Firo Private Transactions & Balancing with MICA regulations

[reuben]

As you are aware, privacy coins have been facing increasing regulatory pressure that have resulted in delistings in several regions particularly in Europe because of new MICA regulations which prohibit the listing of cryptocurrencies that have inbuilt anonymization features.

We have been liaising with important exchanges on this to see how we can come to a balanced approach on this and meet both our needs.

From feedback, exchanges do not want to accept deposits that have an unidentified sender even if it’s to a KYC-ed account. This means masternode rewards and Lelantus transactions would need to be excluded. So exchanges would need to put those funds on hold and return it to the sender. Unlike in a Bitcoin or Eth transaction where they can easily just send it back to the sender address, they can’t do this automatically because the sender is unidentified from the transaction.

We were given two options to remain listed:
a) Remove privacy completely; or
b) Give the exchanges a way for users to prove they were the ones who made a private transaction deposit so that they can return the funds to the user.

One of the reasons why Firo was singled out vs other coins that still have transparent pools as well is because there are many users who do use Lelantus transactions to deposit into the exchange (vs other coins) that results in a lot of manual work for the exchange.

Obviously option a) is out of the question. b) is still workable provided there is no backdoor and it’s at the option of the user. This was always the plan to allow people to selectively reveal to who they choose that they paid for something and is important for even normal use cases. (see Lelantus Spark payment proofs).

We already have devised a way for users to sign a message with their wallet to prove that they made a Lelantus transaction (similar to Bitcoin signing a message) so that exchanges can return funds to them if they had deposited it via a Lelantus transaction. We are awaiting feedback if this is satisfactory but are confident that it will be.

This however has several ramifications:

1. Coins with mandatory privacy such as XMR will have problems staying listed. This is because every deposit would need to go through this process and there is no way for them to send from a transparent address. This further pushes back Firo’s goal to move towards mandatory privacy, though we still can have privacy by default.
2. The UI for our wallets in Spark/Lelantus would need to warn when sending to a transparent address.

Another alternative which I’m personally not to keen on is to create a special type of transparent address that only will accept transparent transactions. This to me sets a dangerous precedent since it creates barriers between the private and transparent layers.

Of course one might ask, what is preventing a user from unshielding to a transparent address and then sending to an exchange address? Nothing for now which is why I’m still okay on this proposal. It does add additional friction but to me this is the lesser evil than the eventual complete delisting from centralized exchanges or at be limited to the more anon ones like TradeOgre or NonKYC or ones that live in regulatory grey areas. This to me hurts adoption and also breaks a lot of integrations that rely on these centralized exchanges.

In an ideal world, I would want mandatory privacy and not rely on centralized exchanges but Firo in its current state of growth cannot do so. As this is a departure from our previously stated commitment to move towards mandatory privacy ASAP, I would like to seek community feedback on this. From the development side we would still be pushing adoption of Spark addresses via Helsing in masternodes and making it the default way to transact in our wallets. That doesn’t change.

I know some would say, screw regulations, screw centralized exchanges, we’ll survive but I think a more pragmatic approach is required here for the long term viability of the project. Also while projects like XMR would still survive, it would also suffer a huge loss of liquidity if it were to lose Binance and Kraken as well though it would also push DEX adoption (which is also what Firo is gunning for).

I am of course frustrated with the hypocrisy of such regulations but at the same time happy and relieved that there’s a way forward for the moment with this. To me, the line that they are drawing while not desirable is not to the point of compromising on the fundamentals of our project. To make it clear, I would never support a backdoor where the core team or regulators can deanonymize transactions but will always support the ability for the user to disclose if they want to.

Would like everyone’s thoughts on this!

[nrsimha]

I personally don’t have issue with optional transparent transactions if that will allow us to be more accessible.

It is for me like option on Android phones to install apps outside of Play store. As default all people use Play store, but if you need you can install apk from elsewhere.

So if we will be privacy by default and optionally be able to send transparent it will not make Firo less of privacy coin.

[zqj0754]

1. Because of realistic conditions, FIRO need to keep the transparent address for now.
2. Let XMR take the lead in developing the DEX market for us.

[Raccoon]

I’ve personally never used BTC in a large capacity but I assume the message/signature is similar to how it would be in the Cosmos ecosystem? Basically when you send a tx you send it with a memo so it knows where to go.

