Virtual money Zcash a hit, but may not find its place in wider financial system

This article is more than 12 months old

NEW YORK: Zcash, the latest virtual currency, has been a success since its launch seven months ago, drawing in new users with promises of unrivalled privacy protection.

But it could face a tough battle integrating into the wider financial system.

After debuting on currency trading platforms in October, Zcash took off, hitting an exchange rate of US$1,000 (S$1,400) a unit, putting it in league with the 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 May 4, South African consumers.

Brazilians now use Zcash to pay taxes, electricity bills and make purchases. To make its mark in the world of virtual currencies, Zcash boasts that it protects user privacy.

But 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 who developed the cryptography have been publicly identified.

It is based on a technology dubbed zk-Snark, which allows untraceable transactions.

The resulting data is encrypted, but users are free to identify themselves.

"You don't expose all of your communications or all of your transactions to random people on the Internet you barely know," said Mr Zooko Wilcox, chief executive officer of Zerocoin Electric Coin Company, which manages Zcash.

Virtual currencies are produced, or "mined" by banks of computers solving complex algorithms, an operation that can be expensive.

Mr Wilcox told AFP he hoped the expanded privacy protection could overcome businesses' reluctance to adopt Zcash as a trustworthy alternative to traditional currencies.

But Mr Jonathan Levin, co-founder of Chainalysis, a start-up that helps banks and authorities trace the origins and destinations of virtual currency payments, doubted Zcash will find its place in the wider financial system.

He said it is hard for existing financial institutions to integrate these types of cryptocurrencies as information on the origin of funds is hard to ascertain.

Nevertheless, despite Zcash's efforts to protect users, the currency itself may be vulnerable to hacking or counterfeiting. In a June attack, hackers reportedly made off with 3.6 million units of the cryptocurrency with a value of US$50 million.

Cryptography consultant Peter Todd said in a November blog that Zcash's encryption could be weak, allowing hackers to crack the code. - AFP

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