Anonymous Cryptocurrencies: Reasons for the Ban in Dubai

7:40 pm  |  21.04.2024

After the appearance of Bitcoin, it became clear that it does not provide true anonymity and sooner or later modifications of the cryptocurrency would be created. The emergence of a new sector of the crypto market was bound to cause concern among regulators.

In February 2023, the authorities of the Emirate of Dubai issued new rules for regulating the cryptocurrency market, in particular, prohibiting any activity related to cryptocurrencies with enhanced anonymity.

The news of the ban may sound strange to the public. You often hear that, for example, Bitcoin is an anonymous currency that allows you to make payments with impunity, including for drugs and weapons. This is one of the main arguments of conservative regulators in favor of a total ban on cryptocurrencies. Now suddenly it turns out that there are more anonymous cryptocurrencies. But figuring this out is not very difficult.

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Anonymity with One Big “BUT”

Bitcoin is not anonymous, but a pseudo-anonymous payment instrument. Cryptocurrency is designed in such a way that all transactions are visible to everyone. Indeed, anyone can open a wallet without a passport, and regulators have not yet figured out how to stop us from doing this, because the system is distributed and there is nowhere to come to regulate it – there is simply no bank or system operator.

All information about payments is extremely transparent and available to any user, without any requests to the bank or similar formalities. Of course, at the moment of opening the wallet, the owner is truly anonymous, but with any operation, the degree of this anonymity decreases and all operations are tied to his pseudonym – address. It is worth making at least one operation with the possibility of identification – pay for the delivery of goods, buy an air ticket, send a letter indicating the wallet number from a personal mailbox, link a bank card or application, register with an exchanger – and all operations instantly find their owner.

Is Anonymous Payment System Possible?

This was first demonstrated back in 1985 by cryptographer David Chaum in his article on digital cash, “Transaction Systems to Make Big Brother Obsolete” To confirm transactions, he proposed using zero-knowledge proofs, ZKP.

The principle of operation can be described as follows: the sender places the payment in a digital envelope, and the bank or payment system processes it without removing it from the envelope and without seeing the details. Next, the envelope comes to the recipient, who opens it, and takes the amount contained there, but does not learn any information about the sender. At the same time, the bank and payment system also do not receive any information about the transaction. No examiner, employee, or bank owner knows how much money a particular customer has or how he spends it.

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Suspicious Updates

When Bitcoin appeared, it became clear to the few who read both Chaum and the probable creator of the cryptocurrency, Satoshi Nakamoto, that firstly, it is a rather poor tool for anonymous payments, and secondly, sooner or later modifications of Bitcoin will appear that combine anonymity and distribution.

Indeed, around 2013, ZKP protocols with true anonymity began to actively develop, followed by working cryptocurrencies. For example, Monero and Zcash. In such currencies, in principle, no one can selectively block a payment or find out information about the recipient and sender. Dubai opposed this.

Similar bans are being discussed in Japan and the EU, but Dubai’s digital asset regulator has proven to be the most responsive, likely because Dubai views itself as a leading crypto platform and wants to avoid reputational risks. Are there any chances of success? The regulator can hardly do anything with cryptocurrencies as such – it is very difficult to prohibit having wallets or mining. 

However, the fact that sanctioned coins cannot be sold or bought on a legal exchange greatly reduces their attractiveness, ultimately pushing them into the shadow sector.

It should be taken into account that another direction of anonymization is developing in parallel – mixers. These are centralized, or distributed, programs that work with cryptocurrencies and are a bit like a network of shell companies.

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The mixer takes an incoming transaction, breaks it down into many small ones, creates one-time wallets, transfers money between them, and mixes it all with well-intentioned transactions in the hope that the mess will be impossible for an outside observer to make sense of.

Mixers are also constantly being improved, which makes them difficult to identify and attempts to block or flag as unreliable. Modern mixers are designed as smart contracts without a physical manager or owner, making them almost impossible to close.

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