Anonymity Enhanced Cryptocurrency
The key to understanding an Anonymity Enhanced Coin (AEC) lies in the varying degrees to which different cryptocurrencies (including standard cryptocurrencies like Bitcoin) offer anonymity and transaction confidentiality to the parties that are involved in a transaction.
When transactions involve a cryptocurrency like Bitcoin, the parties involved in those transactions are psuedonymously represented through the public keys that are associated with their Bitcoin accounts. In contrast to the records that most banks keep for their customer accounts, the Bitcoin distributed ledger doesn’t keep any records of personally identifiable information (PII) that might be associated with a Bitcoin account.
Such pseudonymous approaches to PII are common when it comes to public distributed ledgers and, to a varying extent, offer a degree of anonymity to the users of cryptocurrencies. However, there is often little to no transaction confidentiality; the details of a transaction (e.g., the amount of cryptocurrency being exchanged) are almost never hidden.
Due to a variety of factors including existing and developing international Anti-Money Laundering (AML) regulations, pseudonymous representations of account identity have, in practice, proven to offer less anonymity than originally intended. The true identities of the parties associated with pseudonymous credentials such as Bitcoin’s public keys are increasingly becoming known to certain organizations (e.g., centralized exchanges (CEX) that must comply with those regulations) as well as the public. This continued erosion of anonymity has inspired the invention of newer distributed ledgers and associated cryptocurrencies that offer greater but still varying degrees of participant anonymity and transaction confidentiality.
Two of these are AECs and privacy coins. Whereas privacy coins and their associated ledgers (e.g., Monero) are considered to be the most anonymous and confidential of the different coin types, AECs such as Zcash fall in the middle because identity and transactional obfuscation are optional. For example, Zcash supports two types of addresses. For transactions requiring a greater degree of transparency (similar to that of Bitcoin), Zcash has a transparent type of address known as a T-address. But for transactions that require more confidentiality, Zcash’s Z-address offers a higher degree of anonymity.
In some ways, AECs attempt to offer the best of all worlds. In Zcash’s case for example, a transaction involving only Z-addresses offers the transaction confidentiality and participant anonymity that comes by default with a privacy coin. Then, there’s a hybrid type of transaction where some parties are represented by their Z-address while others are represented by their T-address. And finally, there’s a more Bitcoin-like transaction where all parties to a transaction use their T-addresses.
Since the anonymity of AECs can lead to malicious activity such as money laundering, holding or trading AECs is not permitted in certain countries and on some exchanges.