The Illusion of privacy in crypto: Why privacy coins may become a trap for investors?
- IMLOVINGCRYPTO
- Jan 6
- 3 min read
Financial markets have seen this pattern before.
So-called “paper millionaires” - wealthy on a screen, broke in reality. Assets that looked impressive on charts but could not be converted into real-world value when it mattered.
Today, a similar dynamic may be forming around privacy coins.
The narrative of financial privacy is emotionally powerful and ideologically aligned with the original ethos of cryptocurrencies. But the regulatory and banking reality is increasingly testing these assumptions in a much harsher way than most investors are prepared for.
Privacy vs. the Financial System
In crypto discussions, “blacklisting” is often framed as something a protocol or
a developer might do.
In the case of coins like Monero or Zcash, the real issue lies elsewhere.
It’s not about being blocked by the project.
It’s about being cut off by the entire financial system.
Banks, centralized exchanges, and regulated financial institutions operate under AML/KYC frameworks that depend on traceability of funds. Privacy coins are designed specifically to remove that traceability.
The result?
➡️ Assets that are automatically classified as high-risk, regardless of whether the funds were obtained legally or not.
Delistings and the Exit Liquidity Problem
One of the most underestimated risks in privacy coins is exit liquidity.
When major exchanges delist privacy-focused assets to comply with regulations, investors are left holding tokens that:
are difficult to sell,
cannot be easily converted to fiat,
and cannot safely re-enter the banking system.
This is where paper profits are born - gains that exist on price charts but disappear the moment liquidity dries up.
Wallet Flagging and Compliance Risk
Another issue is address-level reputation risk.
Interacting with privacy coins or tools like Tornado Cash can result in wallets being flagged as “high risk.” In practice, this can mean:
frozen withdrawals,
enhanced due diligence procedures,
or, in extreme cases, funds being locked on centralized platforms such as Coinbase or Binance.
Once again, not because the user committed a crime but because there is no way to prove they didn’t.
Zero-Knowledge: Privacy or Marketing Narrative?
It’s also important to separate real privacy from marketing-driven narratives.
Zero-Knowledge (ZK) technologies such as those used by zkSync and other rollups are often portrayed as privacy solutions.
In reality:
most ZK-based chains are fully transparent,
ZK is primarily used for scalability and efficiency, not anonymity,
this is clearly stated in their own technical documentation.
Equating Zero-Knowledge with privacy is often an oversimplification and sometimes a deliberate one.
Who Is Really Selling the Privacy Narrative?
Increasingly, the “privacy-first” narrative is not driven by developers solving regulatory compatibility, but by large market participants who need:
exit liquidity,
renewed demand,
and fresh capital inflows.
Privacy becomes a marketing slogan rather than a sustainable, system-level solution.
We Need Privacy - But the Right Kind
Financial privacy is necessary.
In a digital world, it is essential.
The problem arises when privacy is implemented in a way that creates a closed-loop economy, disconnected from the real world:
no reliable banking access,
no compliant on-ramps and off-ramps,
no regulatory clarity.
That is not financial freedom.
That is financial isolation.
Conclusion
Privacy coins are not a technological threat.
They are a systemic risk - especially for investors operating between crypto and traditional finance.
As the walls between TradFi and crypto continue to rise, the key question is no longer:
“Is this cryptocurrency private?”
But rather:
“Can I safely exit it?”
Source of insights and inspiration:
Jakub Żurawiński
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