But this makes me think of something you said recently and I’m wondering if we could maybe steer the idea to this route -
I personally like the idea of a private/transparent layer, could almost call it FIRO layer1/layer2.
Layer 1 would be Spark auto-anonymity FIRO would be a monetary proof of verification that could be easily traded privately with no need to anonymize. This would be where the miners and master nodes work essentially the core of everything.
Layer 2 would be Elysium Transparent tokenization layer (which would have to be enabled) with 1-to-1 wFIRO this would also allow us to more easily pair with a stable coin and more easily move our wrapped coins off chain (I think). User could choose to get earnings from miners and MN to a wRAP address which automatically would create it on the Transparent layer if chosen.

When I think of tokens or contracts on a private chain I get kind of worried, what if some bug is found in the code of a token and can’t be worked out for months or years because the dev cant see what happened, or why it happened. What if several tokens were forked from the same code and now the token layer can’t be trusted.

This could allow for both options to remain true, while keeping our ecosystem generally the same.
I’ve never been the best with words so I made a quick diagram of what I’m thinking. Question would be, is something like this possible, especially in a short time-frame to avoid de-listing?? I think maybe if the shaded green part is for a later project.

[Spoon]

100% agree with nrsimha. I would add that in my country (Switzerland) compromise is part of our culture.

[i2pZ7812HTZV69]

If Firo does not become mandatory default privacy coin at protocol level it will never work.
We already have zcash and the market has already spoken. (the market has ways to reward and punish products and companies) (low zcash prices)
I didn’t say or care about miner rewards changes as they may or may not be affects to decentralization and censorship resistance properties due to 100% miner dumping or having hostile state actors getting involved in hostile mining and dumping of coin.
their can be multiple solution at protocol level like solo mining, p2pool mining etc…
But i was forced to make account to say only mandatory default privacy coin are truly Fungible.
and thus private individual or private investor will always prefer privacy coins over surveillance coins.
We could already solve those problem of hostile state regulation by having multiple full nodes clients not under known Firo developers, having more unknown developers join Firo team and remain Unknown, active development of native Atomic swaps DEX, and having others platforms like Matrix, SimpleX, Session, Nostr communications forums.
If Firo team does not make Firo base layer mandatory default private it will send bad signal and then the market will decide and give judgement.
(and everyone knows what it will be )
And question will come then whether to remove the dev fund as it will clearly be seen as a liability to Firo growth as a privacy coin.
Firo should not try to compete with zcash on how fast it can put backdoor (pun intended) on-chain in every transaction.
Firo could provide alternative options to grow adoption with spark ordinals and spark assets with high fees or low fees.
Firo could provide better payment features.
Firo could provide post quantum security and privacy.(instead of compliance which will never be enough until their is either fake privacy or backdoor)(again pun intended)

[Obfustake]

So glad we have CFC members here to put in the work and make Firo better, and not just take the position as a title and sit around like fat cats. Thank you nrsimha for responding and giving your opinion. With current market conditions I think it’s obvious we cannot afford to alienate any central exchanges. If and when the time is right in the dex world, we go full privacy then.

[Fiendish]

“b) Give the exchanges a way for users to prove they were the ones who made a private transaction deposit so that they can return the funds to the user.”

This to me seems the most beneficial approach to Firo. The fewer people Firo is accessible to, then the fewer people Firo can assist/help.

It also makes DEX’s more attractive for those that want maximum privacy, & we really need maximum incentive to build out DEX infrastructures, while still maintaining current userbases.

[jolus]

I also don’t have any issue with optional transparent transactions if that will allow us to be more accessible.

We cant afford to lose CEX.

[FiroFan]

My opinion remains the same - as before, we should move towards the course of mandatory and uncontested privacy of transactions with Lelantus Spark, with the possibility of disclosing transaction details only on the initiative of the sender.

Is this what centralized exchanges want from us, so that the details of the transaction when depositing funds are disclosed by the sender? Then I don’t see any problems in this - coins can be well anonymized before the transaction of depositing funds on the exchange.

Firo should become a technically reference coin, where is my money, they are only mine. And there is nothing for someone to look into my pocket - what, how much and from whom I have there. This is the real philosophy of cryptocurrencies.

[reuben]

Let me clarify!

With the new regulations, exchanges will not accept any funds from an unidentified sender/anonymous sources even if the user can provide proof they own it. The proof method they are asking for is purely to identify so they can return funds to the correct person for funds they receive via an anonymous source. This also incurs administrative cost since this has to be done for each private transaction they receive.

In the event all transactions are mandatorily private, it will result in a delist as currently, the exchanges are unwilling to perform the above ‘identification process’ for all transactions.

