Private Crypto Payments are Maturing: From Privacy Coins to B2B Applications

New B2B payment solutions hide transactions from public view, but unlike privacy coins, they are designed for regulatory compliance. | Credit: Filip Szalbot on Unsplash.

Key Takeaways

The “travel rule” prohibits businesses from using privacy coins. However, companies require more privacy than other blockchain payment channels offer. Emerging B2B platforms offer private but compliant payments.

In crypto, private payments are traditionally associated with privacy coins like Monero.

However, new business-to-business (B2B) solutions are emerging that obscure transaction data from the public ledger, while retaining compliance functions like sanctions screening and wallet freezes.

Why Institutions Won’t Touch Privacy Coins

Although privacy coins have an important place in the hearts of many crypto users, highly regulated financial institutions won’t touch them with a ten-foot pole.

This aversion can be attributed to a regulatory principle known as the “travel rule,” which stipulates that financial intermediaries must collect and transmit information about the sender and recipient of transactions.

Originally applied to traditional payments, the travel rule has been extended to firms that handle crypto. As a result, in jurisdictions that enforce a strong version of the travel rule, processing privacy coin transactions, which are anonymous by nature, could land institutions in hot water.

Standards published by the Financial Action Task Force mean the travel rule now applies almost universally, although how it is applied to privacy coins varies from country to country.

Overall, however, the effect has been a wave of delistings that has increasingly driven the privacy coin market underground, to decentralized venues that regulators can’t shut down so easily.

Institutional Privacy Requirements

While anti-money laundering regulations rule privacy coins out as a regulated payment instrument, many institutions still want to hide their transactions from public view.

As Celo Foundation President Rene Reinsberg told CCN, traditional stablecoin rails risk exposing payment amounts, counterparties and cash flow patterns, which businesses typically prefer not to publicize.

The transparent, public nature of blockchains “has historically served as a barrier” to adoption, he observed. Yet, because of the travel rule, fully anonymous transactions aren’t an option either.

To resolve this challenge, the Celo Foundation recently launched Nightfall. The Layer 3 privacy solution on Celo is among an emerging crop of payment platforms that enable private, but not anonymous transactions, catering to the needs of regulated businesses.

Private and Compliant B2B Payments

While transaction details are encrypted on the public ledger, “Nightfall is fully auditable,” Reinsberg emphasized.

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Regulated companies “can comply within their jurisdiction and share payment history and information with the appropriate parties at their discretion, in accordance with any requirements,” he added.

Paxos Labs recently developed a similar strategy for on-chain privacy.

On Oct. 1, the stablecoin issuer launched USAD on the Aleo Network, an enterprise-focused blockchain designed to balance privacy with regulatory compliance.

Payments on Aleo are encrypted by default, but account owners can opt to reveal transaction information if needed.

This selective transparency is built in at the protocol level. As such, USAD offers all the same features as other Paxos stablecoins, including programmable payments and the ability to freeze funds at the request of AML authorities.

Moreover, because the Aleo Foundation recently joined the Paxos Global Dollar Network, USDG could soon launch on the blockchain.

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