Washington is finally taking notice of the wide range of cryptocurrency issues; first it was the Bitcoin reserve, and now privacy is next on the agenda.
On October 17, the United States Securities and Exchange Commission (SEC) will be hosting a public roundtable on financial surveillance and privacy. This presents a rare opportunity to influence how privacy is handled in economic regulations.
Many people underestimate the amount of data they expose when using blockchains. By linking a social identity to a wallet, one’s economic activities are made public.
This level of data exposure cannot be ignored in the upcoming roundtable discussion. Zero-knowledge proofs (ZKPs) provide a solution that addresses this issue without compromising compliance by revealing personal data.
The SEC’s decision to hold a roundtable in October indicates their willingness to consider smarter approaches to attestations. The SEC is currently reviewing a filing that would allow tokenized securities to be traded on a national exchange, demonstrating that market practices can be modernized without sacrificing surveillance for real risks.
While ZKPs were initially developed to protect privacy, many real-world applications, including the launch of Zcash, focus more on scalability. However, the potential for privacy is immense, and the ability to prove facts without revealing sensitive information is crucial for maintaining confidentiality. The upcoming roundtable in October offers an opportunity to shift the focus from privacy as secrecy to regulated privacy.
Privacy is not secrecy
While radical transparency may sound appealing in theory, in practice it can expose individuals’ financial activities to the public. When a wallet is linked to a real-life ID, donations, purchases, and other economic behaviors become publicly accessible.
The issue is clear: people do not want their financial lives to be made public. Privacy is about protecting personal data shared with the world, not about hiding illicit activities.
Compliance is essential for integrating blockchain, traditional finance, and security, but unnecessary data sharing is a concern. ZKPs offer a solution to this problem and help redefine the surveillance debate, reassuring regulators that they do not need raw user data to manage risks.
By allowing venues to publish proofs of their financial stability, adherence to concentration limits, and commitment to user and regulatory obligations, ZKPs can enhance regulatory processes, preserve citizens’ rights, and provide the necessary guarantees for secure transactions.
Privacy needs to be simplified
Despite existing for years, ZKPs are still not widely adopted due to their complexity and lack of support from wallets and other platforms. This poses a challenge for decentralized finance (DeFi) as smart contracts can unintentionally leak sensitive data.
To move forward, semi-private architectures can offer strong privacy for users without sacrificing transparency or compliance. By using Layer-3 or application-specific domains to generate ZKPs and shield data from the public Layer-2, operators can maintain user privacy while providing necessary proofs to regulators.
This approach enables regulated confidentiality, allowing users to protect their privacy while still complying with regulations. In cases of misconduct by operators, users have cryptographic exits to alternative domains, incentivizing good behavior.
Establishing regulated privacy
The SEC’s roundtable should not only focus on data and surveillance but also on outdated tradeoffs that hinder privacy in a society where privacy should be the default setting. Regulated privacy, which safeguards users while providing regulators with necessary visibility, can build trust between consumers and providers.
ZKPs offer a solution that satisfies both regulators and users by ensuring compliance without compromising privacy. The SEC should use the roundtable to align policy with technological advancements, provide clear guidelines for privacy preservation, and recognize proofs as valid forms of regulatory compliance.
ZKPs have already made a significant impact on blockchain technology and user privacy. It is time for regulators to acknowledge their importance and embrace them for regulatory oversight. With the right proofs in place, regulatory privacy can become a reality.
Should regulators prioritize ZKPs for creating a future of regulated privacy? The roundtable presents an opportunity for them to affirmatively answer this question.
Eli Ben-Sasson is the CEO and co-founder of StarkWare.