

The first to suffer will be those individuals in countries already openly hostile to bitcoin ownership (e.g. Venezuela, China, Iran and North Korea). As bitcoin captures greater value though, eventually further challenging sovereign currencies and the USD, it is likely that even democratic states will become belligerent to bitcoiners.


Although ruminated on for years now as a hypothetical, the possibility of the bitcoin market dividing into ‘black-listed’ and ‘white-listed’ coins may be approaching reality with the new guidelines instituted by the FATF. The guidelines require that institutions engaged in the exchange of cryptocurrencies must link all transaction originator and beneficiary blockchain addresses with a name, date of birth, national identity number and physical address in order to process transactions.

2019 FATF guidelines, Coindesk

This means, for example, that to withdraw bitcoin from your Coinbase account to a private wallet, you must prove that you control the keys to said private wallet, or, if sending to another individual, he/she must be a ‘beneficiary’ who is also registered with an FATF compliant institution. Of course, for verification purposes, this also necessitates that all FATF compliant institutions must share customer data in a global, centralized database.

No doubt, some will opt-out of this closed institutional bitcoin economy, effectively resulting in white-listed and black-listed bitcoins that are valued differently. Even for those who elect to opt-out by moving from white-listed to black-listed coins, the path is not risk-free. The most popular mixing services only add a layer of privacy as opposed to providing any assurance of absolute privacy. Moreover, most mixing services are centralized, which makes them subject to both sudden regulatory seizure as well as corruption by mixing service operators.

It is no surprise that Satoshi acknowledged the importance of privacy in the creation of Bitcoin. We think most bitcoiners would agree that if a better privacy and fungibility option existed in 2009, Satoshi would have implemented it.

Zcash offers that level of privacy.

After years of research and development, Zooko Wilcox and his team iterated on bitcoin’s core design by integrating privacy at the protocol layer. In our opinion, which is shared by many with a deep technological understanding of digital currency protocols, the Zcash cryptographic scheme has achieved a level of privacy that is unrivaled.

Zcash may be the much needed deterrent to government overreach. Even the mere existence of a thriving Zcash network may discourage governments and regulatory bodies from tightening controls on bitcoin. State authorities may realize that imposing restrictive, intrusive and onerous KYC/AML controls could push bitcoiners to the far more private network, Zcash, where the state would have much less ability to eavesdrop and regulate.

Instead of an adversarial relationship with bitcoin, a growing Zcash network is actually supportive. As long as Zcash has an active community, decent distribution and liquidity, and value capture for ZEC, it will be available as a viable network for a medium of exchange and/or store of value if governments antagonize bitcoiners excessively.

Era of secret offshore banking ends

Offshore banking has existed since the late 1700s as families and merchants in wealthy European nations, such as France and England, sought to safe-guard their wealth in locations and jurisdictions ‘offshore’ from their countries of residence during periods of political strife. By the mid 1800s, this practice became more widespread with the neutral European nation, Switzerland, burgeoning as the optimal safe haven for securing wealth.

Bank vault

Today, offshore banking still represents a large percentage of the global financial system. According to a report conducted by the Tax Justice Network and McKinsey & Co., there is estimated to be upwards of 32 trillion USD in assets held in offshore accounts.

Traditional offshore banking has allowed certain protections for safe-guarding wealth, including less regulatory restrictions, reduced transparency, protection from local government instability, enhanced access to deposits/withdrawals, and lower tax obligations from offshore financial trusts.

Over the past decade though, increased regulation has diminished most of the former benefits of offshore accounts — most notably in terms of privacy, seizure and access to assets. In 2018, after facing immense pressure for years from foreign governments, Switzerland began automatically sharing privileged client information with foreign governments and tax authorities.

Stricter capital controls now prevent even the initial offshore transfer of assets. Beginning in 2017, Chinese citizens are limited to exports under 50,000 USD annually. Argentina also imposed capital controls recently by limiting its citizens to purchases less than 10,000 USD monthly amid political turmoil that resulted in the Argentine stock market falling 48% and the Argentine peso losing 15% of its value versus the US dollar.

Is it really possible though that a 200+ year history of private off-shore banking is ending? Will a new means of securing wealth supplant traditional digital banking, vaults and safety deposit boxes, thereby circumventing laws that depend on the cooperation of centralized banks and financial institutions?

Rising to the occasion, cryptocurrency is rapidly becoming the ‘Swiss bank account’ of the 21st century. With minimal effort, one can secure any amount of cryptocurrency without the approval of any bank or government — foreign or domestic. Billions of dollars can be safely secured in a string of words. Nevertheless, without privacy, bitcoiners will always be vulnerable to what is commonly referred to as the ‘$5 wrench attack.’

