The Breakdown - Why Privacy Coins Aren’t Enough | The Breakdown

Episode Date: February 3, 2026

Privacy is back at the center of crypto’s narrative. This episode examines the limits of on-chain privacy, the role of KYC and the app layer, and how crypto onboarding has changed — before closing with Andrew M. Bailey of the Bitcoin Policy Institute. Enjoy! As always, remember this podcast is for informational purposes only, and any views expressed by anyone on the show are solely their opinions, not financial advice. – Follow Blockworks Research: https://x.com/blockworksres Follow Andrew: https://x.com/resistancemoney Follow David: https://x.com/dcanellis — Timestamps: 00:00 Intro 01:20 The Limits of On-Chain Privacy 3:00 Reality of the App Layer 7:57 DAS Promo 8:44 From Self-Mining to KYC Funnels 11:14 The Future of Privacy in Crypto 14:49 Interview with Andrew M. Bailey — Disclaimer: Nothing said on The Breakdown is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only, and any views expressed by anyone on the show are solely our opinions, not financial advice. Hosts and guests may hold positions in the companies, funds, or projects discussed.

So, it's a new year that means new narratives. Or in the case of privacy coins, it's very old narratives made popular all over again. And sure, Zcash and Monaro come back around every ball market, it's true. But a lot has changed since privacy coins were prominent in 2021, let alone 2014 and 2015 when they first arrived. I've seen a theory going around that Zcash and Minero are obsolete, but it's not true. They just don't offer a complete picture on how to achieve true and lasting on-chain privacy. Privacy coins present a decent solution to keeping transactions private and so on, but most users leak identity somewhere else, especially when they move capital over from the old

fiat world into the new crypto space, as in when they actually convert their fiat into crypto and back again. I have a theory. If user privacy is a legitimate concern, we need to stop pretending that on-chain privacy alone solves it. And we really need to start looking outward, rather than only inward to really make a lasting difference. This is the breakdown. Let's get to it. Nothing said on the breakdown is a recommendation to buy or sell securities or tokens. This podcast is for informational purposes only and any views expressed by anyone on the show are opinions, not financial advice. Host and guests may hold positions in the company's funds or projects discussed. First, let's look at what people are saying about the privacy narrative for crypto in 26.

Mailstream, CIO and Perps pioneer Arthur Hayes predicted that this year's dominant narrative will surround privacy. E-cash will become the privacy beta and we're already long on ahead of that at excellent prices obtained. in the third quarter of 2025. That basically aligns with what A16Z wrote in December. Privacy is one feature that's critical for the world's finance to move on-chain. It's also the one feature that almost every blockchain that exists today lacks. For most chains, privacy has been little more than an afterthought, but now privacy by itself is sufficiently compelling to differentiate a chain from all the rest. Privacy also does something more important. It creates chain lock-in, a privacy network effect, if you will. Especially in a world where competing on performance,

is no longer enough. Sandy Peng, co-founder at Ethereum ZK Roll-Up Scroll, cited A16's take in her own post shortly after. Every year, crypto finds a new obsession. 2021, 2022 was NFTs. 2023 and 24 was the race to scale Ethereum. 2025 was meme coins and everyone launching their own L2s. 2026 belongs to privacy. Look, I love the energy, but there's still a lot missing from these takes.

And if we're being honest, the privacy narrative is really about compliant privacy. A term which really makes me cringe. Privacy in crypto is really three different problems. How you acquire digital assets, how you broadcast transactions, and what the chain reveals. The privacy coins mostly address what the chain reveals. Running your own infrastructure mostly reduces who can watch you interact with the chain itself, but it's onboarding.

The fiat on and off ramps, where privacy usually is the first thing given up. So, before we talk about the elephant in the room, in the room, we need to separate two things that matter when we talk about on-chain privacy. The permissionless protocols and then permissioned access. Protocol level permissionlessness is simple. If a transaction is valid, according to the rules, the protocols validators can include it. But the ways most humans actually access these blockchains through wallets, app stores, hosted front ends, RPC providers, exchanges and so on, are full of choke points which collect data and enforce policy by default that could be described as soft permission. On-chain private

on paper is mostly a technology question. That's why zero-knowledge proofs matter. ZK proofs don't inherently make systems permissioned or permissionless, but they do make it possible to transact onshade without having to share everything on a public ledger, and in some cases, they can shift compliance for companies and service providers from, we have to collect everything about our users

to, we only need to prove what's required and we don't need to actually collect at all. But even then regulators can often demand records and so forth to fill in the gaps. But yes, it's true that anyone can deploy smart contracts on major chains without asking the protocol for permission. Circle and Tether, for example, didn't need to ask Vitalik or the Ethereum Foundation whether it was okay if they deployed their stable coins on Ethereum mainnet, just like how you don't technically need anyone's explicit permission to launch a meme coin on pump.fine or open a liquidity pool for one on Aerodrome. But here's the reality.

