Crypto privacy is in greater jeopardy than ever before — here’s why

Many cryptocurrency hacks are targeted and deliberate, making them extremely dangerous if not addressed.

Despite the latest technology, the world has yet to crack the code for privacy and security online. But that isn’t the only big problem we need to worry about.

Hackers and robbers are tricking innocent users into giving up their private information as society becomes increasingly digital — and virtual currencies have a role in all of this.

Cryptocurrencies smashed records in 2022, with the market topping $2 trillion for the first time ever.

And while this has been greeted with excitement by current investors, it’s made others more wary.

Why? Because as the asset class grows, it becomes more appealing to malicious actors. And for evidence of this, you only need to look at the growing number of users being targets of cryptocurrency robberies.

The big question is this: if these crimes against individuals are so dangerous and only likely to increase as the market expands, why is the value of privacy still being overlooked by the world at large? The answer is a lack of clarity around why security and privacy matter — and how they are interlinked.

Let’s imagine an investor has a considerable crypto stash — 50 BTC — which at $30,000 per coin amounts to $1.5 million.

Their wallet would inevitably become a target for hackers and robbers, and that’s why privacy is so vital. Nobody needs to know that millions are being held in that investor’s wallet.

Security is a crucial tenet if adoption levels are to continue growing, but it’s often overlooked. Precautions and robust measures are needed to give investors a sense of privacy as security — and prove to newcomers that digital assets do have value over fiat currencies.

Related: Identity is the antidote for DEXs’ regulation problem

The history of crypto privacy

A few years ago, the world underwent a privacy currency boom. It was 2016 and 2017 — a time when this was new and unlike anything most of us had ever seen before.

This popularity was quickly overshadowed by decentralized finance (DeFi) and smart contracts. The attention was so significant that the world began recognizing smart contracts as a requirement, leaving “anonymous transactions behind.”

Out of the box, smart contract transactions are not confidential, meaning anyone can access and see all the information sent and stored through this method. And although they are secure, their details are embedded on the blockchain forever.

Around the same time, the development of the Lightning Network, a Layer 2 payment protocol implemented to improve transaction speeds and Taproot, an upgrade that batched multiple signatures and transactions together for easier transaction verification, were attributed to greatly improving Bitcoin privacy.

Another contributing factor is the world at large misunderstanding “privacy technology” as a hindrance to fee stability through scaling and functionalities of a smart contract, which can only be described as a trade-off.

Few understand just how crucial privacy is for cryptocurrency assets, and even fewer recognize how much greater the stakes have become.

Related: Self-custody, control and identity — How regulators got it wrong

Why privacy equates to security

As crypto adoption has increased, the regulation of exchanges has become much stricter, specifically in terms of retention of identification data, including many addresses.

Unfortunately, this creates a single point of failure — resulting in significantly more reported cases of hacks and data leaks. These negative outcomes come down to regulation being aimed at finding adversaries in a given list of users, and the list of users not being supposed to exist on the customer list of an external adversary.

Companies that cannot afford to run a business are too busy complying with regulations that check user identity data and do not pay the cost of actually storing user identity data securely.

An accompanying concern comes down to the vulnerability in the design of exchanges to internal leaks. In a cryptography context, even one bad actor, among an “N” number of innocent persons, can effectively impact security and, therefore, privacy.

As a second major consideration, blockchain analytics and other tracking technologies have proven to be a powerful game-changer in capturing previous perpetrators of old hacking cases. Unfortunately, despite having good intentions, these same tracking tools have the potential to help facilitate targeted attacks when put into the wrong hands.

In this example, privacy, a key differentiator of decentralized assets, is quickly eliminated, underscoring the purpose of the basic infrastructure.

Related: Needed — A massive education project to fight hacks and scams

Making a case for cryptographic privacy

Privacy concerns are not new, which is why several technologies have risen to attention for not allowing privacy to interfere with fee stability through scaling — namely, the Lightning Network.

In practice, the Lightning Network assumes that users are online and can communicate with protocol participants based on online assumption. The process effectively ensures that scaling and privacy are compatible.

Together, the online assumption, when combined with zero-knowledge proof, makes it possible to enforce successful online communication, an opportunity that can be extended to an Ethereum-type smart contract. The belief is that if privacy can be efficiently attached to a smart contract, cryptocurrency users will soon recognize the importance of privacy.