Huobi Growth Academy | In-Depth Research Report on Privacy Coins: Paradigm Shift from Anonymous Assets to Compliant Privacy Infrastructure

1. The Institutional Ceiling of Complete Anonymity: The Advantages and Dilemmas of the Monero Model

 The complete anonymity privacy model, represented by Monero, constitutes the earliest and most "pure" technical path in the privacy track. Its core goal is not to make trade-offs between transparency and privacy, but to minimize observable on-chain information, severing as much as possible the ability of third parties to extract transaction semantics from the public ledger. To achieve this, Monero employs mechanisms like ring signatures, stealth addresses, and Ring Confidential Transactions (RingCT) to simultaneously obscure the three key elements: sender, receiver, and amount. External observers can confirm "a transaction occurred," but find it difficult to deterministically reconstruct the transaction path, counterparties, and value. For individual users, this experience of "privacy by default, unconditional privacy" is highly attractive—it transforms privacy from an optional feature into a system norm, significantly reducing the risk of "financial behavior being tracked long-term by data analysis tools," and grants users anonymity and unlinkability akin to cash at the levels of payment, transfer, and asset holding.

On a technical level, the value of complete anonymity privacy lies not only in "hiding" but also in its systemic design against on-chain analysis. The primary externality of transparent chains is "composable surveillance": the public information from a single transaction is continuously pieced together, gradually linked to real-world identities through methods like address clustering, behavioral pattern recognition, and cross-validation with off-chain data, ultimately forming a "financial profile" that can be priced and abused. The significance of Monero is that it raises the cost of this path to a level sufficient to alter behavior—when large-scale, low-cost attribution analysis is no longer reliable, the deterrent power of surveillance and the feasibility of scams decline simultaneously. In other words, Monero does not serve only "those doing bad things"; it also responds to a more fundamental reality: in a digital environment, privacy itself is part of security. However, the fundamental problem with complete anonymity privacy is that its anonymity is irrevocable and non-conditional. For financial institutions, transaction information is not only essential for internal risk control and auditing but also a legal obligation carrier under regulatory requirements. Institutions need to retain traceable, explainable, and submittable evidence chains within frameworks like KYC/AML, sanctions compliance, counterparty risk management, anti-fraud, tax, and accounting audits. Complete anonymous systems "permanently lock" this information at the protocol layer, resulting in a structural inability for institutions to comply, even if they are subjectively willing: when regulators demand explanations for fund sources, proof of counterparty identity, or provision of transaction amounts and purposes, institutions cannot reconstruct key information from the chain, nor can they provide verifiable disclosures to third parties. This is not a matter of "regulators not understanding the technology," but a direct conflict between institutional goals and technical design—the bottom line of the modern financial system is "auditable when necessary," while the bottom line of complete anonymity privacy is "not auditable under any circumstances."

The external manifestation of this conflict is the systemic exclusion of strongly anonymous assets by mainstream financial infrastructure: delisting from exchanges, lack of support from payment and custody institutions, and inability for compliant capital to enter. It is worth noting that this does not mean the real demand disappears. On the contrary, demand often migrates to more concealed, higher-friction channels, fostering a "compliance vacuum" and a boom in "grey intermediaries." In the case of Monero, instant exchange services at times absorbed significant purchase and conversion demand. Users paid higher spreads and fees for accessibility, bearing the costs of fund freezes, counterparty risk, and information opacity. More critically, the business models of such intermediaries may introduce persistent structural selling pressure: when service providers quickly convert the Monero fees they collect into stablecoins and cash out, the market experiences passive selling that is unrelated to genuine buy-side demand but occurs continuously, thereby suppressing price discovery over the long term. Thus, a paradox emerges: the more an asset is excluded from compliant channels, the more demand may concentrate in high-friction intermediaries; the stronger the intermediaries, the more distorted the price; the more distorted the price, the harder it is for mainstream capital to evaluate and enter in a "normal market" manner, creating a vicious cycle. This process is not a matter of "the market not recognizing privacy," but a result shaped jointly by institutional and channel structures.

Therefore, evaluating the Monero model should not remain at moralistic debates but return to the practical constraints of institutional compatibility: complete anonymity privacy is "security by default" in the personal world, but "unusable by default" in the institutional world. The more extreme its advantages, the more rigid its dilemmas. Even if the privacy narrative heats up in the future, the main battlefield for completely anonymous assets will likely remain primarily within non-institutionalized demand and specific communities. In the institutional era, mainstream finance is more likely to opt for "controlled anonymity" and "selective disclosure"—protecting both commercial secrets and user privacy while providing the evidence required for audits and regulation under authorized conditions. In other words, Monero is not a technological failure but is locked into a use case that institutions find difficult to accommodate: it proves that strong anonymity is feasible in engineering, yet it also proves with equal clarity that as finance enters the compliance era, the competitive focus of privacy will shift from "whether everything can be hidden" to "whether everything can be proven when needed."

