Ethereum co-founder Vitalik Buterin co-authored a research paper focused on a privacy protocol called Privacy Pools with core developer Ameen Soleimani, researcher Jacob Illum from analytics firm Chainalysis, and academics Matthias Nadler and Fabian Schar. With what could be a potential alternative to the troubled Tornado Cash, they posit that financial privacy can co-exist with regulation.
The authors describe the new platform as "a novel smart contract-based privacy-enhancing protocol" designed to enhance transactional privacy on blockchains. Privacy Pools aims to leverage zero-knowledge proofs to determine whether user funds originated from lawful sources without revealing the complete transaction history.
Financial privacy and regulation: a dual approach
The primary goal of the project is to create what the authors describe as a "separating equilibrium." Simply put, the system aims to filter out funds linked to criminal activities while striving to find a balance between privacy and regulatory requirements.
"The core idea of the proposal is to allow users to publish a zero-knowledge proof, demonstrating that their funds (do not) originate from known (un-)lawful sources, without publicly revealing their entire transaction graph," read the paper’s abstract.
The authors argued that financial privacy and regulation can co-exist. They cited Tornado Cash as a useful privacy tool, but acknowledged its susceptibility to misuse by illicit actors.
Tornado Cash faced legal difficulties last year over allegations that it facilitated transactions for the North Korea-linked hacking group Lazarus. In August 2022, Tornado Cash was blacklisted by the U.S. Treasury Department’s Office of Foreign Assets Control due to its alleged involvement in illicit activities.
© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.