Even if the chain is permissionless, access to the chain often isn't completely without friction. For most people, the first point of entry is the app layer, wallets, decks, UIs, games, social apps. Apps are how regular people onboard into crypto. The app layer is a double-edged sword. It makes crypto usable, but it also becomes a filter. That's why apps tend to geo-block sanction jurisdictions and sometimes even the UK and the US or specific US states like New York and Washington, depending on the app and its risk appetite, not because the chain requires it, but because the distribution layer is forced into compliance. Debating whether apps should be permissionless is a non-starter. Consumer apps with real users can't ignore laws forever,

and the most obvious symbol of that is the whole terms and conditions ritual. We click agree, we accept the rules, we accept that the company can refuse service, collect personal data about me and who I transact with and so on. You may not ever actually read the terms and conditions, but you are implicitly agreeing to whatever is in them in return for permission to use the app. If you were a user living in a heavily sanctioned country who arguably could benefit from crypto more than most people around the world, the company that built the app might have to close your account or else they might get in trouble with the feds. But no problem, considering you agreed to the terms and conditions that allows them to kick you off. You have no

recourse because you violated the agreed upon terms and conditions. From the developers' perspective, they are expected to block you. And okay, in theory, it doesn't really matter if the app layer comes with its own soft filters. Anyone can submit a valid transaction directly to the network, which means they can interact with smart contracts and so on without having to agree to any apps terms and traditions. Yes, you can interact without a wallet UI, code your own uniswop trades or whatever, but if you care about not relying on someone else's infrastructure and someone else's compliance, policies and logging and so forth, you eventually run into the question of whether you should

run your own node to minimize that trust. More often or not, that's easier said than done. and your own node can be demanding in terms of hardware, technical know-how and costs, especially for some of the more popular chains with faster throughput like Solana. One could pay cloud hosts like AWS or use a community or paid RPC to take away most of that burden. But in doing so, you would typically need to agree to terms and conditions before you could use those third-party systems. And again, it would likely take giving up some privacy along the way. This is exactly the service that apps, wallets, node providers, exchanges and so on provide. They're really chain liaisons.

the middleware that increases the size of all of our online footprints. And because money is crypto and increasingly so in the eyes of the old Fiat world, dates to stable coins, that means crypto apps also usually handle money by default. And anything with real users and a real company behind it gets pulled towards compliance. Custodial or not, the pressure usually lands on the apps that are distributing crypto to users in some way. Again, that's front ends, hosted infrastructure, coordinators, app stores, the places where permissionless chain space meets the real-world meat space, the on-and-off ramps. And of course this problem extends far beyond the on-and-off ramps.

Just look at what happened to the developers of Tornado Cash or Samurai. Those alongside Wasabi are and were among a shrinking subset of apps with a clear bend to keep their platforms as permissionless as possible. But their developers have still paid the price, and even Wasabi was forced into geoblocking US users at the tail end of last year out of fear of retribution. and they don't even handle Fiat on and off ramps. Quick break before we continue. Blockworks's flagship institutional conference, Digital Assets Summit, is back in New York City this March 24th through 26th. Das brings together allocators, asset managers, policymakers,

and the builders actually shaping crypto's next phase. Not the hype cycle, but the infrastructure and capital behind it. This year's summit represents over $4 trillion in assets under management with more than 150 speakers and 750 institutions in attendance. Speakers include leaders from firms like BlackRock and Franklin Templeton, senior policy makers and regulators. Don Wilson of DRW will be there, alongside core crypto infrastructure teams across Bitcoin, Ethereum and Stablecoins. If you're looking for a serious institutional grade view of where digital assets are headed in 2026, this is where that conversation happens.

