Will Zerocash Re-Ignite The Anonymous Payments Debate?

In March this year, co-author of Zerocash: Decentralized Anonymous Payments from Bitcoin, Medars Virza, spoke at the MIT Bitcoin Expo. According to Virza, Zerocash is a protocol that seeks to improve bitcoin’s privacy and anonymity, and has the ability create a truly decentralized and anonymous payment system.

“Bitcoin is not really anonymous. If you look at a very simplified example of a blockchain, you see ‘address from’, ‘address to’, ‘amount’, [and] how many bitcoins. And all of the transactions are going to be there forever.”
— – Medars Virza

Privacy is topic often discussed in the bitcoin industry. The CEO of digital currency exchange Shapeshift, Erik Voorhees, gave an interview on the topic around the same time, at the Texas Bitcoin Conference in March this year.

“I think the issue of financial privacy is absolutely fundamental, and the industry needs to stand up and defend it in the same way that the Internet industry — to a large extent — has defended various types of Internet privacy and speech.”
— – Erik Voorhees, Shapeshift CEO

Voorhees is recognised for being rather vocal regarding his stance on an individual’s right to personal and financial privacy. Later in the year, when the BitLicense was first introduced to New York, Voorhees pulled Shapeshift’s services from the US state, and encouraged other digital currency companies to do the same.

“For some reason, people are generally cool with privacy when it comes to your personal life. If you’re in your home with your doors locked and your shades down, people don’t assume you’re doing something evil. And yet, if you want that same privacy when it comes to finances, people assume you’re doing something evil. Not only will they assume that, but they will often say that you’re doing something illegal and you need to be prosecuted for it. This is a terrible hypocrisy and something befitting of North Korea or China — certainly not something befitting of the United States of America.”
— – Voorhees

Regulators have also weighed in on the conversation, repeatedly stating concerns over bitcoin’s use in illicit activities, such as money laundering. Former Superintendent of the New York Department of Financial Services and architect of the the BitLicence, Benjamin Lawsky, stated:

“The emergence of digital currency and other new forms of payments technology represent an important test for financial regulators such as NYDFS. We have a responsibility to regulate new financial products in order to help protect consumers and root out illicit activity. However, by the same token, we should not react so harshly that we doom promising new technologies before they get out of the cradle.”
— – Benjamin Lawsky

Zerocash is one of those new technologies, a protocol that is designed to provide a privacy-preserving version of Bitcoin. “The main difficulty with money laundering does not typically lie in how to privately transfer money from one person to another, but in how to make the eventual income appear legitimate: for regulatory purposes, one still has to present credible sources to justify the income, regardless of the technical means by which it was transferred.”

“Bitcoin is increasingly subject to regulation that narrows the gap between it and traditional financial systems. For instance, Bitcoin exchanges are required to identify customers conducting sufficiently-large transfers to/from traditional currencies. Presumably such regulations would apply to Zerocash exchanges as well.”
— – Zerocash

This new protocol has both anonymous coins, dubbed zerocoins, and non-anonymous ones, which are called basecoins. Users can convert from basecoins to zerocoins, send zerocoins to other users, and split or merge zerocoins they own in any way that preserves the total value.

The mixing service provided by Zerocash exchanges the currency for anonymous receipts, which also act as transferrable coins. These coins/receipts are like blank envelopes full of cash, but they have the ability to be divided, merged, or can be paid to other people. Matthew Green, co-author of Zerocash: Decentralized Anonymous Payments from Bitcoin, believes that the protocol will be able to “do everything you ever wanted to do in a completely anonymous fashion,”

“The correctness of the transaction is demonstrated via the use of a zero-knowledge proof,” states Zerocash. “The only information that makes it into the [public ledger] is the fact that a transaction occurred. Should you want to make a traceable purchase, you can always redeem the receipt and spend the equivalent amount in the base currency,” adds Green.

“Even without the ‘help’ of Zerocash, criminal users can already anonymize their activities via existing financial systems (e.g., by using cash) or Bitcoin (e.g., by using mixers). Thus, the introduction of yet another method to anonymously move money is of little consequence.”
— – Zerocash

While “yet another method to anonymously move money” may be of little consequence to regulators and law enforcement, the digital currency industry was instantly enamoured with the new protocol.

The first coin to provide built in support for the I2P darknet, [Anoncoin], announced plans to implement the technology last year. When the Zerocash developer, Gnosis, announced there would be delays releasing a working version late last year, Anoncoin suffered a massive price crash. “I underestimated the scope of this project and set too ambitious of a schedule for it. Zerocoin will be probably be ready within 2-3 months, but I don’t want to give any more release dates (either for testnet or mainnet) until I am very, very close. I will not make this mistake again. I will continue to give status updates, and I have made tremendous progress in recent weeks,” Gnosis said at the time.

“We oppose all forms of censorship and have a long history in leading internet privacy initiatives. Whether you are a journalist, activist, or dissident, or just someone who cares about privacy, Anoncoin is for you.”
— – Anoncoin

Developers on Zerocash have been quiet ever since, and the industry was starting to question whether the project is still afloat. Green recently announced on twitter that the project was still going ahead. “A few people have asked about Zerocash. I’ve been keeping quiet about this because we’re working hard, not because it’s been dropped.”

Green went on to state that the project should be ready by February, and official public announcements are not far away.