Gemini's introduction of Zcash withdrawal feature raises doubts, analyst asks: Can Bitcoin also be withdrawn using a mixer?

The New York-based compliant cryptocurrency exchange Gemini launched the shielded withdrawal feature for the privacy coin Zcash yesterday (9/29), seemingly enhancing user privacy within regulatory frameworks. However, beneath the surface, Gemini will still be required to submit relevant user data to regulatory authorities when requested in the future.

Surface-level Anonymous Withdrawal Feature

The Gemini cryptocurrency exchange has announced the implementation of shielded Zcash (ZEC) withdrawals within a regulatory framework. The Zcash developer, Electric Coin Company (ECC), stated in a blog post that Gemini has introduced this feature with approval from the New York State Department of Financial Services (NYDFS). Jack Gavigan, the regulatory relations lead, mentioned:

This partnership demonstrates Zcash's compliance with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations recommended by the Financial Action Task Force (FATF).

Zcash's Privacy Feature

Zcash, launched in 2016, is a privacy-focused cryptocurrency project derived from modifying the Bitcoin code. It utilizes zero-knowledge proofs (zk-SNARK) technology to offer "optional" shielded pools for anonymous transactions. Data before entering the shielded pool is publicly transparent, but addresses and balances are encrypted.

Therefore, users must actively choose to use Zcash's shielded pool for transactions. By default, transactions do not occur in the shielded pool and are publicly visible and unencrypted, similar to Bitcoin. Gemini's withdrawal option provides the shielded pool functionality.

(Additional) What is Zero-Knowledge Proof?: Imagine having a safe box in front of you. How can you prove you know the password to the safe without telling others the digits? The simplest way is to open the safe in front of others, proving you know the password without revealing any information. The essence of zero-knowledge proof lies in the fact that the Prover does not need to disclose the information to the Verifier, yet the Verifier can verify if the Prover truly holds certain information.

Regulators Can Still Access Data

ECC stated in the announcement that regulatory authorities are striving to strike a balance between user privacy and lawful data access. In the future, users can opt for anonymous transactions with Zcash withdrawals on the Gemini exchange to prevent unknown third parties from viewing their transaction records through the blockchain. However, regulators may still request relevant data from the exchange based on legal and audit requirements.

Some industry insiders sensitive to regulatory news expressed surprise at Gemini's move. Hasu, a well-known researcher at the options exchange Deribit, tweeted:

This is quite the news to me. Does this mean regulators will also approve users withdrawing Bitcoin through mixers in the future?

This can be seen as progress in privacy coins' regulation. In September 2019, Korean exchanges UpBit and OKEx Korea announced the delisting of major privacy coins, including Monero (XMR), Dash (DASH), Zcash (ZEC), among others.

Gemini will still provide user data to regulators when necessary, so user privacy is not significantly enhanced. Moreover, blockchain data analysis firm Chainalysis previously pointed out that the percentage of transactions using Zcash's shielded feature is less than 0.7%.