24th May 2022 > > Litecoin.

tl;dr

Litecoin (LTC) and my privacy concerns.

Market Snap (at time of writing)

Market Wrap

That’s a big move overnight in perpetual futures funding rates, lowering the bar for a short squeeze higher, which would be nice given the seeming inability of BTC to keep hold of the all-important 3-handle.

Occasional Series – Our first overseas office

Regular readers know that the CCC has gone global with an office in Inverie on the Knoydart peninsula, home to the UK’s most remote pub The Old Forge. The office comes equipped with its very own waterfall, which is looking really rather gorgeous after some recent heavy rains:

iPhone 13 for those who are asking. And no. I can’t take photos that beautiful.

Occasional Series – India Willoughby

“When the Queen dies, wouldn’t be surprised if Boris appoints himself Fuhrer and assumes total control. That’s how close I think Britain is to Nazi Germany.”

Curious Cryptos’ Commentary – Litecoin (LTC)

One of the most remarkable design features of BTC is this concept that every single transaction is made public, available to anyone who has access to the internet thingamajig. The movement of coins can be tracked between wallets, if one has enough time, patience, and is of a diligent nature.

There is an element of privacy for wallets (aka public keys – see the Curious Cryptos’ free training course Module 1.4:

https://www.curiouscryptos.com/_files/ugd/22f8f8_feb08332181a48b6819b46d7e624470b.pdf)

in as much as that the ownership of any wallet that only ever interacts with another wallet in an entirely decentralised manner cannot be confirmed unless the owner self-declares.

Any wallet that interacts with a centralised exchange (I suspect most of them) can be linked to an individual. Theoretically, any wallet that has a centralised connection via another wallet can be linked to a person, but that is a materially non-trivial task.

As an example, here is a not entirely randomly chosen wallet that has only ever seen two transactions:

Quite rightly the forces of law and order – and particularly the taxman – have been successful in tracking down the proceeds of illicit trade in the crypto world.

The most famous bust of them all, which brought down the original and most successful darknet website – the first and only Silk Road – netted $1bn for the US Department of Justice (DoJ) and two lifetime sentences plus forty years without parole for its creator Ross Ulbricht.

(Fun fact – Donald Trump was widely expected to pardon Ross, but certain events intervened.)

Thrillingly enough, just last month a shedload of BTC that had been hacked from Silk Road years ago was also tracked down by the Feds. This stash is now worth about $2bn and has been used to pay off Ross’ debt to the US government of $183mm.

In a futile attempt at any possible future reconciliation – and associated early release – he has agreed to forgo the remaining $1.8bn or so.

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There are some people who believe that this apparent lack of privacy is a major drawback for cryptos.

I am not getting into that debate, but I am confident that the supporters of that point of view have everyone’s best interests at heart. The solution that was proposed and implemented is a series of privacy coins, for which through some complicated cryptographical wizardry, all transactions can still be seen on the blockchain, but sending and receiving wallets are – to some extent – hidden.

Early examples include Monero (XMR) and ZCash (ZEC).

Personally, I feel conflicted on the issue of privacy coins.

I understand the motivation for them (we could all do with a great deal more privacy from the prying eyes of Western Liberal democratic governments) but I also worry that their existence entrenches one of the most popular but most wildly mistaken tropes of cryptos. This trope centres on a falsehood that cryptos are simply a vehicle for drug dealers to launder their illicit gains.

It isn’t difficult to see how smart people who know not of the benefits to mankind of the crypto revolution can fall for this fallacy.

In 2021, the US authorities in the shape of the taxman started making some very concerning statements about the taxation treatment of privacy coins. To be more precise, concerning statements about how the owners of privacy coins might be treated going forward.

Hands up, at the time I owned XMR.

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The tax treatment of crypto gains and losses has not been detailed in the UK. One can only assume for now that CGT as applied to capital gains on shares is a likely outcome, and the passive income from loaning or staking cryptos will be treated like dividends on shares.

Anyone who has had complicated tax returns in the past understands how easy it is to make mistakes. Any material mistake made honestly will incur the taxman’s wrath of a 30% fine of that mistake. If you are stupid enough to deliberately make a material misstatement, the fine is limited at 100% of your deception.

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I suspect that as the taxman gets on top of the crypto tax complications, then owners of privacy coins will attract a great deal more attention and interest from the authorities compared to those who do not. I have nothing to hide, but I know how easy it is to make a mistake, and how painful those honest mistakes can be.

With that in mind, I sold out of my XMR some time ago.

Now an upgrade of LTC has occurred, known as Mimblewimble:

“Taking its name from the Harry Potter books series’ well-known tongue tying spell that ties the victim’s tongue to prevent it from revealing specific information, Mimblewimble protocol literally works like a spell. It provides a framework for a blockchain that offers a new realm of potential in terms of scalability, fungibility, privacy and crypto anonymity, as the protocol allows cryptocurrency information to remain completely anonymous.

Mimblewimble transactions' complete anonymity feature stands in contrast to the pseudonymity of Bitcoin and other cryptocurrencies where usually three secrets are revealed: the sender’s address, the amount of crypto sent and the receiver’s address. Mimblewimble does not reveal any of the three secrets or information.”

Rather embarrassingly for me, this upgrade was implemented last November, and I failed to fully comprehend its implications, though they seem very clear to me now.

I am slightly up on the trade but whatever the gains or losses are, I do not want to be involved in privacy coins. Get rid and move on is my opinion, but as always, that comment is for information and discussion. It is most certainly not investment advice.