2. The Rise of Selective Privacy

 Against the backdrop of complete anonymity privacy gradually hitting institutional ceilings, the privacy track has begun a directional shift. "Selective privacy" has emerged as a new path of technological and institutional compromise. Its core is not to combat transparency but to introduce a controllable, authorizable, and disclosable privacy layer on top of a ledger that is verifiable by default. The fundamental logic of this shift is that privacy is no longer seen as a tool for evading regulation but is redefined as an infrastructural capability that can be absorbed by institutions. Zcash is the most representative early practice of the selective privacy path. Through its design featuring both transparent addresses (t-addresses) and shielded addresses (z-addresses), it provides users with the freedom to choose between public and private transactions. When users employ shielded addresses, the sender, receiver, and amount of a transaction are encrypted and stored on-chain; when compliance or audit needs arise, users can disclose complete transaction information to specific third parties via a "viewing key." This architecture is a milestone in concept: it was the first to explicitly propose within a mainstream privacy project that privacy does not necessarily have to come at the cost of verifiability, and that compliance does not inevitably mean complete transparency.

From the perspective of institutional evolution, Zcash's value lies not in its adoption rate but in its "proof-of-concept" significance. It demonstrated that privacy can be an option rather than the system default, and that cryptographic tools can reserve technical interfaces for regulatory disclosure. This point is particularly important in the current regulatory context: major global jurisdictions have not rejected privacy itself but rather "non-auditable anonymity." Zcash's design precisely addresses this core concern. However, as selective privacy moves from a "personal transfer tool" to "institutional trading infrastructure," Zcash's structural limitations become apparent. Its privacy model is essentially still a binary choice at the transaction level: a transaction is either completely public or entirely hidden. For real-world financial scenarios, this binary structure is too crude. Institutional transactions involve not just the single dimension of "transaction parties" but multiple layers of participants and responsibility bearers—counterparties need to confirm fulfillment conditions, clearing and settlement institutions need to know amounts and timing, auditors need to verify complete records, and regulators may only care about fund sources and compliance attributes. The information needs of these entities are neither symmetrical nor fully overlapping.

In such a context, Zcash cannot perform componentized splitting and differential authorization of transaction information. Institutions cannot disclose only "necessary information" but must choose between "full disclosure" and "full concealment." This means that once entering complex financial processes, Zcash either exposes too much commercially sensitive information or fails to meet the most basic compliance requirements. Its privacy capabilities thus struggle to embed into real institutional workflows, remaining relegated to marginal or experimental use. In stark contrast is another selective privacy paradigm represented by Canton Network. Canton does not start from "anonymous assets" but directly takes the business processes and institutional constraints of financial institutions as its design starting point. Its core concept is not "hiding transactions" but "managing information access rights." Through the smart contract language Daml, Canton splits a transaction into multiple logical components, where different participants can only see data fragments relevant to their permissions, with the remaining information isolated at the protocol layer. This design brings a fundamental change. Privacy is no longer an additional attribute after transaction completion but is embedded into the contract structure and permission system, becoming part of the compliance process. 

From a broader perspective, the difference between Zcash and Canton reveals the divergent directions of the privacy track. The former is still grounded in the crypto-native world, attempting to find a balance between personal privacy and compliance; the latter proactively embraces the real-world financial system, engineering, process-izing, and institutionalizing privacy. As the proportion of institutional capital in the crypto market continues to rise, the main battlefield of the privacy track will migrate accordingly. The future competitive focus will no longer be on who can hide the most thoroughly, but on who can be regulated, audited, and used at scale without exposing unnecessary information. Under this standard, selective privacy is no longer just a technical route but a necessary path to mainstream finance.

3. Privacy 2.0: Infrastructure Upgrade from Transaction Hiding to Privacy-Preserving Computation

As privacy is redefined as a necessary condition for institutional on-chain activity, the technical boundaries and value scope of the privacy track also expand. Privacy is no longer understood merely as "whether a transaction can be seen" but begins to evolve towards a more fundamental question: can the system perform computation, collaboration, and decision-making without exposing the data itself? This shift marks the privacy track's transition from the 1.0 stage of "privacy assets / privacy transfers" to the 2.0 stage centered on privacy-preserving computation, upgrading privacy from an optional feature to a general-purpose infrastructure. In the Privacy 1.0 era, the technical focus was primarily on "what to hide" and "how to hide," i.e., how to obscure transaction paths, amounts, and identity linkages. In the Privacy 2.0 era, the focus shifts to "what can still be done while in a hidden state." This distinction is crucial. Institutions do not only need private transfers; they need to perform complex operations like trade matching, risk calculation, clearing and settlement, strategy execution, and data analysis under privacy-preserving conditions. If privacy only covers the payment layer and not the business logic layer, its value to institutions remains limited.

