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Monero and the complicated world of privacy coins

Monero is known for being one of the most common cryptocurrencies seen in illicit transactions, but its development community paints a different picture of the privacy coin.

Monero is a cryptocurrency like Bitcoin, but where Bitcoin zigs, Monero zags.

Initially released in 2014, Monero (also known as XMR) is a type of cryptocurrency often referred as a "privacy coin"; it has been built first and foremost with privacy in mind. Compared to something more public and traceable like Bitcoin, Monero (currently valued at approximately $137 USD per coin) uses a technology suite to obscure transactions and is generally considered far more "anonymous" than its more well-known counterpart. It also has a substantial development community and maintains a strong base of privacy advocates and cypherpunks.

And yet, what Monero might be best known for in the general public is its now-common usage in illicit transactions. The currency is accepted on many large darknet markets alongside Bitcoin, and one of the largest dark web drug markets, the now-defunct White House Market, exclusively facilitated XMR transactions starting in late 2020.

Perhaps because of this, some major cryptocurrency exchanges like Coinbase do not offer Monero transactions. Meanwhile, U.S. regulators have taken notice of difficult-to-track cryptocurrency like Monero, putting the privacy coin in a precarious position.

A privacy coin

In more technical circles, privacy coins like Monero are referred to as anonymity-enhanced cryptocurrencies (AECs). Monero is the most popular and valuable AEC, but other top coins include ZCash (ZEC), Oasis Network (ROSE), Secret (SCR) and Decred (DCR).

Monero's official website explains that the coin is built with three core values: security, privacy and decentralization. The reason for being so privacy-focused is explained as follows:

"Monero takes privacy seriously. Monero needs to be able to protect users in a court of law and, in extreme cases, from the death penalty," the site reads. "This level of privacy must be completely accessible to all users, whether they are technologically competent or have no idea how Monero works. A user needs to confidently trust Monero in a way that this person does not feel pressured into changing their spending habits for risk of others finding out."

Monero XMR website home homepage
The homepage of The Monero Project's official website.

Justin Ehrenhofer, who organizes the Monero Space workgroup, said Monero's privacy technology gives the coin a level of fungibility (meaning all transactions are treated equally, like cash) lacked by less private currencies.

"By just providing a very basic level of privacy protection to everyone, it means that you can, in practice, treat Monero as fungible, which helps with commerce," he said. "So when you see people actually accepting cryptocurrency payments, Monero is really high up there."

The Monero site lists two directories which in total contain over 1,000 vendors where XMR is accepted. Some of the primary vendor types include those offering VPNs, cloud storage and web hosting, but other vendor types include gambling and cryptocurrency-themed merchandise.

While other privacy coins like ZCash have found some popularity, Monero has become the most popular among them.

David Décary-Hétu, an associate professor at the University of Montreal who researches illicit markets, believes XMR's technology offers a key role.

There are other coins that can provide some level of privacy, but for some reason, [Monero is] the one that probably has the best crypto and the best means of hiding transactions.
David Décary-HétuAssociate professor, University of Montreal

"It has been tested. There are other coins that can provide some level of privacy, but for some reason, [Monero is] the one that probably has the best crypto and the best means of hiding transactions," he said. "It just works."

Monero's technology suite includes RingCT (a means of hiding transaction amounts), Dandelion++ (used to anonymize peer-to-peer connections) and automatic stealth addresses for each transaction (to ensure only the transaction sender and receiver know a payment's destination).

A factor in Monero's technological competence is almost certainly its development community, which is one of the largest in cryptocurrency.

Monero's development community

The development community that supports Monero is broken into various workgroups with roles that include infrastructure, community, development, regulatory compliance and more. Ehrenhofer's Monero Space workgroup, for example, provides a number of services to the coin's community.

Ehrenhofer, who joined the community in 2016, explained that the closest thing to leadership within Monero is the Core Team, which comprises seven members who ultimately decide what code is and isn't merged. They maintain the coin's infrastructure and repositories, as there are some limits to how decentralized something like a cryptocurrency can be.

However, the Core Team are often not the advocates for any technical changes, Ehrenhofer said, and the process for making changes is distributed across various workgroups and ecosystems.

"Normally, [a protocol change] starts in the Monero Research Lab, and you'll have a bunch of discussions there. People pitch ideas, talk about that for a while, and then it'll get moved to a development workgroup, where we'll talk about the actual implementation and all sorts of things like that. If there needs to be external work, where money needs to be raised for an audit or something, they'll talk to a different workgroup," Ehrenhofer said. "It's very, very distributed."

Despite its comprehensive development structure (which, again, includes a workgroup dedicated to compliance) and a seemingly noble quest to create a private, fungible coin for those who advocate for or need that privacy, one of the most well-known uses for Monero is in illicit transactions.

Cryptocurrency on the dark web

Due to its privacy-focused technology and popularity, Monero has become a cryptocurrency of choice for darknet markets in recent years. For example, two of the most active markets, The Versus Project and ASAP, accept Monero. Both offer an array of illicit goods, including hard drugs, malware, stolen accounts and more.

The Versus Project market darknet dark web
The 'Botnets & Malware' section of dark web market The Versus Project shows which vendors accept Bitcoin and Monero. All but the bottom listing accept XMR.

Bitcoin is still on top, however. Décary-Hétu said that even though Monero is rapidly gaining market share, it will likely lack the market power of Bitcoin "for a very long time." Even though it's not difficult to exchange Bitcoin and Monero, he said, it adds another step and more fees.

