Regulators are cracking down on privacy-preserving protocols like cryptocurrency mixers, but zero-knowledge proofs (ZK-proofs) could offer a solution for both developers and regulators.
Delivering privacy-preserving features in a legally compliant way is among the biggest concerns with today’s privacy-focused blockchain protocols, which can be used by almost anyone with access to the Internet.
However, the development of ZK proofs, along with other privacy-preserving models, such as decentralized identity verification systems, could help protocols preserve privacy and ensure they do not serve any terrorist organizations or money launderers, according to Matthew Niemerg, co-author. In the fight against terrorism. Founder and President of AlephZero.
In an interview with Cointelegraph, Niemerg explained:
Regulatory compliance became even more important for privacy-focused protocols on May 14, after Dutch authorities sentenced Tornado Cash developer Alexei Burtsev to five years and four months in prison, for laundering $1.2 billion worth of illicit digital assets on the platform.
The ruling came despite Tornado Cash being a non-custodial cryptocurrency mixing protocol – meaning funds that pass through the protocol are never held or controlled.
In a promising development for open source code developers, ZK proofs can be used to ensure that none of the cryptocurrencies on a specific platform are previously linked to any illicit activities, according to AlephZero’s Niemerg:
“From the time of the last 20 transactions or from block
With each user’s decentralized Web3 identity, ZK Proofs can be used to verify that funds and wallets are not linked to criminal activity while maintaining user anonymity.
However, Niemerg noted that both ZK proofs and decentralized identity systems need further development before such complex functionality can be facilitated.
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Financial privacy is not a crime
For AlephZero, helping developers create compliant privacy tools is a priority, according to Niemerg:
“There are a lot of real-world use cases when it comes to private transactions…just because you want privacy, doesn’t mean you’re doing something wrong.”
Financial privacy has become a growing concern since 2022 when the US government blacklisted Tornado Cash for alleged money laundering.
Concerns increased on April 24, after the founders of Samurai Wallet were arrested. Cryptocurrency wallet CEO Keon Rodriguez and chief technology officer William Hill will each face one count of conspiracy to commit money laundering and one count of conspiracy to operate an unlicensed money transfer business.
The arrest has been characterized as an attack on crypto privacy leaders, according to Ki Young Joo, founder and CEO of CryptoQuant:
“Privacy is a core value of Bitcoin. Mixing in itself is not a crime. Even cryptocurrency exchanges use mixing to protect user privacy. It’s like punishing the inventor of the knife instead of punishing the person who uses it.
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