Stablecoin Privacy Is ‘Extremely Lackluster’

The non-profit Human Rights Foundation (HRF) has analyzed the censorship and privacy landscape of stablecoins in a report published on Nov. 20.

For privacy coins that are not stablecoins, the largest single-week losses so far this year have ranged between 24% and 34%, the HRF notes; a fact that bolsters the attractiveness of stable-value crypto assets, particularly for citizens in hyperinflationary economies.

Blockchain-based stablecoins do not only provide the stability advantages of the U.S. dollar but can “democratize access to that stability,” according to the report. 

The HRF further states that such assets have the potential to free citizens from the deleterious impact of state-imposed capital controls and from centralized oversight by digital payment processors and other bank and non-bank intermediaries. 

Yet for all these prospective advantages, the HRF deems censorship resilience and privacy to be a crucial — and under-scrutinized — aspect of the asset class. 

HRF’s analysis

As compared with fiat currencies, all stablecoins can be held and transacted pseudonymously with public-private cryptographic key-pairs and are broadly more resistant to censorship or forfeiture by state authorities or extortion by criminal actors.

However, per the report, several stablecoin issuers may themselves compromise the potential financial autonomy of citizens by introducing blacklists that enable them to freeze stablecoins held at specific addresses, so as to contain the adverse impact of hacks, for example. 

The issuers of Tether (USDT), USD Coin (USDC), TrueUSD (TUSD), Pax Standard (PAX), and Binance USD (BUSD) all have this functionality, the report notes.

HRF’s report includes a list of selected dollar-pegged assets indicating whether or not they can be frozen and, moreover, whether their code — the full blockchain and smart contract logic that underpins the assets — is open source.

Privacy features of various stablecoins. Source: HRF

While open sourcing allows for scrutiny of the technical capabilities that the assets’ issuers have and their history of freezing assets, the data does not in itself give insight into the motivations behind such decisions, the report states. The authors add:

“It’s good to take into account, however, that an asset is only as unfreezeable as its underlying ledger. While Tether may not be able to freeze the USDT circulating on Liquid, it currently only takes the ill-will of five companies (⅓ of the Liquid blockchain operators) for an asset to be frozen.”

Inadequate privacy tooling in the stablecoin sector 

As regards privacy, HRF notes that blockchain analysis firms such as Chainalysis — which licenses its tools to various governments’ law enforcement units — can today surveil 90% of all cryptocurrency trading volume in aggregate.

Given the blockchain’s immutability and the consequent potential for significant retrospective investigation, privacy tooling is critical, HRF states — yet most stablecoins are, in its words, “extremely lackluster” in this regard.

USDT on Liquid is assessed positively in this light, while Dai (SAI) on Ethereum is reportedly vulnerable — although the report includes a shortlist of technologies — including mixing services and zero-knowledge privacy systems for Ethereum — that can help alleviate many of these shortcomings.

Yesterday, Cointelegraph reported that tech investment company Cypherpunk Holdings completed an equity investment worth $337,500 in zkSNACKs, the firm behind privacy-focused cryptocurrency wallet Wasabi.

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