Crypto privacy gained attention in 2025 as new technologies faced off against regulators, a trend that will escalate in 2026 with developers innovating and legal disputes nearing resolution.
Initially, Bitcoin (BTC) was perceived as an anonymous payment method, despite its transparent nature. However, the rise of onchain analytics and surveillance has revealed that transparent blockchains lack privacy.
This has spurred an arms race between pro-privacy developers, onchain surveillance entities, and regulators, leading to significant legal cases. The creators of the decentralized Ether (ETH) mixer Tornado Cash are contested whether software development counts as a financial service, while the developers of the Bitcoin non-custodial mixer Samourai Wallet faced prison sentences from a US court.
Nevertheless, privacy-centric development gained momentum this year. Experts indicate that while the privacy toolset remained largely static in 2025, advancements are anticipated in 2026 with a new wave of “pragmatic privacy,” balancing privacy with compliance with sanctions.
How we sleepwalked into traceable money
The ability of payment processors to clearly identify parties, products, and services involved in transactions enables censorship. This is not just a theoretical concern; in 2025, leading PC game distributors Steam and Itch.io purged adult content under pressure from payment processors. Earlier, WikiLeaks was cut off by payment providers, despite a statement from the US Treasury in 2011 asserting that it could not be sanctioned.
WikiLeaks adopted Bitcoin, establishing it as uncensorable money. Bitcoin emerged from cypherpunk circles that circulated Timothy May’s influential “Crypto Anarchist Manifesto,” advocating for encrypted exchanges that guarantee total anonymity, speech freedom, and trading freedom since 1988. Today, much of the crypto narrative revolves around institutional adoption, regulatory progress, and financial speculation, yet the crypto community has continued to champion digital rights and privacy.
Related: Crypto urges SEC to see the good in blockchain privacy tools
The three layers of crypto privacy in 2026
Crypto privacy can be understood through three layers. At the protocol layer, layer 2s (L2s) and privacy-focused coins like Monero (XMR) implement encryption, shielded pools, and specific transaction formats to obscure transaction details.
At the user level, privacy relies on user competence: selection of wallets, address reuse, device fingerprints, network behaviors (VPN/Tor), privacy tools, and overall operational security (OpSec).
At the perimeter layer, fiat on- and off-ramps, such as crypto exchanges, banks, stablecoin issuers, and analytics companies that connect blockchain activities to real identities, can eliminate the protocol privacy established in other layers.
Nathaniel Fried, co-founder and CEO of 0xBow — the firm behind the Ethereum-based privacy tool Privacy Pools — informed Cointelegraph that the perimeter layer, especially fiat on- and off-ramps, presents a significant privacy bottleneck. For compliance, these platforms scrutinize deposits using blockchain analytics services, which typically disregard most privacy-preserving solutions.
Zachary Williamson, co-founder and CEO of privacy-oriented decentralized blockchain Aztec, mentioned that many privacy protections should be automated for users. “It isn’t reasonable to expect users to fully understand what information they are transmitting,” he said, adding that “this must be handled securely and automatically by the application layer.“
The new privacy tech stack
As outlined earlier, securing privacy as a crypto user necessitates a strategy that encompasses the protocol, user, and perimeter layers. Williamson acknowledged Privacy Pools as the sole significant enhancement in privacy tool availability in 2025.
He asserted that the team “has been doing exceptional work developing safer methods for private transactions.” Williamson recommended anoncoin Zcash (ZEC) for the protocol layer until Aztec’s mainnet rollout.
Privacy Pools, as suggested by Fried, are shared pools where users can deposit and later withdraw with zero-knowledge proofs verifying that their funds came from a “clean” subset of deposits, thereby enabling anonymity while confirming compliance with sanctions.
Proper usage is crucial, and maintaining assets in the pool for a while enhances anonymity. Fried noted that withdrawing back to the original depositing address does not bolster privacy, providing another instance of poor usage:
“Sometimes we also observe a specific deposit amount come in, e.g., 0.2439 ETH, followed by an immediate withdrawal of 0.02439, which arouses significant suspicion, but isn’t definitively the same user.”
Both Williamson and Fried recommended the use of Nym for network anonymity. Nym operates as a decentralized mixnet that breaks traffic into uniform, layered-encrypted packets and routes them through various nodes with random delays and cover traffic, aiming to thwart global traffic analysis rather than merely concealing the IP address.
A Nym representative explained to Cointelegraph that “while a centralized VPN can shield your IP address and connection from outside observers, it merely shifts your trust to the VPN provider, who can monitor both ends.”
