Summary Privacy coins are cryptocurrencies designed to enhance anonymity for users by obscuring transaction details, hiding the sender, receiver, and/or amount information in a transaction. ZCash is now the largest privacy coin by market cap; it was launched in 2016 as a fork of Bitcoin, with privacy features built directly into its protocol. Monero is the 2nd largest privacy coin; it is known for making every transaction untraceable by default. Not all privacy solutions are standalone blockchains like ZCash and Monero, some are protocols that work on existing blockchains. In this article, we explore three major protocols in the privacy sector, ZCash, Monero, and Tornado Cash, and examine the complex regulatory landscape surrounding them. Introduction to Privacy Coins Privacy coins are cryptocurrencies designed to enhance anonymity for users by obscuring transaction details, hiding the sender, receiver, and/or amount information in a transaction. Unlike the conventional perception that cryptocurrencies like Bitcoin ( BTC-USD ) and Ethereum ( ETH-USD ) are anonymous, they are actually not. Transactions on Bitcoin and Ethereum are recorded on public ledgers and are visible to all. Skilled analysts can often uncover the real identities behind wallet addresses through tracing the transaction history to the original on-ramp step in centralized exchanges, thus linking to a KYCed user in centralized exchanges. Transacting in BTC or ETH essentially has less financial privacy than just using cash, as their entire transaction history can be traced and analyzed. Privacy-focused coins solved this privacy problem by using cryptographic techniques to hide the sender, receiver, and/or amount in a transaction. These projects implement features like stealth addresses, mixing protocols, or zero-knowledge proofs to achieve privacy. Below, we explore three major protocols in this sector, ZCash ( ZEC-USD ), Monero ( XMR-USD ), and Tornado Cash, before examining the complex regulatory landscape surrounding them. ZCash (ZEC) – Optional Privacy, More Regulatory Friendly ZCash is now the largest privacy coin by market cap; it was launched in 2016 as a fork of Bitcoin, with privacy features built directly into its protocol. ZCash’s distinguishing technology is its use of zk-SNARKs to enable shielded transactions. ZCash's privacy feature is optional. Users can choose between transparent addresses (t-addresses), which function like Bitcoin addresses (publicly showing balances and transfers), or shielded addresses (z-addresses), which encrypt transaction data on-chain. When coins are sent from one shielded address to another, the network uses a zero-knowledge proof to verify the transaction’s validity without revealing the sender, recipient, or amount. Source: Coinmarketcap As we will introduce in the next section, the 2nd largest privacy coin, Monero, uses default privacy rather than optional privacy. This has led to more regulatory hostility toward Monero. Uniquely, ZCash supports “view keys” for its shielded addresses, essentially read-only keys that users can share with auditors or exchanges to selectively disclose their private transaction details for compliance or reporting purposes. This feature means ZCash users can prove specific transactions or balances to regulators or third parties without exposing their entire history, making ZCash’s privacy more compatible with institutional and legal requirements. Currently, around 70% of ZEC supply today remains in transparent addresses, though the shielded pool has grown significantly (now about 25–30% of circulating ZEC) as privacy adoption increases. The optional privacy model makes ZCash flexible: it allows those who need transparency or auditability to use transparent addresses, while others can go fully private. Transparent supply is at 11.4 million (70% of total supply) now out of around 16.32 million total supply. Source: Galaxy Research Monero (XMR) – Privacy by Default Monero is the 2nd largest privacy coin; it is known for making every transaction untraceable by default. Launched in 2014, Monero’s blockchain conceals senders, recipients, and amounts for all transactions. Monero achieves this through a combination of cryptographic techniques. It uses stealth addresses (one-time destination addresses for each payment) and ring signatures (grouping a sender’s output with many decoy outputs) to obscure who the real sender is. In addition, Monero employs RingCT (Ring Confidential Transactions) to hide the transaction amount. Together, these features mean that every Monero transaction mixes with others and encrypts values, resulting in high anonymity for all users. This robust privacy has made Monero popular among privacy-conscious individuals, but at the same time also drew scrutiny from authorities. Since 2019, major cryptocurrency exchanges, including Binance and Coinbase ( COIN ) (which never listed it), have delisted Monero and other privacy-focused assets due to mounting regulatory pressure. Authorities such as the U.S. Department of Justice (DOJ), the Financial Crimes Enforcement Network (FinCEN), and Europol have all cited Monero as a preferred currency for dark web transactions, ransomware payments, and other illicit finances. Monero is not listed on major CEXs, including Binance and Coinbase, while ZCash is listed by both: Source: Coinmarketcap Tornado Cash – Ethereum Mixing Service Not all privacy solutions are standalone blockchains like ZCash and Monero, some are protocols that work on existing blockchains. Tornado Cash is a famous and controversial example of a privacy mixing protocol on Ethereum. Launched in 2019, Tornado Cash is a decentralized smart contract that mixes Ether ((ETH)) and other tokens to break the link between sending and receiving addresses. Users who want privacy can deposit their funds into Tornado’s smart contract “pool” and later withdraw the funds to a new address. Because multiple users’ deposits are pooled and shuffled, it becomes extremely difficult to trace which withdrawal corresponds to which deposit. The protocol uses zero-knowledge proofs to allow users to prove they deposited funds without revealing which deposit was theirs, enabling withdrawals that are unlinkable to the original source. While this powerful privacy tool saw significant usage on Ethereum, it also attracted illicit actors. According to the U.S. Treasury, over its existence, Tornado Cash was used to launder over $7 billion worth of cryptocurrency, including funds from major hacks. In August 2022, Tornado Cash became the center of a regulatory storm when the U.S. Department of the Treasury’s OFAC sanctioned the Tornado Cash protocol. After a protracted legal battle (Van Loon v. Treasury, funded by Coinbase), a U.S. appellate court in late 2024 overturned the sanctions. The court ruled that Tornado Cash’s immutable smart contracts could not be considered property or a controlled entity; once deployed, nobody (not even its developers) can alter or own the protocol. Following the ruling, in March 2025 the Treasury lifted the Tornado Cash sanctions, removing the protocol’s addresses from the blacklist. This dramatic shift in regulatory decision also reflects on the TVL recovery in the Tornado Cash protocol. The total TVL of the protocol has already recovered all of the lost TVL after the 2022 sanction, reaching a new all-time high right now. Source: defillama Regulatory Complexities and Challenges Privacy coins and protocols exist in a tense regulatory environment. On one hand, they fulfill a legitimate demand for financial privacy and security; on the other, regulators worry that anonymity features can facilitate money laundering, terrorism financing, and other illicit activities. This concern has led to increased scrutiny and crackdowns on privacy-focused crypto projects in recent years. For example, global anti-money laundering bodies like the FATF have recommended that virtual asset service providers (exchanges, etc.) be able to trace crypto transactions and share sender/receiver information (the “Travel Rule”). Privacy coins directly challenge this, since by design they make it harder to identify who is transacting. In response, several countries have enacted or proposed bans and restrictions. Japan banned exchanges from listing privacy coins like Monero, ZCash, and Dash as early as 2018. South Korea and Australia have similarly prohibited licensed exchanges from offering such coins, forcing delistings of XMR, ZEC, DASH, and others. More recently, Dubai ((UAE)) in 2023 moved to ban privacy coins, and the European Union has considered rules that would effectively outlaw anonymity-enhancing crypto for regulated entities. Law enforcement agencies continue to invest in blockchain analytics to trace transactions even on privacy coins. Companies like Chainalysis claim that “nothing is completely anonymous” and that advanced techniques can follow some movement of privacy coins. This is a cat-and-mouse dynamic; privacy technology and tracing capabilities are both advancing, often in response to each other. Going forward, the privacy coin sector faces a challenge of balancing privacy and compliance. Complete anonymity and full transparency represent two extremes; real-world adoption may require a middle ground. As Chainalysis observed, neither extreme is ideal: regulators need some transparency to prevent abuse, while individuals and businesses need tools to preserve confidentiality. Disclaimer: The information provided herein does not constitute investment advice, financial advice, trading advice, or any other sort of advice, and should not be treated as such. All content set out below is for informational purposes only. Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
