The unique strength of blockchain and cryptocurrency can also be considered a weak point. Crypto users enjoy unrivaled financial transaction privacy thanks to a decentralized transaction system. However, governments demand transparency in financial transactions for legal reasons. This creates a paradox. People are less likely to use financial instruments if they disclose their money to the world. On the contrary, there are a number of regulations requiring financial institutions to combat terrorism and money laundering, which is a major concern of many governments.

The crux of the problem is that most public blockchains require the consent of all participants to verify transactions. How can two parties – users and authorities – achieve their conflicting goals when they are completely opposite?

A possible solution to this problem includes balancing the concerns of user privacy and the centralized oversight that authorities need to ensure compliance with regulations such as anti-money laundering, customer awareness and countering the financing of terrorism. The introduction of covert transaction procedures along with government oversight procedures has a delicate balance, as crypto assets remain secret but are still subject to funding laws around the world.

Related: Comparison of Money Laundering with Cryptocurrency and Securities

Combating terrorism and money laundering
The need for the government to control cryptocurrency transactions in order to combat terrorism and money laundering is critical to public safety, especially since the two are intertwined. Money laundering can be used to finance terrorist activities that, like everything else, require funding, even if they are not money laundering. Comparison of cash flows between parties for popular cryptocurrencies such as Bitcoin (BTC), Ether (ETH) and others can provide invaluable information to prevent these crimes. Regulators need at least some idea of ​​who pays whom and why.

However, the nature of cryptocurrency makes it easy to hide these and other transactions. Bitcoin can be tracked using modern tools, but some transactions can be completely tracked using other cryptocurrencies. These legitimate concerns partly explain the creation of organizations such as the Financial Action Task Force on Money Laundering, which exists to combat money laundering and terrorist financing, and whose efforts will greatly benefit from greater transparency in cryptocurrency transactions.

On the subject: the minister’s perspective on what regulators expect from the industry

Privacy means something
The public privacy concerns surrounding the use of cryptocurrency go against the vision required by the authorities to combat money laundering and terrorism. People just want to keep their business a secret with cryptocurrency, as with traditional foreign exchange transactions. However, transaction verification functions on public blockchain networks can reveal this information and attack users’ financial privacy.

Related: Blockchain Can Give You The Privacy Rights Everyone Deserves

The first element of a solution that ensures consumer privacy along with government oversight is to address this issue. There are hidden transaction features, some of which are used by Monero (XMR) or Zcash (ZEC), which confuse the amount and participants in the transaction while it is still being verified for the blockchain. These cryptocurrencies provide measures to keep people from knowing the origin, destination, and amount of a particular transaction. These methods solve many of the privacy concerns for cryptocurrency holders.

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Cryptocurrency monitoring
By linking these privacy practices to the following cryptocurrency monitoring ideas, authorities can track anti-terrorism activities and anti-money laundering targets. Suppose, for example, that it is a cryptocurrency backed by an organization of a limited number of banks. The first thing users need to do is join these institutions – as well as others – that provide an initial level of understanding of cryptocurrency behavior while supporting mandates such as KYC. Thus, after users have carried out transactions to other persons registered with this institution, they will have to disclose the details of a bank member to prove it. This obligation can be imposed on the dealer using cryptography so that auditors can determine that the disclosures were made correctly.

Source: CoinTelegraph