Use code breakdown 200 for $200 off. Learn more at blockworks.com slash events. Now back to the show. Now let's zoom out. Historically, the cleanest onboarding wasn't buy coins on an exchange. It was just mine the chain. Validate the transaction. Actions. Get paid in crypto, whatever it takes not to upload your identity into a database. In fact, let's take that one step further. Becoming a blockchain validator with your own equipment was arguably the most compelling solution to crypto's problem with permission KYC onboarding onboarding, but it's only gotten harder for normal people to do that at meaningful scale. How do you mine Bitcoin, pre-merge Ethereum, Zcash, Monero, Dogecoin, Lightcoin, or whatever obscure

layer one was profitable at the time. Odds are you would have earned loads of KYC free coins that if you held them for years would have appreciated in value by a ton. You would have never had to wire any fiat from your bank account to an exchange to buy those coins and barring the use of cloud-based hash providers, you would have never had to agree to any terms and conditions or given up any personal data to generate that crypto either. Although it's worth pointing out that when running a node you automatically broadcast your IP address to the network, but that can be somewhat mitigated by the use of Tor, even if that still has its limits.

It's just that in orders to gain the full benefits of the pseudonymity afforded by the blockchain, you must be as close to the source as possible, preferably mining or staking to the chain directly and receiving block rewards directly to an address you control. But even the latter case raises the question of how one might acquire enough state without going through KYC. What's really uncomfortable is that the crypto space has largely lost something incredibly powerful in its evolution out of the self-mining age, the ability for regular users to onboard themselves into crypto through mine. without letting trusted third parties, particularly banks and government agencies, see all of the evidence.

And so my point is this. We like to think of privacy coins as the native tokens on those blockchains designed specifically to limit how much data is written to the chain like Zincas and Manero. But in some sense, the real privacy coins are those which one did not have to divulge any personally identifying information to acquire them. The Doge coins earned by Doge Toy miners with GPUs in their garages in 2015 are inherently much more private, than any Zcash board on Coinbase at any time. And while there's a record of an address you control receiving those coins on the Dogecoin chain, that's nothing compared to the record

that Coinbase has of you trade in USDC for Zc, for instance, and those trades would be easily paired with your name, address, date of birth, and driver's license or passport photo, and maybe even hand it over to the IRS. It boils down to this. Onboarding privacy, or what we might call acquisition privacy, often matters more than ledger privacy. A privacy coin bought through KYC is inherently only symbolic.

Hide all the transactional details you like. You can't delete the paper trail you created on the way in. Here's what privacy coins are actually good at today, minimizing your footprint once you actually make it on chain. That's incredibly powerful on its owner. A humanitarian organization sending aid money to political activists living under brutal authoritarian rule might opt to use Zetas shielded pools, perhaps, to distribute funds that cannot be linked to individuals fearing their safety.

For what it's worth, previous UN programs that have distributed humanitarian funds have opted for USDC on Stella, for example, which, aside from the permission nature of the stable coin itself, does offer some privacy benefits, but does only really extend to how well one can maintain good Opsic when it comes to keeping your real IRL identity separate from the blockchain address that one is currently using. What privacy coins don't fix is the on-ramp problem.

Most users still enter through permissioned funnels. It's crypto exchanges, banks, KYC, stable coins. And as stable coins become the default unit of account, that funnel becomes even more obvious. But critically, as the ability to enter the crypto space without KYC has been eroded for most mainstream users, it was inevitable that the development of privacy tools in the blockchain space would move towards maintaining privacy within wall gardens, even though it's looking like those wall gardens will be on permissionless rails. But the idea out there right now is to build a safe space for, the largest financial institutions in the world to use digital assets for profit, while keeping in line

with traditional compliance measures and without compromising their own positions to potential counterparties due to the transparent nature of the chains themselves. Because transparency is a competitive liability when you're handling trillions of dollars. In and of itself, this is a worthy pursuit and development in that arena should continue because more than likely it will result in much more robust privacy controls for the broader crypto ecosystem. You can imagine that more businesses might opt to operate on-chain if it meant their customers and rivals for that matter couldn't simply plug their blockchain wallet into an explorer to see everything about their finances and business dealings and so on. Right now, very little of that is directly helping users onboard to crypto privately.

