Zcash, the latest virtual currency, has been a smash success since its launch seven months ago, drawing in new users with promises of unrivaled privacy protection.
However, the cryptocurrency could face a tough battle integrating into the wider financial system.
After debuting on currency trading platforms in October last year, Zcash took off, hitting an exchange rate of US$1,000 per unit, putting it in a league with the much better established bitcoin, the virtual currency pioneer created in 2009.
While its value has since come down to earth, Zcash is attracting the interest of Russian, Chinese, Venezuelan and, as of Thursday last week, South African consumers.
To make its mark in the world of virtual currencies, Zcash says that it protects user privacy.
However, because of that guarantee it does not offer the transparency demanded by authorities who want to prevent it from being used in money laundering, financing terrorism, evading taxes or fraud.
Zcash was developed by researchers at Johns Hopkins University and the Massachusetts Institute of Technology in the US and Tel Aviv University and the Technion-Israel Institute of Technology in Israel. Only five of the six people who developed the cryptography have been publicly identified.
It is based on a technology dubbed “zk-Snark,” which allows untraceable transactions. The resulting data are encrypted but users are free to identify themselves.
Other cryptocurrencies such as Dash and Monero offer a level of privacy, but Zcash goes further, even obscuring the origin of a payment.
This is the opposite of bitcoin, which uses blockchain technology that publicly records transaction details including the unique alphanumeric strings that identify buyers and sellers.
“You don’t expose all of your communications or all of your transactions to random people on the Internet you barely know,” said Zooko Wilcox, chief executive officer of Zerocoin Electric Coin Co, which manages Zcash.
Virtual currencies are produced, or “mined,” by banks of computers solving complex algorithms, an operation that can be expensive.
Wilcox said he hoped the expanded privacy protection could overcome businesses’ reluctance to adopt Zcash as a trustworthy alternative to traditional state-controlled currencies.
However, Zcash is unlikely to find its place in the wider financial system, said Jonathan Levin, co-founder of Chainalysis, a start-up that helps banks and authorities trace the origins and destinations of virtual currency payments.
“It is hard for existing financial institutions to integrate these types of cryptocurrencies as information on the origin of funds is very hard to ascertain,” he said.
Financial institutions began to take an interest in bitcoin, and in particular in its blockchain technology, once the Darknet marketplace known as Silk Road was closed in 2013.
Silk Road facilitated bitcoin transactions, but was also a platform for the sale of illegal drugs.
“Nobody has ever used Zcash for any kind of crime as far as anyone knows,” Wilcox said, while conceding that “all technologies can be misused.”
Wilcox said he gave a presentation on Zcash to Canadian and US authorities in November last year and their attitude was “very pragmatic.”
Nevertheless, despite Zcash’s efforts to protect users, the currency might be vulnerable to hacking or counterfeiting. In a June last year attack, hackers reportedly stole 3.6 million units of the cryptocurrency worth US$50 million.
Zerocoin Electric is alert to such risks and pays hackers to test the currency’s security, Wilcox said.
Zerocoin Electric expects a maximum of 21 million Zcash units to be mined, or produced, of which 10 percent would go to Zcash Electric shareholders, including founders, employees and investors.
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