Rather, their system strives to ensure that no part of the network can connect the user’s IP address to their assigned external address: “There’s no need to trust Nym, because Nym is unaware,” they asserted.
When compared to standard VPNs, it provides much greater metadata privacy and diminishes reliance on a single entity. Nevertheless, it is slower and less developed than traditional VPNs, with notable issues identified recently in 2024. A spokesperson for Nym noted that these issues were found in a security audit and have since been resolved, with another audit set for 2026.
Williamson suggested Signal as a communication tool — a favorite among journalists that retains nearly no user data and wasrevealed in March to have been employed by high-ranking US national security officials for planning strikes against the Houthis.
For document handling, Fried recommended Fileverse: a decentralized, privacy-first end-to-end-encrypted alternative to Google Workspace and Notion that facilitates collaborative work on documents, spreadsheets, and files onchain using decentralized storage and wallet-based access control. It was recently praised by Ethereum co-founder Vitalik Buterin.
Related: SEC commissioner says crypto is ‘helping to nudge reassessment’ on privacy
Development obstacles
Creating genuinely decentralized, trustless, and private systems is typically much more challenging than building centralized counterparts. Nonetheless, regulatory pressure, rather than technical hurdles, is likely the predominant current barrier to the development of crypto privacy.
On Nov. 19, the co-founders of Bitcoin non-custodial wallet and mixer Samourai Wallet, Keonne Rodriguez and William Lonergan Hill, received prison sentences of four and five years, respectively. They were convicted of conspiring to operate an unlicensed money-transmitting business and facilitating transactions derived from criminal activity.
This sentencing occurred even though Samourai never controlled the assets. Prosecutors contended that coordinating these transactions equated to a money transmission service despite the lack of asset control.
Other cases illustrate that prosecutors frequently use any form of control to attribute responsibility. In 2023, prosecutors argued that developers behind previously-sanctioned Ethereum-based decentralized crypto mixer Tornado Cash “failed to implement Know Your Customer or Anti-Money Laundering procedures as required by law” for money transmitting businesses.
In October, Tornado Cash co-founder Roman Storm raised questions for decentralized finance developers, stating, “How can you be confident you won’t be charged by the [Department of Justice] as a money service business for constructing a non-custodial protocol?” He noted that prosecutors could assert that any service should have been designed as a custodial one, as he was prosecuted for not implementing centralized control measures.
Eric Hill, former legal head at decentralized finance protocol Lido and now counsel for Ethereum privacy protocol Railgun, advised Cointelegraph that to avoid prosecution, projects should utilize open-source technologies in a non-custodial, decentralized manner “that does not align with definitions of financial services.”
Hill suggested refraining from including central control, maintaining administrators for protocol updates, profiting from transactions, and targeting sanctioned entities or users. The service should be framed as a public good, he asserted:
“Total decentralization and lack of control by the builder are critical design principles.”
Niko Demchuk, head of legal at crypto forensics firm AMLBot, informed Cointelegraph that a non-custodial wallet would “typically not be classified as a money transmitter simply because the tool permits users to perform transactions without the tool holding custody of funds.” However, he acknowledged the complexity:
“Recent cases suggest that non-custodial services might also come under scrutiny if they facilitate anonymized fund transfers linked to some form of interstate or foreign commerce.”
Crypto attorney Cal Evans advised Cointelegraph that “a decentralized body or group must establish a proper structure, irrespective of the governance protocol or how it is built.”
“The degree of decentralization necessary to shield builders from criminal liability hinges on the level of operational control an individual maintains,” Demchuk emphasized.
Proposing pragmatic privacy
A trending response to regulatory pressure, expected to gain traction in 2026, is the anonymization of assets while ensuring compliance with sanctions. “The practical reality of privacy is pragmatic,” asserted 0xBow’s Fried.
“Privacy developers need to genuinely address government apprehensions regarding privacy and publicly demonstrate compliance with relevant laws and regulations,” he noted. However, Fried emphasized that “the collection of users’ personal data” is “the boundary we refuse to cross.”
Williamson shares a similar vision to what Privacy Pools is developing, indicating that Aztec is following suit. “It’s crucial to create applications that users can engage with, trusting that their participation does not aid bad actors,” he stated.
Aztec is progressing toward mainnet deployment, positioning itself as one of the most decentralized Ethereum L2s, likely the most private as well. Following the model of Privacy Pools, the network embraces a pragmatic privacy design philosophy.
Aztec intends to offer default privacy while also providing private sanctions checks through anonymous proofs and selective disclosure features for users undergoing audits.
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