Headline:  What Is a Cryptocurrency Privacy pool?

Body:  I have been writing about cryptocurrency issues for a while now, and the debate that I come back to, again and again, is transparency v. anonymity.  On one hand, all of the transactions are transparent, radically so, as they are all on the publicly distributed blockchain.  And yet, the identifications of the wallets involved are known, but the people behind these wallets are usually not known.  Conceptualizing that this duality can exist is tricky given my traditional financial education.

The paper suggests a protocol known as “Privacy Pools,” which can act as a regulation-compliant tool aimed at improving the confidentiality of user transactions.

How do Privacy Pools work?

OK.   A privacy pool is not a pool that is completely shaded by palm trees and other vegetation where people can go sans clothes, as they like.(Ever heard of a “naked option”?)    What it is, is a pool of money that is cryptographically separated from other pools of money, and there is some secret and verifiable attribute that will identify the pool and the owner, without pinning a name to the owner.  I realize this is confusing, so, let’s take an analogy here.   When I was 6 and my sister was 7 or 8, my mom made us memorize a password.  (It was “airplane” as my Dad could fly anything with wings.)  So, whenever somebody needed to pick us up at school, and we didn’t know them, they would use this password.  So, this is an attribute that would only be known by a trusted person, and we wouldn’t have to know them at all.  As soon as they told us “airplane” we knew they were OK, and could safely go with them.    This is essentially what we are talking about here.  

Then, the reader might read about “association sets” and get confused again.  Association sets are a series of wallets within the pool, which have been identified as “good.”  Going back to our example above, the “association set” we might find is that our neighbors and friends from church are within our “pool” and have been pre-selected as “good” meaning that my sister and I could accept rides from them without using a password.  I might not know their names all the time, but, I had seen them before in a trusted place.

So, why are Privacy Pools something to fight for?  Why might they legitimately exist?

Everybody knows that employers ask (sometimes with some leverage) employees to never speak about salaries.  But, it is known that some employees have asked that they get paid only in cryptocurrencies.    Using this method, employers can use cryptographically secured transfers directly from a wallet owned by the company to a wallet controlled by the employee.  If a person doesn’t want their salary remarked upon by others, this use of a privacy pool might be something worth fighting for.

Privacy pools might be just a short-term solution to a problem demanding long-term thought.    Let’s say you’re on a cruise ship that runs aground.    You fall off into the water, and you first look for anything floating to pull you up and out of the water.   Once on something dry-ish, you look around to see if you can find a rescue boat.    Once aboard a small boat, then you can look for land or a larger ship.  To rescue yourself, you have to find that one piece of floating furniture first, to help you survive, and privacy pools might be that thing for cryptocurrency.  For this reason, they might be something worth fighting for.

The Verdict

In readings for this entry, the word I keep running into is “criminality.”    To be clear, nobody wants cryptocurrency to make it easier to launder money or send money to terrorists.  But, the definition of each could be set to limits within individual countries, that are so narrowly defined as to be self-serving, and this is not good either.  For instance, what if Russia were involved, and altered their definition of money laundering as “money sent to political parties outside the Kremlin”  Russia is certainly a powerful nation, are the developers of cryptocurrencies now hackers working for Russia?  I know that it is annoying to read  a law, and the first 60 pages are definitions, but, remember the bumper sticker wisdom.  LET’S EAT, CHILDREN is markedly different from LET’S EAT CHILDREN.  Definitions  and technicalities matter, and that is why it is so difficult to have several individual political power structures (think countries of Europe) sharing one currency (Euro).  This too will take some time to iron  out.




Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.


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