Wrench attack cartoon

A ‘wrench attack’ can be performed by not just an intruder, but also a hostile government threatening prison or even death. Privacy/anonymity is the first layer of protection against this threat.

As addressed previously, blockchain analysis tools and stringent identity requirements for cryptocurrency exchanges are eroding bitcoin’s privacy. If this trajectory continues, privacy at the protocol layer with Zcash may become the most viable option for a truly private and seizure-resistant ‘Swiss bank account’ in the 21st century.

Informal economy

In the history of money, citizens and participants in the global economy enjoyed the ability to transact privately in the form of precious metals and physical cash. In just the past two decades, the number of global digital transactions processed by financial institutions has exploded. In Sweden, nearly 80% of the population uses a credit/debit card or mobile apps for payments as it accelerates toward a ‘cashless society’. For many businesses, physical cash is no longer a payment option. In many ways, this is a convenient and welcome progression. Digital transactions offer numerous benefits, such as access to larger amounts of capital than can be carried in physical cash, some safety from theft, faster transactions and remote payments. The convenience of digital payments comes at a price though — privacy.

The ever tightening controls on financial transactions threaten fundamental assurances of participation in free trade and commerce without fear of monetary, economic or other physical repercussions from transactional information disclosure. As the right to transactional privacy is degraded, the ability for citizens to wholly participate in free trade is sacrificed.

Street vendors in India

Increasing regulation and government restriction on free trade resulted in what is known as the ‘informal economy’. The informal economy is a diverse collection of economic activities, enterprises, jobs, and workers that operate outside the purview of the state. The black market or shadow economy is a single sector of this informal economy. The informal economy, however, is also comprised of less ominous sounding markets including street vendors that sell food, clothing, mobile phone minutes and other digital/physical goods and services. While this may be difficult to appreciate in first world countries, in emerging and developing countries, it is far more apparent. It is estimated that street vendors and home-based workers alone account for upwards of 10% to 15% of total urban employment. These vendors operate with minimal, if any, government oversight. Although global estimates vary greatly, it is estimated that nearly 2 billion people are employed in the informal economy and accounts for 10% to 30% of the global GDP.

The persistence of the informal economy is threatened in an age where cash is rapidly extracted from society as digital transactions increasingly dominate commerce. Most recently, in a sudden dramatic move, India removed the 500 and 1,000 rupee banknotes from circulation in 2016. This forced anyone storing wealth privately in these notes to register with banks in order to exchange old notes for new legal tender. In an economy that operates largely in cash, this was an aggressive attempt by the Indian government to curtail participation in the informal economy. No doubt, participants in the informal economy will seek alternative options as states become increasingly aggressive.

Cryptocurrency could be that alternative. Over time, as the global user base becomes more comfortable operating within the cryptocurrency economy, it may become possible to make purchases and transact entirely within this ecosystem.

The use of bitcoin within the informal economy, and more specifically within dark markets, was one of the first markets that gave bitcoin utility. Unsurprisingly, this market is excluded from most investment theses. While there is an obvious propensity to distance bitcoin from negatively perceived narratives such as dark markets, there is still an obligation to address the entire value proposition of cryptocurrency as an investment. The reality is that bitcoin and cryptocurrencies are positioned to become ever more relevant in the informal economy. While the primary value proposition of cryptocurrencies is not limited to the informal economy, we must acknowledge the current and future role they may have within the over 10 trillion USD informal economy.

Traceability, or lack thereof, will be paramount for the adoption of cryptocurrency within the informal economy. Digital assets that carry a permanent history of transaction data could easily fall victim to a ‘tainted’ label given inspection over a significant timeline. Cash, on the other hand, carries no history. To replicate the privacy properties of cash, transaction data should not be linked to every address/account. To date, Zcash eliminates any transaction history through the use of shielded z-addresses.


Arguably the most significant challenge to the bitcoin network is user privacy. For an asset that exists outside of state control and captures value as censorship resistance, sound money, disclosure of its users’ entire transaction histories is an undeniable limitation.

Today, privacy options for bitcoin are restricted to mixing services and wallets that offer layers of transactional obfuscation and/or deniability in the form of centralized mixers and trustless wallet-based mixers. The shortcomings of centralized mixers are abundant, and include the sale of transactional history to third parties, theft of bitcoin, regulation and state seizure of assets. One recent example was the seizure and take down of BestMixer by Europol and Dutch authorities, one of the largest centralized bitcoin mixing services that reportedly processed over 200 million USD in cryptocurrencies. It is unlikely that centralized mixers will remain a long-term viable option.