"If I'm selling a piece of ransomware or cocaine on the dark web, I want to get $100 in my pockets at the end of the day. But how do you get that when the price of Bitcoin just crashed? It goes up, it goes down, and you have all these commissions, all these fees, and it becomes very difficult to predict how much money you're going to have," he said. "It's yet another barrier for entry and barrier for purchase, which means that the sales are going to decrease because of that."

In addition to the darknet markets, XMR has also become a rising star in ransomware. Experts say ransomware actors are increasingly demanding ransom payments in Monero, and some even charge less if a victim pays in the coin.

The main consequence of these emerging illicit use cases has been clear: more attention from regulators.

ASAP market darknet dark web
A checkout page on the ASAP darknet market, showing the total cost of a listing offering WannaCry ransomware in Bitcoin and Monero.

Consequences for exchanges

Several countries, including Japan, Australia and South Korea, have put severe regulatory pressure in recent years against cryptocurrency exchanges offering privacy coins, resulting in many delisting the coins in such territories. While the U.S. has not put as much pressure on exchanges, a number of major exchanges like Coinbase do not facilitate Monero exchanges.

Coinbase did not respond to SearchSecurity's request for comment.

Binance, the largest cryptocurrency exchange in the world, does allow Monero transactions. [Editor's note: An earlier version of this story said Binance supports Monero transactions in the U.S., but, the exchange's U.S.-based partner, does not offer Monero support.] Binance provided a statement when asked about its support for the privacy coin.

"Binance strives to be the best crypto exchange and provide our users with choice," the spokesperson said. "When deciding which coins to list, the listings team considers many aspects including: the number of users, a coin's trading volume, token economics and so on." 

Asked about the exchange's thoughts on regulatory pressure, the spokesperson said the following:

"Binance believes regulators are right to pay attention to the potential risks of privacy coins; more regulatory clarity on how privacy coins are treated would be a welcome development for the whole crypto industry. Binance focuses on keeping users safe with measures such as mandatory KYC [know your customer] and has strict AML [anti-money laundering] protections in place. Our security team closely cooperates with law enforcement agencies around the world to support their investigations, which has previously included identifying relevant Monero transactions."

The U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) regularly mentions AECs like Monero in its advisories and documentation, and in 2020, the IRS awarded Chainalysis and Integra $500,000 contracts to develop Monero tracing tools, with $125,000 available if either company succeeded.

The current status of Monero tracing remains in question. Cryptocurrency analytics firm CipherTrace filed two patents in 2020 for Monero tracing technology and released "tracing virtualization" tools last summer for qualified government agencies and financial institutions.

Chainalysis, meanwhile, did not share the results of the work resulting from the IRS contract because, as Chainalysis global public sector CTO Gurvais Grigg told SearchSecurity, "as a policy we do not discuss details of any Monero tracing capabilities we may have."

In a separate series of questions in November, SearchSecurity asked Grigg about the overall traceability of Monero. He said privacy coins lie between cash -- the most difficult to trace -- and Bitcoin.

"It's very hard to develop total privacy. It's not necessarily the case that privacy coins are completely anonymous. It's also worth noting that privacy coins -- like other cryptocurrencies -- operate on an immutable ledger," Grigg said. "This means evidence of criminal transactions will exist forever. Should someone find a way to view privacy coin transactions, any criminality found can be retroactively investigated and potentially prosecuted. We've seen that with cases involving Bitcoin from many years ago, including activity connected to the Silk Road."

A familiar story

Monero represents just one example of technology being inadvertently used for ignoble purposes.

Contraband, for example, has been sold on the internet for decades by this point. Tor, the main open source software used to access the dark web, was created by the U.S. Naval Research Laboratory to protect U.S. intelligence. And the first widespread use of Bitcoin -- originally created as a proof-of-concept for a peer-to-peer currency system -- was on black markets like the Silk Road.

Guillermo Christensen, law firm partner at Ice MillerGuillermo Christensen

Guillermo Christensen, a partner with law firm Ice Miller who specializes in cybersecurity incidents including ransomware, said while he doesn't advocate for or against increased cryptocurrency regulation, he doesn't support a ban simply due to its use in criminal operations.

"I would not favor banning cryptocurrency over things like ransomware because we still don't really understand how [cryptocurrency] can be a force for good. I think there are a lot of strong arguments that it can be, especially in places that have very poor banking systems," he said. "My default position is to let innovation work its way out. And then assess it. Don't go and kill something off just because you don't understand it."

However, Sophos senior security advisor John Shier argued some additional regulation may be needed.

"I don't know that I have an immediate aversion to privacy coins. I do, however, feel like there needs to be some regulation around it," he said. "I think that there needs to be some guardrails put up. Ransomware is really thriving because of the global lack of regulation around Bitcoin, specifically in some crypto coins. It's just too easy. Russian ransomware criminals don't have Coinbase accounts. They have accounts on exchanges that don't have KYC and AML. And they don't really care about where the money goes to and from."

Décary-Hétu called privacy coins "essential," and said they represent a new reality for law enforcement to adapt to.

"I think they're essential. I think they're great. I think we should embrace them. There's no reason why we should leak information about who we send money to. These are very interesting, and law enforcement will always complain that these new technologies are going to prevent them from doing investigations," he said. "Is law enforcement going to need to adapt to these new reality? Probably yes. If you have these privacy coins, you're going to have to work a little bit harder, and you're going to have to develop new methods to investigate people. But I don't think they really change the balance of powers between the offenders and law enforcement. There's nothing to be afraid of."

Alexander Culafi is a writer, journalist and podcaster based in Boston.

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