Aztec Network represents the earliest form of this shift within the blockchain system. Aztec does not treat privacy as a tool against transparency but embeds it as a programmable attribute of smart contracts into the execution environment. Through its zero-knowledge proof-based Rollup architecture, Aztec allows developers to granularly define at the contract level which states are private and which are public, enabling hybrid logic of "partial privacy, partial transparency." This capability allows privacy to extend beyond simple transfers to cover complex financial structures like lending, trading, vault management, and DAO governance. However, Privacy 2.0 does not stop within the blockchain-native world. With the emergence of AI, data-intensive finance, and cross-institutional collaboration needs, relying solely on on-chain zero-knowledge proofs is insufficient to cover all scenarios. Consequently, the privacy track has begun evolving towards a broader "privacy-preserving computation network." Projects like Nillion and Arcium were born in this context. The common characteristic of such projects is that they do not attempt to replace blockchain but exist as a privacy-preserving collaboration layer between blockchain and real-world applications. Through a combination of Multi-Party Computation (MPC), Fully Homomorphic Encryption (FHE), and Zero-Knowledge Proofs (ZKP), data can be stored, accessed, and computed while remaining encrypted throughout the process. Participants can jointly complete tasks like model inference, risk assessment, or strategy execution without obtaining the raw data. This capability upgrades privacy from a "transaction-layer attribute" to a "computation-layer capability," expanding its potential market to areas like AI inference, institutional dark pool trading, RWA data disclosure, and inter-enterprise data collaboration.

Compared to traditional privacy coins, the value proposition of privacy-preserving computation projects has changed significantly. They do not rely on a "privacy premium" as a core narrative but on functional irreplaceability. When certain computations simply cannot be performed in an open environment, or when performing them in plaintext would lead to severe commercial risks and security issues, privacy-preserving computation is no longer a question of "whether it's needed" but "cannot operate without it." This also gives the privacy track, for the first time, the potential for a "deep moat": once data, models, and processes are established within a particular privacy-preserving computation network, the migration cost becomes significantly higher than for ordinary DeFi protocols. Another notable feature of the Privacy 2.0 stage is the engineering, modularization, and invisibility of privacy. Privacy no longer exists in the explicit form of "privacy coins" or "privacy protocols" but is decomposed into reusable modules embedded into wallets, account abstraction, Layer 2s, cross-chain bridges, and enterprise systems. End-users may not even realize they are "using privacy," but their asset balances, trading strategies, identity linkages, and behavioral patterns are protected by default. This "invisible privacy" aligns better with the practical path to mass adoption.

Simultaneously, regulatory focus has shifted accordingly. In the Privacy 1.0 stage, the core regulatory question was "does anonymity exist?" In the Privacy 2.0 stage, the question becomes "can compliance be verified without exposing raw data?" Zero-knowledge proofs, verifiable computation, and rule-level compliance thus become the key interfaces for privacy-preserving computation projects to engage with the institutional environment. Privacy is no longer seen as a source of risk but is redefined as a technical means to achieve compliance. In summary, Privacy 2.0 is not a simple upgrade to privacy coins but a systemic response to "how blockchain integrates into the real economy." It signifies that the competitive dimensions of the privacy track are shifting from the asset layer to the execution layer, from the payment layer to the computation layer, and from ideology to engineering capability. In the institutional era, privacy projects with genuine long-term value may not be the most "mysterious" but will certainly be the most "usable." Privacy-preserving computation is the concentrated embodiment of this logic at the technical level.

4. Conclusion

In summary, the core watershed in the privacy track is no longer "whether to have privacy" but "how to use privacy under compliance premises." The complete anonymity model possesses irreplaceable security value at the individual level, but its institutional non-auditability determines its difficulty in supporting institutional-grade financial activities. Selective privacy, through its disclosable, authorizable design, provides a feasible technical interface between privacy and regulation. The rise of Privacy 2.0 further upgrades privacy from an asset attribute to an infrastructural capability for computation and collaboration. In the future, privacy will no longer exist as an explicit function but will be embedded as a default system assumption into various financial and data processes. Privacy projects with genuine long-term value may not be the most "secretive" but will certainly be the most "usable, verifiable, and compliant." This is the key marker of the privacy track's transition from the experimental stage to maturity.