At one point, onboard to crypto without KYC was not an edge case, it was the norm. It was the intended way to acquire coins and exist within the crypto ecosystem, at least in the very beginning. But now, it's an edge case which is only supposedly urgent in high-risk jurisdictions. I'm not sure crypto has really reckoned with what it has lost in that respect. If crypto is a revolution, then it's one where the entryways are now precisely monitored, with a huge share of inflows mediated by KYC databases, which can be routinely shared under legal process with regulators, authorities and bank offices. To me, all this has taken some of the shine out of the privacy coin narrative, which,

while powerful in its own right, is realistically more of a consolation prize after the fact. As crypto and blockchain continues to gain traction with the traditional finance system, I would expect that the privacy narrative will need to break out of the crypto space and take up the fight within the banking system itself. It's not enough that blockchains are private. Privacy has to be native on the on and off ramps and in the systems that we all use in the Fiat world too. Only then can we really exist on these crypto rails privately. Is it realistic? I don't know, but it's the truth. I put all of this to Andrew M. Bailey, Professor of Philosophy at the University of Singapore,

and senior fellow at the Bitcoin Policy Institute who had this test. saying. Welcome, Andrew. Thanks, David. Great to be with you. So I've subjected you to my ramblings about privacy coins and privacy in blockchains for the past 15, 20 minutes. What do you think that I kind of got wrong or what am I missing here? Well, I don't think you're missing anything. And one thing I noticed while listening to your thoughts is that in some ways, they take the form of a lament. And this is the basic, basically anybody talking about privacy online, begins and maybe even ends with a lament because the news just doesn't appear to be very good. Of course, there are privacy tools.

There are privacy coins. There are privacy tools for Bitcoin. There's Tor. There's tails. There's graphing. They're these little doodads you can add to your flow of information or value online. But fundamentally, it's getting harder and harder to actually control your personal information online. And what you've done that's valuable is to identify maybe the weakest points of that for crypto users.

And as I said, where you left me with is just a lament. And the lament for me gets more intense when I think about even what was possible in the recent past that probably isn't possible now. I do have two bits maybe optimism here. One of these isn't directly connected to crypto. There's one example of a firm that has managed to do very good privacy stuff and make money off of it. that's Apple. And the way they did that was to make privacy part of their brand. Explicitly in marketing and top to bottom, iOS was redesigned for privacy ends and ICloud services as well. And Apple has well advertised that and published enough of their specs that there's some certainty that what

they say about privacy assurances is true. So they found a way to make money on this and to market it and people like it. You wouldn't see those ads continue if there hadn't been some success, I suspect, for a firm as big and successful as Apple. Here's another smaller example, and this is specific to crypto, a way to make privacy work and to get people to use it. It's this little device called cross-input signature aggregation, where multiple inputs in a Bitcoin transaction cross-aggregate or combine their signatures, and collaboratively form a transaction from different users. And it's actually a smaller on-chain footprint for the signature, which means fees are lower. And this is how you get people to start entering these little mini privacy pools is if it's cheaper to do so.

Now, Bitcoin needs a fork to really get this going. As usual, privacy stuff on Bitcoin is really hard to get any real assurances. But this is a nice little model of the way to make it work. is to either make it profitable in the case of Apple's case as part of the brand or to make it profitable or for the consumer cheaper to actually have better privacy. So if you want to extract some hopeful thoughts out of me, those are the directions that would go either in the big tech side or in the crypto side. Can I just add one more thing that sucks?

I'm more in the Bitcoin world than the crypto world. And for Bitcoiners, it's worse. If we're committed somehow to Bitcoin, whether for network effects reasons or ideological reasons or just years in the community, or you think that ICOs are scams and so you won't ever touch anything on Ethereum or whatever your reasons are. Well, you've painted yourself into a corner when it comes to privacy. Yeah, I mean, it kind of ties in what I'm trying to get to is that I don't want privacy coins to be mean coins. but, you know, and at some point they aren't.

Like, you know, you, I can really, I can really see the utility in a privacy network that is enclosed that you do have stable coins on and, you know, you wouldn't want those to be regulated stable coins or permission stable coins. You would want some kind of permissionless stable coin on these privacy preserving networks. And then if you're distributing funds, that can be used in the real world using shielded addresses and so on, then there is real utility there. That's very different from what the market is pricing them in.

Because, you know, if the price is to reflect that real world utility, I would wonder how much of that real world use case is actually being done on those networks in their current form, even though there is the possibility to use them for those use cases. But the way that the market is showing us is that there is hype around this narrative, so we are buying the hype on that narrative. But there is a very clear disconnect between the utility and what the hype wants. That's right. I think we have a fairly straightforward way of measuring the distance between the hype and the reality. And that is the ratio of T to Z addresses in actual Zcash transactions.

