Understanding Zcash (ZEC) And Its Advanced Privacy Features

Understanding Zcash (ZEC) And Its Advanced Privacy Features

Talk of delisting privacy coins has Zcash holders and investors looking for news, statements and other developments that will give them some indication of how the market is going to break. An effort to understand the fundamentals of Zcash and other privacy coins has taken a back seat to talk about compliance, regulation and privacy coin listings on major exchanges. Investors know that rumors can turn into profit if they make the right move at the right time, but long-term holders care less about spot prices and more about the very fundamentals that are being overlooked. Ultimately, those long-term holders might have a point when it comes to privacy coins in general and Zcash in particular. To understand why, it is necessary to delve into understanding Zcash (ZEC) and its advanced privacy features, and their influence on the international financial system.

Zcash privacy features: how do they work?

Zcash offers selective privacy features. Users must be careful about shielding or de-shielding their transaction information. Zcash users have access to either z-addresses, which are private, and t-addresses, which are transparent. Z-addresses allow users to shield transaction information on transactions while t-addresses have the same level of disclosure that any standard Bitcoin address has.

To transact, Zcash users must choose between 4 different types of transactions:

  • Z-address to z-address
  • Z-address to t-address
  • T-address to z-address
  • T-address to t-address

Therefore, to shield transaction information, users should use a z-address to z-address transactions. If they have funds on a-address and they send the funds to a z-address, there are enough assumptions that blockchain analytics experts can safely make about the information of that transaction. However, any subsequent transaction will be shielded if it goes to another z-address.

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Regulation and Zcash privacy features

Given these features, it is easy for an exchange to be compliant with certain aspects of KYC/AML requirements while keeping Zcash listed, which might not be the case with other privacy coins like Monero. For instance, an exchange can ban funds coming in from z-addresses, or from t-addresses that have a number of z-address transaction factors related to them. Although blockchain analytics will be more limited than on the Bitcoin blockchain for instance, it would still be better than the level of understanding exchanges might get from the data on Monero transactions.

Exchanges could also compel users to disclose where the funds came from if they come from a z-address. Proof can be fabricated, but that would make it a crime and there would be an identifiable person behind it – provided that KYC requirements are strong enough. 

The Regulatory Conundrum

Nevertheless, if authorities decide that there must be a more stringent control on funds in any given exchange, these disclosure features that Zcash (ZEC) offers might not suffice. If that is the case, then those authorities will have to recognize that other regulated assets have been used to commit crimes no matter how stringent the regulation. In fact, regulators have a less than stellar record when it comes to preventing crimes like money laundering, tax evasion, drug trafficking and even terrorism through financial regulation:

  • Drug lords move cash from the US to Mexico on a daily basis. That cash goes into the banking system eventually 
  • It is easy to buy pre-paid cash cards without identifying oneself, or even Amazon or iTunes gift cards, which become vehicles to launder money
  • Even terrorists have had their way financing operations through the use of regulated assets like fiat and oil in a post 9-11 world

Zcash (ZEC) provides more transparency than cash

Zcash arguably provides more transparency as it is than cash and other regulated assets that are used to commit crimes on a daily basis. Zcash’s blockchain can be analyzed and there are t-address transactions that can be traced. But beyond Zcash privacy features, regulators, investors and everyone else must understand a critical point that cannot be overstated: Zcash’s market cap and its adoption rate are so low that even if malicious actors would like to use it widely to commit crimes, they wouldn’t be able to. Zcash’s price has plummeted since it was launched, and it is currently down more than 95% from its initial price. It is hardly an asset that shows the kind of usage necessary for large scale criminal activity.

If criminals insist on using Zcash’s privacy features to their advantage, even if governments impose stringent regulation that forces major exchanges to delist Zcash and other privacy coins, they will not be able to get it delisted on every single exchange around the world. Therefore, malicious actors will be able to use Zcash and exchange it for Bitcoin on exchanges that are not compliant, bringing those coins into a regulated exchange to turn it into fiat later.

How do these fundamentals affect investor decisions?

Investors who understand these fundamentals might turn their attention to other market indicators. Zcash privacy features have been largely irrelevant when it comes to the asset’s adoption so far. Regulation should not be a game-changer either, especially because the Zcash Foundation is working hard to comply with regulatory requirements in different jurisdictions. 

Long-term Zcash holders, on the other hand, should be thrilled to know that their transaction information can be shielded. They should understand that the fundamentals make Zcash a good alternative in the long run when more governments limit the use of cash and the ability to censor transactions within the regulated banking system grows. The privacy features that Zcash offers, are a welcome development in an international financial system that is moving towards more surveillance measures, censorship and less privacy. Now with your understanding Zcash (ZEC) and its advanced privacy features, are you keen to enter the market of privacy coins?