An ideal way to do it might be to have the exchange do an inbuilt automated method to prove someone made a deposit via a challenge that they need to sign instead of using customer support. However at this time, exchanges are unwilling to implement this custom feature especially with the regulatory scrutiny as MICA comes online next year.

While logically this doesn’t makes sense as someone can just unshield to a transparent address and then send it to Binance, a lot of regulation is just ticking boxes unless you have the policy maker/regulators’ ear. Personally, to me this is the lesser evil without sacrifice in privacy given that there is only one hop to the exchange and that exchanges only use transparent addresses for the moment anyway.

Also I hear the concerns that Zcash has dwindled because of its optional privacy. I think this is overly simplistic and there are many other reasons they haven’t done well (but as it’s not a project I’m involved in, I rather not comment too much). Note that we don’t know what will happen to Monero’s price when exchanges delist it en-masse. As I mentioned, I believe they are big enough to survive but will still take a big hit. No one who is realistic even within the Monero community believes they will escape unscathed if this happens.

Don’t get me wrong, I’m very for mandatory privacy and if there’s a way to do it without harming the project too much, I would support it but this is a stopgap solution as we see how the regulatory situation develops. If somehow Monero can remain listed on major CEXes or remain supported by major DEXes, then it would be a viable path but alone we are not large enough to be in a bargaining position.

[zqj0754]

agree

[Blacksea]

Hello, as far as I understand, CEX exchanges, especially Binance, say that privacy coins will be delisted if they are not regulated due to the mica protocol. I think this will be a disaster for privacy coins, especially for Firo, in today’s conditions. I think the price will bottom and even the project will become impossible to sustain, so an urgent solution must be found. What is your road map on this issue?

[reuben]

You might want to read the very first post which actually outlines the way forward clearly which is what this post is about, seeking community feedback whether they are amenable to such a solution.

[nrsimha]

Can somebody who is strictly against to have ability to optionally send to/from transparent address explain what are the issues with it if it is optional? @FiroFan @i2pZ7812HTZV69

I understand possible technical argument as there may be more code to maintain.

But didn’t we have some saying like “My money my business” or something like that? Why should have somebody problem with if I decide to make selected transaction transparent (especially if that would allow Firo to be more accessible? And of course Lelantus Spark privacy should be default.

[nrsimha]

When you have some project or company, you have bank account where transactions are not visible to the public, but you can open also transparent account where transactions to that account (address) are visible to all. (It is used mostly for some kind of non profit project or for project where you want to be transparent with project’s finance)

[i2pZ7812HTZV69]

@nrsimha question is whether ditching mandatory default privacy at base level will even work to improve adoption.
its almost funny to me that no one here understand that both regulators and centralized exchanges(current ones) do not like you or any one at the privacy community.
they will delist all privacy coin anyway (unless implementation of backdoor).
and their is no indication that privacy coin that are optional will get any adoption in the first place.
plus we already have 10000 surveillance coins for those that want transparency.
if any one wants surveillance let them chose among those 10000 coins and Atomic Swaps them.

[Enn0]

regulation is just ticking boxes

Yup, and sadly they probably don’t even know what they mean in the first place.

[FIDO]

What about creating a Firo “clear” or transparent coin which has no privacy. An option baked into the wallets to exchange Firo to Firo clear, which would not show the transaction from Firo to Firo clear or Firo clear to Firo, or at least those transactions would have privacy built in. Then list Firo clear all over the exchanges. Let Firo maintain full anonimity without compromise.

Or some variation of this.

[reuben]

There are very strong arguments on why mandatory privacy is important. The main issue of having optional privacy is the lack of adoption of the privacy features making those who use private transactions ‘stand out’ vs others. This is something that has plagued every single coin that has some sort of ‘opt-in’ privacy.

Your effective anonymity set, while high, doesn’t encompass your entire userbase.

Additionally, transparent layers leak information and make it such that those who use privacy features without being careful can reveal themselves for e.g. if they shield and unshield similar amounts or there is a pattern.

Also exchanges like to take the easy route and will integrate the transparent addresses while leaving out the private addresses.

That being said, the reality now is however that they simply won’t list privacy coins unless you have some big VC backer (MobileCoin for e.g.)

Also it’s worth noting that other compulsory privacy coins have not done that great either. Monero is the exception rather than the rule. Grin, Beam, Pirate…while mandatorily private all have their own issues and have all suffered in terms of getting listings or quirks with their addressing/system.

This is why I think that privacy by default in our wallets while not being mandatory is a good stopgap until Firo gets bigger and more traction.