Where Does Crypto Stand When it Comes to Privacy?

By Jonathan Zerah, Head of Marketing at Status.IM

Sometimes the fear of loss is a more powerful motivator than the prospect of gain. Recently, social media platforms have announced new privacy policy changes that ultimately expand big tech’s access to private usage information and metadata, thus causing confusion, with many users now in search of private communications apps.

There has been a massive influx of encrypted chat interest and alternatives to centralized systems. But how well understood is this phenomenon overall? Are there certain aspects of privacy that matter more than others? Or is it simply situational? For a group of people who value self-governance over their private information, it has become increasingly apparent that the crypto community is acutely aware of these issues.

Seeking Pseudonymity over Privacy

Private communications apps like Telegram and Signal, once fringe, have suddenly become very popular, increasing by tens of millions of users in just weeks. For some, this is a new move to protect their information from prying eyes, but within the crypto world, using encryption is a common practice. We know the crypto community values privacy because we see people who use encrypted apps like Telegram and are outspoken about centralized authorities having too much control over personally identifiable information (PII). But there also seems to be a unique breakdown of these beliefs and practices when it comes to decentralized finance.

In blockchain and crypto communities, such as Ethereum and Stacks, users claim privacy as a critical feature of the decentralized ethos. For instance, those in the Ethereum community often use decentralized financial (DeFi) applications because they are autonomous, self-executing smart contracts that interact with user-owned data instead of interacting with centralized, financial services. However, this same DeFi community openly transacts on Ethereum, a public blockchain which preserves transaction history forever.

The notion of self-governance has long been reported as a big draw for crypto enthusiasts using dApps and Web 3.0 applications. But crypto communities still use centralized, mainstream applications for community building and coordinating governance, which does not keep privacy to a high standard. With few options available, the crypto community is left to create their own social privacy tools to interact and connect on their own terms. From what we can see, people are actually looking for pseudonymous connections, interactions, and transactions more often than they pursue total anonymity.

From Cypherpunk Beginnings

Early crypto communities like the cypherpunks pioneered what it means to create private communications. However, ease-of-use never caught up with the call to action for private communications until recently.

While different, privacy and security connect at the hip. So, a good proxy for privacy is security. Security precautions like 2FA usage are slowly increasing for the general public (reaching just over 50% in 2019). This behavior bodes well for account security but quantifying privacy overall remains difficult precisely because of its nature of secrecy.

From personal observation, crypto users often prioritize security features because they preserve the ability to maintain a level of privacy and protect crypto holdings. This shift often occurs as users migrate towards taking ownership of their holdings and communications. By removing the centralized third parties, users have the choice to take ownership of their communications and crypto assets. As the migration from centralized ad-driven services ushers in private chat apps and DeFi, understanding what new users want will help drive long-term adoption.

Privacy and Financial Inclusion

In just over a year, DeFi has exploded from less than $1 billion to over $77 billion in total market capitalization, marking an ethos-based trend with financial staying power. DeFi enables banked, unbanked, and underserved communities to interact with non-traditional financial services in a way that is both public in nature, yet provides a level of pseudonymity to end users.

While practical protections in theory, in reality certain regulatory requirements restrict marginalized communities who may not have access to personally identifiable information (PII), such as birth certificates or drivers licenses. By extending the ability for persons without documents to gain financial access and communicate with peers in a pseudonymous manner, privacy-focused DeFi gateways can help onboard underserved portions of the population in a meaningful way.

For instance, using multiple pseudonymous identities can enable users to register a wallet or ETH address for regulatory compliance and use other pseudonymous addresses alongside it for interacting with friends and extended communities. In this scenario, a regulatorily registered ETH address acts as a store of wealth, distinct from a store of reputation address, while pseudonymous accounts act as separate ways of speaking under a different identity in decentralized apps (dApps) without necessarily associating with your real identity directly. This construction provides a level of pseudonymity that complies with the law and protects personal privacy at the same time.

Open Questions

To date, the blockchain industry has paved the way for privacy but we need to continue this trend and ask newcomers critical questions. In order to develop a fuller understanding of what’s desired vs. what’s possible, it may be prudent to ask the community at large critical questions, including, when is privacy the primary priority? When interacting with privacy tools, what features matter most to you? What privacy measures do you use to keep your digital assets and communications private?

Understanding this range of open questions and concerns can lead to more comprehensive solutions. If pseudonymity is a primary desire for crypto communities, then the focus of the industry should be on securing pseudonymous communications. If private access to decentralized applications and DeFi is wanted, solutions should be built to accommodate these desires. If blinded transactions or transactions that use mixers and zero-knowledge proofs prove desirable, these features should be incorporated.

Centralized authorities’ complete control over PII has brought into question how crypto communities value privacy. What needs to be evaluated is how these communities can protect PII while still enabling open access to decentralized applications and financial tools while adhering to local law and regulation. When privacy goals can be more fully evaluated, crypto communities will be able to interact with products that fit their needs.

About the author

Jonathan Zerah joined Status in 2017 to lead marketing and communications. Before Status he worked at leading digital agencies crafting campaigns, activations, and building digital products for global companies including Nike, Samsung, Audi, and Google.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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