Trustless wallet-based mixers, such as Wasabi Wallet, also have significant weaknesses. First, the transaction history of what addresses join the mixing service is susceptible to blockchain analysis. This means that it can be determined if tainted bitcoins enter the service with a chance of redistribution to non-nefarious addresses. This may be concerning to law-abiding users who are seeking transactional privacy, but are not interested in dramatically upping the stakes by potentially mixing their bitcoin with government sanctioned bitcoin addresses, such as the OFAC-sanctioned addresses of two Iranian residents. Secondly, the ability to truly anonymize transactions within mixing services is questionable. For example, it may be possible for malicious parties to participate in the mixer in a way that de-obfuscates transactions, a reported concern with Wasabi Wallet.

Furthermore, with continual advances in blockchain analysis software, it is possible that transactions mixed today could be de-anonymized at a future date.

Thirdly, as transaction fees rise, mixing services and wallets become increasingly more expensive, eventually making privacy unaffordable. Earlier this year, Adam Ficsor, the leading software engineer for Wasabi Wallet, openly stated that rising transaction fees on bitcoin will eventually price-out privacy on bitcoin’s main chain.

Moving beyond mixing services, there are a few cryptocurrencies that offer privacy at the protocol layer, which include Monero, Grin and Beam. Monero utilizes ring signatures to conceal both the sender and recipient addresses along with the amount transacted. Grin uses a multi-faceted approach to privacy, including Confidential Transactions, Dandelion Relay and Cut Through to help obfuscate IP leakage and cut-out inputs and outputs from the blockchain as they are being spent. The general consensus within the crypto community though is that the Zcash cryptographic scheme is the superior technical protocol when using z-addresses. In a podcast with Laura Shin on Unchained, Riccardo Spagni of Monero stated,

“Zcash also does all of these. It also focuses on the first three pillars that Monero focuses on, and it does so in, you know, like, in terms of obscuring where transactions are going to, in terms of obscuring the transaction amount, it has the same strength, I guess, is probably the best way to describe it, when it comes to how private it is. The only aspect where it is much stronger is in the hiding the transaction graph, so, where transactions are coming from.”

Later in that same interview, Riccardo Spagni addresses Grin and Beam, which are developed on the MimbleWimble protocol. “At Monero, we’re interested in MimbleWimble not as a base layer, but as a sidechain, because whilst it has weaker privacy than Monero, it has much stronger scalability…”

Utilizing zero-knowledge proofs, the cryptographic scheme of Zcash offers superior privacy. It is no surprise that the software development teams of an ever growing number of projects are looking to implement Zcash’s zero-knowledge cryptographic scheme into their own projects (e.g. Ethereum, Tezos, Quorum and Ren).

State of the Market

Currently trading at ~44 USD, ZEC is near its all-time-low. ZEC has admittedly been one of the worst performing large cap assets in 2019, and is approaching meme status on Crypto Twitter.

Cryptocurrencies with high inflation perform notoriously poorly in bear markets. With a rate of inflation between 80% and 36% since its all-time-high back in January 2018, Zcash has seen a higher rate of inflation during this time than any other large cap cryptocurrency. This relentless emission of Zcash likely exhausted early appetites for Zcash during the bull market of 2017, where investors afterwards watched their investment lose 95% of its value.

There may, however, be a fresh influx of capital interested in investing in Zcash. Many technical indicators suggest that bitcoin is in an early bull market. In 2019, after a precipitous 84% correction from all-time-high, bitcoin recovered from 3200 USD to surpass 10,000 USD, forming a golden cross between the EMA50 and EMA200 on the daily chart back in April and on the 3-day chart in July. Even some of the most steadfast bears calling for bitcoin under 4,000 USD have reversed their projections to bullish. Historically speaking, bitcoin leads the market, drawing fresh capital flows to the rest of the cryptocurrency market.

Lastly, we cannot neglect the fact that it is just over a year before Zcash’s first halving, where inflation in October 2020 will be only 12.5%, a significant decrease from today’s 36%. The timely coincidence of Zcash’s first halving in an early cryptocurrency bull market could result in demand for ZEC vastly outpacing supply.

Come regulation or revolution, Zcash will be there

It is very possible that bitcoin remains the dominant cryptocurrency and goes on to capture trillions of dollars of value to become the largest global reserve currency. If this comes to pass, we hope the result is a freer world with less global conflict and greater opportunities for all. The path to this reality is more peaceful if bitcoin is private and bitcoiners are able to retain financial privacy from both the state and public. If state authorities ever push too hard against financial privacy though, the most private cryptocurrency in existence is here — Zcash.


The managing partners of Blocktown Capital own Zcash and bitcoin. We do not endorse or recommend any investment action in Zcash. This document should not be regarded as investment advice. These views are those solely of the managing partners of Blocktown Capital and do not represent the views of the Zcash Foundation or Electric Coin Company.