In a bid to address growing concerns regarding privacy and regulatory compliance in the blockchain sector, Ethereum co-founder Vitalik Buterin and four co-authors unveiled a research paper on Wednesday. The paper, titled "Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium," proposes a new technological feature known as "privacy pools."
This smart contract-based privacy-enhancing protocol aims to differentiate transactions involving criminal activity from those originating from honest users. The proposal comes as governments intensify crackdowns on criminal groups using privacy mixers to conceal and launder funds.
One notable example of these mixers is Tornado Cash, a crypto mixer that has been sanctioned by the U.S. Treasury for its alleged use by the North Korean hacking group Lazarus for money laundering purposes. While Buterin acknowledged Tornado Cash's utility in addressing privacy issues, he noted its limited capacity to dissociate from criminal activity on the network.
The proposed privacy pools would utilize zero-knowledge technology, theoretically resolving part of this issue. This technology would provide users with privacy around transaction data while simultaneously distinguishing it from criminal activity. By pooling honest transactions together, users could demonstrate that their transactions originate from one of these honest deposits.
The paper states, "All users with 'good' assets have strong incentives and the ability to prove their membership in a 'good'-only association set. Bad actors, on the other hand, will not be able to provide that proof."
As regulators continue to clamp down on illicit activity on the blockchain, Buterin aims to demonstrate that these technological innovations can comply with regulations. The authors argue that privacy and regulatory compliance are often seen as incompatible, but this doesn't necessarily have to be so if the privacy-enhancing protocol allows users to prove certain properties regarding the origin of their funds.
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