The Z addresses should, if demand for privacy is fueling the Zcash pump of the last five, six months, you should expect those to go up. Dramatically. Last time I checked, not the case. It hurts. Which just plays into your worry that this is fundamentally a mean coin. Yeah. I think of Monera is as different, both in the kind of community that it has, the actual uses that it commands, and also it's history, because it doesn't have the ECC stuff, the developer tax, the kind of stuff that makes people feel that Zcash might be a little bit scammy or meme coinish

rather than fundamentally useful. I think Monero is quite different, in fact, for those reasons. And I just want to also touch on quickly before we round up, like this idea of like KYC-free coins and mineable chains being the best way through. that. And I know that, because at some stage if we really unpacked this conversation, you know, and we are saying that, yes, I would love more ways to mine valuable coins directly using my own infrastructure, using my own miners, that essentially we do want more layer ones to launch, even though there might not be as much demand for them just in order to extract value from their launch.

And so it gets very scruly at some point. And obviously, we are never going to return to a world where it makes sense for everybody to run miners in their house for Bitcoin. And since the merge, Ethereum can't do that anymore, you know, is this like boomer talk? Is this like, well, it was better back in the day? Or is this an actual tangible thing that, you know, I keep saying to crypto space, but just, you know, that we have all lost over the past 10 years.

Is there any way to get it back? A lot of Monero people would disagree when it comes to Monero in particular because of the way mining works, that it's still possible to mine without ASICs or GPUs. I forget what they call it. The way the algorithm moves around basically makes it ASIC resistant. And so it's still possible to mine on cheap. gear. So I'm not a Monara pumper or anything, but I got to give credit where it's due. That is a serious technical innovation. I mean, it's an old one, but it's an important piece of technical machinery

that does make that little bit of the dream still alive for that chain, at least. And I've seen other privacy chains try to replicate this, Ironfish, for example. And one of the big things that they pumped when doing a launch was that you can mine this at home on your PC. And last I checked, that project was more abundant. It was unfortunately just another meme coin. My Monero positive suggestions here have been informed by the people I know who need privacy the most, and they often have a dual setup. They're at heart Bitcoin maxis. They'd rather stick to Bitcoin only. They know that they can't. And so they spend with Monero and save in Bitcoin and use atomic swaps to move between them. So they'll acquire one or the other however they can.

Swap it to Monero when needing to spend and keep the stuff in deep, deep cold storage for long-term savings in Bitcoin. And worry mostly about privacy only when moving between those two. And thanks to atomic swaps, that's now much easier. more secure and less trust requiring than it was several years ago. So that's good news. And you don't have to have a command line to do the atomic swaps anymore, so that's nice, too. We started this conversation quite pessimistic, but actually that does, it does reassure me. There's a model here.

So you could see how the model might work, even at scale, that you have this smaller chain that has dedicated purpose and crazy users who use their thing to buy drugs and guns and prostitutes online and whatever, that's more narrow. And then you have something that has on and off ramps and that maybe pumps more and dumps more is more volatile. Maybe he'll have other properties too. That would be Bitcoin that's highly liquid. That's a truly international, geopolitically relevant asset. And as long as these permissionless bridges between them that are trust reduced, then there is a viable two-tier model there that in the real world, the people who are need to use it, do in fact use things along those lines.

So all we need to hope for is that once, you know, this matter of securities laws and market structure pills has been settled that all of a sudden the eye of Soron does not just pour its way over the privacy tools that we still have that are still being used. It feels like ultimately that that would be the deciding factor. That's right. And the price of liberty is eternal vigil. And though Bitcoin is robust and decentralized, it is by no means obvious that it'll stay that way and that it won't in one someday, for example, fork between roughly the coin that is controlled by Corpo suits that does not allow you, you know, that has all sorts of blocking and Coinbase won't let you deposit UTXOs that have ever touched anything that's ever touched a swap. service versus freedom Bitcoin, on the other hand, this kind of nightmare scenario where there's

a corporate or governance takeover and a fork, which is economically beneficial to stay on the corpus side. That's the scary part. This is by no means impossible. It totally could happen. And vigilance and attention to this is the only way to stop it. You got to run a node. You got to pay attention. Thank you for your time, Andrew. Thank you so much. Hopefully we'll have be back on the breakdown soon. My pleasure.